EFTPS is here.

The Electronic Federal Tax Payment System (EFTPS) represents a dramatically different way for most businesses to make their Federal tax deposits. The IRS has begun to send to those depositors who have completed Form 9779, EFTPS Business Enrollment Form, a confirmation package consisting of an enrollment letter, an enrollment confirmation/update form and a payment instruction booklet. In a separate mailing, these depositors should have received a personal identification number assignment. As soon as a business receives those materials, it can begin making electronic deposits. (See Tax Practice & Procedures, "Electronic Tax Payment. Coming Soon to a Taxpayer Near You," TTA, July 1996, p. 440, and "Update: The Electronic Federal Tax System," TTA, Oct. 1996, p. 635, for more information on EFTPS.)

Background

Depositors of more than $50,000 of payroll taxes in 1995 are required to start making all of their tax deposits electronically in 1997. Originally, these deposits were to begin on January 1; however, late July 1996, the Service announced that penalties for failure by mandate depositors to use the system will not be imposed until July 1, 1997. In addition, Congress extended the statutory time frame (from Jan. 1, 1977 to July 1, 1997) by which the IRS was required to implement the 1997 phase of the electronic funds transfer system.

Penalties for Failure to Deposit

Electronically

Penalties for failure to make electronic deposits can be extreme. It is the Service's position that businesses required to use EFTPS, but which instead make deposits with a Federal tax deposit coupon at an authorized depository, will be subject to a 10% late payment penalty because the deposit will not have been made "in the manner required" by the Code. Deposits made in the proper manner, but late, will be subject to the sliding scale penalty of Sec. 6656: 2% for five days or fewer, 5% if more than five but not more than 15 days late; and 10% if the delay is more than 15 days but before the IRS issues a delinquency notice with respect to the tax.

Method of Payment

EFTPS payments can be made by ACH debit or ACH credit. Both of these types of transactions must be initiated no later than the day before the due date of the payments. Recently, proposed regulations issued by the Treasury Department also offer three "same-day" settlement methods. These methods - Fedwire value, Fedwire non-value and Direct Access - can be used to make a tax payment on the day it is due. All three use the Federal Reserve Board's systems. These payment methods have been made available to depositors in response to concerns that many companies will not have the information available to initiate a tax deposit on the day prior to its due date.

When a depositor initiates an ACH debit, it instructs a Treasury Financial Agent (an IRS agent) to withdraw funds from its bank account and route them to the Treasury's account at the Federal Reserve Bank. At that time, the agent provides the depositor with an acknowledgement number. When a depositor makes an ACH credit payment, it instructs its own bank to send the payment to the Treasury's account. Another provision in the proposed regulations requires a financial institution to provide a "transaction trace number," on request, to a taxpayer as evidence that the taxpayer has completed those actions necessary to initiate an ACH credit. One of the distinct advantages of ACH debits over ACH credits is the receipt of the acknowledgment number on the making of an ACH debit transfer, since this number should be extremely useful in establishing reasonable cause for late payments caused by a failure of the Treasury Financial Agent responsible for processing the payment.

Effect of Recently Issued

Treasury Regulations on

Financial Institutions

The Treasury regulations also increase the ability of all financial institutions to participate in processing Federal tax payments. Although financial institutions must meet certain requirements to be permitted to process Federal tax deposit coupon payments, these requirements need not be met to process electronic tax payments.

Finally, the regulations propose "to place liability for errors on the party making the errors." Therefore, if a depositor properly instructs a financial institution and complies with all requirements of the financial institution, and the financial institution is late in transmitting a tax payment to the Treasury, the financial institution could be charged for the time value of the lost funds.