Pay taxes electronically or face being hit with fines.

If you own a small business, you had better prepare your company for paying taxes electronically or you could be subject to substantial penalties from the Internal Revenue Service.

Beginning July 1, 1997, employers whose 1995 employment tax deposit equaled or exceeded $50,000 must enroll in the Electronic Federal Tax Payment System (EFTPS), an electronic funds transfer system which replaces the existing paper coupon system.

Once a taxpayer qualifies for EFTPS, all taxes subject to the federal tax deposit system require electronic payment. Businesses that are required to deposit their taxes electronically will incur a 10-percent penalty if they continue to use the paper coupon system.

Anticipating snafus during this initial phase, sympathetic members of Congress are urging the IRS to operate the program without penalties until all the kinks have been ironed out, so no unsuspecting businesses will incur steep fines.

The IRS requires business taxpayers whose federal employment tax payment exceeds threshold amounts to use EFTPS.

Business owners will have to adhere to the following schedule:

Paid More                     In Calendar                  EFTPS
Than                             Year                     Required

$50,000                          1995                   July 1, 1997
$50,000                          1996                   Jan. 1, 1998
$20,000                          1997                   Jan. 1, 1999

Employers can determine if they are mandated to use EFTPS by calculating the sum of tax deposits made for the following tax returns: Forms 941, 943, 945, and CT-1. Or check with your accountant to inquire whether you need to file electronically.

Once threshold amounts are met, taxpayers are required to pay all federal business taxes electronically, even if future tax deposits fall below the threshold in the future.

You can expect the IRS to audit your tax deposit record and then send you a notification letter and an enrollment form with instructions if you meet or exceed the threshold amount for the determination period.

However, even if you don't receive a letter from the IRS, you are still responsible for paying the taxes electronically if you fall within the parameters.

The next step is to complete Form 9770 (EFTPS Business Enrollment Application) to enroll in EFTPS.

This process may take more than two months to complete, so if you haven't submitted the form already, you should do so immediately.

The Treasury Department contracted with First National Bank Chicago and NationsBank to serve as the Treasury Financial Agents to manage EFTPS. The taxpayer's geographical location determines with whom they should enroll.

The IRS offers businesses two electronic payment options from which the taxpayer can chose: 1. Automated Clearinghouse (ACH) Debit and 2. ACH Credit.

The ACH Debit method requires the business to initiate payment by instructing the Treasury Financial Agent to withdraw funds from the business bank account and transmit the tax payment via EFTPS to the Treasury's account at the Federal Reserve Bank.

Upon receipt of these instructions, the agent provides the taxpayer with an acknowledgment number, thereby assuming responsibility for processing the transaction.

The ACH Credit method requires the business to instruct its bank to withdraw funds from the business account and transmit them via EFTPS directly to the Treasury's account at the Federal Reserve Bank.

With this method, no acknowledgment number is provided. The taxpayer assumes responsibility for the tax payment until it has been completely processed.

FEDWIRE, when permitted, may serve as a back-up method for same-day deposits. Either method may be executed by personal computer or telephone, and payments should be initiated two business days before tax due date.

The North American Free Trade Agreement mandated the electronic collection of business taxes so that the U.S. Treasury would receive funds on their due date rather than the following business day, which occurs with the existing paper coupon system.

With the implementation of EFTPS, the IRS plans to satisfy NAFTA's requirement that all business taxes be collected electronically by 1999. The intention is to increase the efficiency of the tax collection system and speed the influx of revenue.

To begin the process, small business owners should call NationsBank at 1-800-555-4477 or First National Bank of Chicago at 1-800-945-8400. Either of these institutions will provide information and software for EFTPS.

For more data on the program, the IRS has posted information on the World Wide Web at: www.irs.ustreas.gov/prod/elec_svs/index.html.

Larry Wayne is founder of Lerman, Wayne & Umanoff CPAs and Owl Computing, a payroll service located in Beverly Hills.