Are you ready for EFTPS?

The Electronic Federal Tax Payment System (EFTPS), a provision in the North American Free Trade Agreement of 1993, is codified in Sec. 6302(h). The provision requires the IRS to collect a minimum of 94% of all business taxes electronically by 1999. Employers with a payroll tax liability of $50,000 in 1995 ("mandated" taxpayers) must begin making all Federal tax payments using EFTPS on July 1, 1997. Mandated taxpayers can no longer use Form 8109, Federal Tax Deposit Coupon, to make Federal tax deposits.

Suppose a mandated taxpayer does not pay Federal taxes electronically. Perhaps he failed to register in time for the July 1, 1997 deadline, could not figure out the system, or simply deplores the system and refused to use it. No problem; he can continue to make Form 8109 payments. However, the Service will assess a 10% penalty on the amount deposited ($417 per month on $50,000 a year).

Regulations prohibit banks from charging taxpayers for accepting Form 8109 deposits of Federal taxes. With EFTPS, this fee protection has disappeared.

Mandated Taxpayers

A taxpayer will be notified by the IRS if he has met the threshold that mandates EFTPS. For a July 1, 1997 entry, the Service determines this from the taxpayers liability for 1995 payroll taxes required to be deposited for Form 941, Employer's Quarterly Federal Tax Return; Form 943, Employers Annual Tax Return for Agricultural Employees; Form 945 Annual Return of Withheld Federal Income Tax; and Form CT-1, Employer's Annual Railroad Retirement and Unemployment.

For Jan. 1, 1998 entry and thereafter, the IRS determines the taxpayer's liability for all 1995, 1996 and thereafter taxes required to be deposited under Sec. 6302, including corporate income, excise and other taxes (in addition to payroll taxes). Those taxpayers satisfying the $50,000 payroll tax threshold during 1995 must begin submitting payments using EFTPS on July 1, 1997. Taxpayers with deposit liability of $50,000 for all taxes in 1995 or 1996 must use EFTPS beginning on Jan. 1, 1998. The deposit liability threshold falls to $20,000 in 1997, and those taxpayers must use EFTPS starting Jan. 1, 1999 (Temp. Regs. Sec.

Once a taxpayer meets the threshold, he must pay "all Federal taxes" electronically. He may not revert back to paper coupons, even if his deposits fall below the threshold amount in the future. "All Federal taxes" include payroll, corporate income, excise and unemployment taxes, among others.

Those seeking comfort in third-party payroll service providers must still enroll in EFTPS to pay corporate income taxes or any other taxes the payroll service will not handle.

Taxpayers who do not have the required liabilities to be "mandated" are encouraged to become voluntary participants, and may alternate between EFTPS transfers and Form 8109 tax deposits. Flexibility and learning curve are two reasons for becoming a voluntary participant. The IRS encourages Form 1040 filers to become voluntary participants as well.

EFTPS Payment Methods

There are three methods for making tax payments via EFTPS. (Use of the Automated Clearing House (ACH) system is preferred by Treasury.) 1. ACH Debit: Most taxpayers have no reasonable choice besides this method. The taxpayer initiates an ACH Debit using his taxpayer identification number (TIN) and a four-digit personal identification number (PIN). He dials a toll-free number to authorize a transfer of funds from his bank account to the Treasury. The fee banks charge for an ACH Debit will probably approximate the amount charged for clearing a check.

A touch-tone telephone, voice telephone call or personal computer must be used for initiating ACH Debits. Upon completing the call, the taxpayer receives an eight-digit acknowledgment number, which should be retained. ACH Debit payments will be timely if initiated up until 8:00 P.M. Eastern time on business day prior to the tax payment due date. For example, if Christmas falls on a Friday, and the tax deposit is due on Monday, the ACH Debit must be initiated on Thursday (or maybe Wednesday, if the business is closed on Christmas eve). If the tax due date falls on a holiday (so that the tax due date falls on the next business day after the holiday), the tax payment must be initiated by 8:00 P.M. Eastern time one business day prior to the holiday. The ACH Debit system can be accessed 24 hours a day. ACH Debits may be "warehoused" (i.e., authorized up to 30 days prior to the due date). Funds will not be transferred from an account until the tax due date specified. Using the acknowledgment number, an ACH Debit authorization can be canceled up to two business days prior to the transfer date. Failing that, a taxpayer can attempt to stop payment on the transfer by contacting his bank. 2. ACH Credit: With this method, the taxpayer instructs his bank to send the tax payment directly to Treasury. ACH Credits are not commonplace, and many banks will not process them. Those banks that do process ACH Credits may charge dearly for them, and the deadline for initiating payments may be much earlier than that for ACH Debits. A taxpayer may call EFTPS Customer Service on the due date to receive an acknowledgment number for an ACH Credit. 3. Same-day payment: A taxpayer may make tax payments on the due date using his bank's access to the FEDWIRE, Fedline or non-Fedwire system. Bank arrangements must be initiated well in advance of the first time this method is used, or it will be unavailable. The cut-off time may be earlier than the 2:00 P.M. deadline for Form 8109. A bank may charge a fee of $50 or more. A mandated taxpayer who misses the "one day prior" deadline for initiating payment should weigh the potential late deposit penalty against the bank charge. Regardless of method, there must be adequate funds in the account on the transfer date or the transfer will fail. An EFTPS deposit can be up to five days late for the same 2% penalty under Sec. 6656; a 10% penalty applies if EFTPS is not used.

Enrolling in EFTPS

A taxpayer must enroll in EFTPS with the IRS's Financial Agent using Form 9779, EFTPS Business Enrollment Form, and receive confirmation before an electronic tax payment can be made. Although processing should normally be speedy, as the July 1 deadline approaches, up to 12 weeks should be allowed in the event of problems. Form 9779 is a scannable form; an original red-printed form must be used. Enrollment provides the Financial Agent with payment method preferences, bank information and business contacts. Be sure to enroll for ACH Debits, unless the arrangements for ACH Credits have definitely been set up. Enrolling for the ACH Debit payment option automatically enrolls a taxpayer for ACH Credit payments, allowing him to alternate between methods. However, a taxpayer who enrolls in the ACH Credit payment option is not automatically enrolled for ACH Debit payments.

A separate Form 9779 must be completed and submitted for each TIN and each bank account that will be used. The Financial Agent assigns a four-digit PIN for each application. The Service has no access to this PIN. Once Form 9779 is successfully processed, the taxpayer will receive a confirmation package, including instructions on how to use the EFTPS system.

Getting Help

EFTPS has been outsourced by the IRS to Financial Agents. Taxpayers living in the northern half of the U.S. are serviced by First National Bank of Chicago, in the southern half, by NationsBank. For questions about EFTPS, call Customer Service at NationsBank at 1-800-55-4477, or First Chicago at 1-800-945-8400.

Call EFTPS Customer Service to obtain a free Windows software program to make EFTPS payments via computer modem. NationsBank and First Chicago use incompatible programs to access their systems, therefore, it is necessary to obtain the right one for the right location. The EFTPS touch-tone system can be tested using the Voice Response Tutorial System at 1-800-572-8683 (in English and Spanish).

Internal Control Alert

An EFTPS PIN number(s) should be carefully guarded. Courts have ruled that the taxpayer is responsible for problems with tax deposits.

A PIN will be needed for every bank account to be accessed under EFTPS. A separate PIN should be considered for every authorized employee, so that when an employee is terminated, so is his PIN. Hopefully, this will hinder a disgruntled employee from transferring funds in a manner that would be difficult to trace and refund, or from making unauthorized changes through EFTPS Customer Service.

Do not change banks prior to acquiring a PIN for a new bank account, or there will be no available method to make ACH Debits. Allow at least 45 days to re-enroll with Form 9779 for a new bank account. PINs can be changed with a call to Customer Service (allow at least 10 days), but new or additional accounts must be authorized for EFTPS through a new Form 9779 application.

Under the ACH Debit method, Form 9779 allows taxpayers to set a threshold for each tax type. This enables taxpayers to give themselves a warning when they attempt to transfer funds in excess of the threshold. It is easily overridden simply by verbally confirming the transfer. Some banks allow ACH Debit "filters," which set time and amount limits on ACH Debits; this can provide some protection against improper ACH Debits.

There is no paper trail for ACH Debits other than the posting to a monthly bank statement. The verbally or modem-transmitted eight-digit acknowledgment number is a taxpayer's only verification.

An entity's TIN is widely known. It appears on many databases, on every W-2 and Form 1099 issued by or to the entity, and on every IRS label mailed out. If the ACH Debit method is used, anyone having the entity's TIN can hack at the PIN, and, if successful, mischievously transfer funds on its behalf. Financial Agents have some security measures to thwart hackers, but a mere four-digit PIN makes a hacker's job easy. There do not appear to be adequate controls against the IRS processing a fraudulent Form 9779. Anyone with the entity's TIN and bank account information (printed on the bottom of its checks) can attempt to file a fraudulent Form 9779, particularly the person listed as primary contact.

It is also very simple to incorporate a taxpayer's business name in another state. A fraudulent Form 9779 can be filed listing information from any of that taxpayer's bank accounts, with the TIN of the person perpetrating the fraud, and a name that matches the taxpayer's. The taxpayer's funds can then be transferred via ACH Debit to the fraudulent IRS accounts, which the Service refunds as an overpayment. (This can all be managed from abroad.)

Any entity or individual should ask the bank to place an "ACH Debit blocker" on all accounts not to be ACH-debited. A separate bank account (without checking privileges) should be considered for making ACH Debits, so that very few people will have access to the ACH Debit account number information. This strategy, combined with ACH Debit blockers on other accounts, can help taxpayers minimize the risk of a fraudulent Form 9779.

Finally, if an IRS Revenue Officer is investigating a taxpayer using EFTPS, there will be no paper record to prove he made the payment the IRS seeks. An individual's IRS master record is only updated weekly, and the EFTPS Customer Service will not provide payment information to the agent. The agent can, however, research EFTPS files at the Service, the files are updated daily with payment information.

From the IRS: EFTPS Messages for Required Taxpayers

I. Taxpayers planning to make their payment using the toll-free phone method or free PC software method must be enrolled in the ACH Debit option. II. Enrollees should review the Confirmation Package as soon as possible to identify and correct any discrepancies. III. Enrollees should use the Payment Instruction Booklet before making first payment.

* Practice. Use the tutorial service before making the first payment.

* Be prepared. Use the worksheet in the booklet.

IV. Common start-up issues:

* Using ACH, taxpayers must initiate payments at least one day prior to the tax due date.

* Taxpayers wishing to change payment option from ACH Credit to ACH Debit must re-enroll.

* Taxpayers enrolled in ACH Debit are automatically enrolled in ACH Credit.

* All taxpayers are automatically enrolled for Same-Day Payment.

* A taxpayer's Personal Identification Number along with his Tax Identification Number control the access to his account. All payments are initiated by the taxpayer.

* No special equipment is needed -- only a telephone.

For additional information, contact Karen Taylor, IRS Submission Processing Division, Cash Management Office, at [phone].