porting threshold is not met, the employer must allocate (as tips for information reporting purposes) an amount equal to the difference between 8 percent of gross receipts and the aggregate amount reported by employees. This allocation may be made pursuant to an agreement between the employer and employees or, in the absence of such an agreement, according to Treasury regulations. These Treasury regulations64 provide that this allocation may be made by the employer in either of two ways. One is to allocate based on the portion of the gross receipts of the establishment attributable to the employee during a payroll period. The second is to allocate based on the portion of the total number of hours worked in the establishment attributable to the employee during a payroll period. Under prior law, this latter method was available to all establishments, regardless of size. Reasons for Change Congress believed that the method of tip allocation based on the number of hours worked could unfairly allocate tips among employees, because the amount of tips is not spread evenly throughout all the hours an establishment is open for business. At the same time, Congress recognized that eliminating this method entirely could pose a significant administrative burden on small employers. Consequently, Congress repealed this method, but only for relatively sizeable establishments. Explanation of Provision The Act provides that the method of tip allocation based on the number of hours worked may be utilized only by an establishment that employs less than the equivalent of 25 full-time employees during a payroll period. Establishments employing the equivalent of 25 or more full-time employees would consequently have to use the portion of gross receipts method to allocate tips during the payroll period (absent an agreement between the employer and employees). Effective Date This provision is effective for any payroll period beginning after December 31, 1986. 12. Treatment of forfeitures of land sales contracts (sec. 1572 of the Act and sec. 7425 of the Code)65 Prior Law Generally, before Federal tax liens can be extinguished, notice must be given to the Government. Several cases have held (Runkel v. United States, 527 F.2d 914 (9th Cir. 1977); Brookbank v. Hubbard, 712 F.2d 399 (9th Cir. 1983)) that forfeitures of land sales contracts are not subject to these notice requirements. Notice provides the Government with the opportunity to redeem the property. 64 See Treas. Reg. sec. 31.6053-3. 65 For legislative background of the provision, see: H.Rep. 99-841, Vol. II (September 18, 1986), p. 818 (Conference Report). Reasons for Change Congress believed that sound tax administration principles require that the Government receive notice of these types of forfeit ures. Explanation of Provision The Act provides that forfeitures of land sales contracts are subject to these notification requirements. Thus, these cases are explicitly overturned as to this issue. The effect of this provision is to provide the Government with both notice and the opportunity to redeem the property, which it currently has with respect to most other transfers of real estate. Effective Date The provision is effective for forfeitures after the 30th day after the date of enactment. Revenue Effect of Tax Administration Provisions These tax administration provisions are estimated to have a negligible effect on fiscal year budget receipts. H. Modification of Withholding Schedules (sec. 1581 of the Act and sec. 3402 of the Code)66 Prior Law Prior and present law require that the Secretary prescribe tables and computational procedures for determining the appropriate amount of taxes to be deducted and withheld from wages (sec. 3402(a)). Form W-4 is the form that enables that calculation to be performed. It is completed by the employee, who furnishes it to the employer. The employer uses this form to determine the proper level of wage withholding. The employer does this by using tables issued by the Secretary that specify the proper amount of withholding, considering the employee's wage level and number of withholding allowances claimed. The employee completes the Form W-4 by determining the proper number of withholding allowances (or exemptions) to which he is entitled. Withholding allowances may be claimed for the employee and any dependents (sec. 3402(f)) and for itemized deductions and estimated tax credits (sec. 3402(m)). Other items prescribed in regulations may also be claimed. For example, the regulations issued under prior law permit IRA contributions and the tax savings attributable to income averaging to be considered (see Treas. Reg. sec. 31.3402(m)-1). Under prior law, an employee's Form W-4 generally remained in effect until the employee revoked it and filed a new one. 67 The IRS had the authority under prior law to issue regulations permitting employees to request, once the amount of their withholding has been determined on the basis of Form W-4 and the withholding tables, that that amount of withholding be increased or decreased. The IRS has long permitted taxpayers to request increases in withholding; the IRS has never permitted taxpayers to request decreases in withholding. Reasons for Change Other provisions of the Act affect the wage withholding system in two ways. First, the Act alters several of the provisions of the Code relating to itemized deductions, tax credits, and other items that were permitted to be considered in computing withholding al 66 For legislative background of the provision, see: H.R. 3838, as reported by the House Committee on Ways and Means on December 7, 1985, sec. 1335; H.Rep. 99-426, pp. 852-854; H.R. 3838, as reported by the Senate Committee on Finance on May 29, 1986, sec. 562; S.Rep. 99-313, pp. 214-216; and H.Rep. 99-841, Vol. II (September 18, 1986), pp. 819-820 (Conference Report). 67 The employer is required to furnish copies of certain Forms W-4 to the IRS, such as those that claim more than a specified number of allowances or that claim total exemption from withholding (where wages are above $200 per week). Treas. Reg. sec. 31.3402(f)(2)-1(g). The IRS examines these forms, and if, after contacting the employee, it determines that a claim of withholding allowances cannot be justified, it notifies the employer to change the employee's withholding. lowances. Forms W-4 that claim withholding allowances with respect to any of these altered provisions are inaccurate. For example, a Form W-4 that claims allowances for income averaging (which is repealed elsewhere in the Act) is inaccurate, in that it claims excessive allowances. Second, the Act affects the tables issued by the Secretary that are used by employers to determine the proper amount of withholding. The Act affects these tables primarily by altering the tax rates and brackets. In addition, the Act increased the value of personal exemptions, which affects the value of withholding allow ances. Congress consequently determined that, in light of the major modifications that are made in this Act to the entire income tax system, the wage withholding system needed to be modified. Congress believed that these major changes make it necessary for employees to file revised Forms W-4. Explanation of Provision The Act requires that employees file a revised Form W-4 before October 1, 1987. They must do so on a Form W-4 that has been revised by the IRS to reflect the changes in the Code made by this Act. 68 If an employee does not file a revised Form W-4 by that date, the employer must withhold income taxes as if the employee claimed one allowance (if the employer checked the "Single" box on the most recent Form W-4 that the employee filed) or two allowances (if the employee checked the "Married" box). The Act also requires that the IRS and Treasury modify the withholding schedules under section 3402 to approximate more closely tax liability under the amendments made by the Act. Congress expected that this modification will affect at least two major items. First, Form W-4 is to be modified. Second, the withholding tables used by employers to determine the proper amount of wage withholding are also to be modified. With respect to modifying Form W-4, Congress expected that the IRS would make every effort to notify taxpayers that Form W-4 has been modified and that taxpayers must file the modified form with their employers before October 1, 1987. In addition, Congress expected that the IRS would issue the revised Form W-4 well before that date, to minimize the inconvenience of filing new forms for both employers and employees. The modified form and tables should be designed so that withholding from taxpayer's wages approximates as closely as possible the taxpayer's ultimate tax liability. While Congress recognized that it is impossible to accomplish this goal with absolute precision in the case of each taxpayer, it is nonetheless vital to the integrity of the tax system that the amount withheld from wages closely match the taxpayer's ultimate tax liability. While Congress recognized that substantial involuntary overwithholding is undesir 68 It is also permissible for employees to fulfill the requirements of this provision by filing on a substitute Form W-4 provided by the employer, so long as that form has been revised to parallel the official form and the substitute form complies with all IRS requirements pertaining to substitute Forms W-4. able,69 Congress also recognized that substantial underwithholding creates significant collection and enforcement problems. While Congress believed that the changes in the substantive tax law made by the Act will permit wage withholding to approximate tax liability more closely for many taxpayers, Congress believed that increased complexity in the current Form W-4 and wage withholding tables is not desirable, even if it were designed to permit withholding to approximate tax liability more closely. Consequently, neither Form W-4 nor the wage withholding tables is to be made more complex when they are revised in accordance with this provision of the Act. The Act also repeals the provision of prior law giving the IRS authority to issue regulations permitting employees to request decreases in withholding. The provision relating to increases in withholding is unaffected. Effective Date The provision requiring employees to file new Forms W-4 is effective for wages paid after September 30, 1987. The provision relating to decreases in withholding is effective on the date of enactment. Revenue Effect This provision is estimated to increase fiscal year budget receipts by $1,007 million in 1988, $61 million in 1989, $177 million in 1990, and $195 million in 1991. 69 A significant portion of overwithholding appears to be attributable to taxpayer preference. |