Guidance on required electronic FTDs.

Sec. 6302(h) requires that certain taxes be deposited by means of electronic funds transfers (EFTS). Proposed and temporary regulations that implement this section are significant, as they mandate a change in the way most business taxpayers will deposit taxes. The IRS has also issued Rev. Proc. 94-48, which provides necessary guidance on EFT payment options. Although the rules for depositing taxes by way of EFTS will be phased in over a number of years (approximately 800 large employers will be required to use EFTS beginning Jan. 1, 1995), it is not too early for other taxpayers to prepare for this requirement.

Background

Under the current Federal tax system, taxpayers are required to deposit certain taxes (i.e., FICA, withheld income taxes, corporate income and estimated taxes, excise taxes and Railroad Retirement Tax Act taxes) with an authorized financial institution (depository). These depository taxes must be deposited by specified dates using a Form 8109, Federal Tax Deposit Coupon. The depository then forwards the coupon to an IRS service center, which reconciles the coupon information with the liability shown by the taxpayer on the applicable return.

In 1993, as part of the tax systems modernization initiative, the IRS introduced a test program called TAXLINK that allowed business taxpayers to make Federal tax deposits (FTDS) using EFT technology. At the time it was introduced, participation in TAXLINK was strictly voluntary. However, shortly after its introduction, as part of the North American Free Trade Agreement, Congress enacted Sec. 6302(h), which required the Service to phase in an EFT payment system for the collection of Federal depository taxes.

Temporary regulations

The proposed and temporary regulations implement a phase-in of effective dates for taxpayers to use EFTS to deposit taxes. For periods after Dec. 31, 1994, a taxpayer would be required to begin EFTS when its aggregate deposits of depository taxes during a "determination period" exceed a threshold amount. See the table, above, for the threshold amounts, determination periods and applicable effective dates.

Rev. Proc. 94-48

Rev. Proc. 94-48 specifies the depository taxes subject to the EFT requirement and provides guidance to both financial institutions and taxpayers. Only taxes reported on the following forms are subject to TAXLINK:

* Form 720, Quarterly Federal Excise Tax Return.

* Form 940, Employer's Annual Federal Unemployment Tax Return.

* Form 941, Employer's Quarterly Federal Tax Return.

* Form 943, Employer's Annual Tax Return for Agricultural Employees.

* Form 945, Annual Return of Withheld Federal Income Tax.

* Form 990-C, Farmer's Cooperative Association Income Tax Return.

* Form 990-PF, Return of Private Foundation or Section 4947(a)(1) Charitable Trusts Treated as a Private Foundation.

* Form 990-T, Exempt Organization Business Income Tax Return.

* Form 1042, Annual Withholding Tax Return for U.S. Source Income of Foreign Persons.

* Form 1120, U.S. Corporate Income Tax Return.

* Form CT-1, Employer's Annual Railroad Retirement and Unemployment Repayment Tax Return (after July 31, 1994).

How TAXLINK works

Under TAXLINK, a taxpayer who is required (or who voluntarily chooses) to make EFT deposits has a choice of Automated Clearing House (ACH) payment methods--either ACH debits or ACH credits. The main differences between the options relate to the initiation of payment and the payment origination. Under either option, however, a taxpayer remains liable for penalties for any payments initiated late or any insufficient funds.

Under the debit method, a taxpayer authorizes a "financial agent" (a financial institution specifically designated as an agent for the IRS) to debit its bank account for payment. The deposit is initiated by the taxpayer, who one day prior to the due date for the deposit reports the payment information to the financial agent. To use the credit method, a taxpayer's bank must be able to originate ACH credit payments in the appropriate format. capability is available, one day prior to the payment's due date, the taxpayer must make arrangements with its bank to make an ACH credit transfer to the financial agent on the FTD due date.

Enrollment

Additional information on TAXLINK and enrollment forms can be requested by calling the IRS at [phone].