Taxpayer Relief Act of 1997 affords businesses more time to switch to EFTPS (Electronic Federal Tax Payment System)

The IRS will not impose penalties through June 30, 1998 on businesses that make timely deposits using paper Federal tax deposit coupons while converting to the new Electronic Federal Tax Payment System (EFTPS). Under the law, taxpayers with more than $50,000 of Federal employment tax deposits in 1995 were required to enroll in EFTPS and make deposits electronically by July 1, 1997.

To meet the demands of the future, the Service is modernizing the way it collects business taxes; through EFTPS, financial institutions, taxpayers and the IRS are linked together. Employers enrolled in this system can pay employment taxes simply by transferring funds electronically (by telephone or computer) from hank accounts directly to the U.S. Treasury, thus doing away with taking funds and paper deposit coupons to designated banks.

The Taxpayer Relief Act of 1997 prohibits the IRS from asserting deposit-related penalties solely for the failure to deposit taxes electronically through June 30, 1998. (Rev. Rul. 95-68 provides that, absent reasonable cause, a taxpayer required to deposit Federal taxes by electronic funds transfer is subject to the 10% failure to deposit penalty if the taxpayer deposits the taxes by means other than electronic funds transfer.) However, deposits must still be made on time even when paper coupons are used, in order to avoid a late deposit penalty. The waiver of penalties applies only to deposits required to be made before July 1, 1998. The penalty waiver does not apply to taxpayers that were required to begin using electronic funds transfer in 1995 or 1996. The Treasury Department contracted with NationsBank and First National Bank of Chicago to manage and operate EFTPS. The two banks enroll taxpayers in EFTPS, provide customer service, and initiate payments only on a taxpayer's explicit direction. Thus, the commercial banking industry largely runs EFTPS; the IRS merely receives tax payment information to update taxpayer accounts.

The Service previously applied penalty relief to taxpayers that used TAXLINK, the predecessor system to EFTPS, when those taxpayers were first required to begin paying Federal tax deposits electronically; a similar approach is being applied for EFTPS.

It has never been the IRS's intention to penalize those taxpayers that make a good-faith effort to meet their electronic payment obligation but somehow fail to do so. Businesses are strongly encouraged to use this additional time to become familiar with the process. When businesses properly make EFTPS payments, they will see that they are correctly enrolled and that their payments can be processed without error. If problems are encountered, this will allow time to get help and make whatever adjustments are required without facing a penalty.

How well is the system working? Of the nearly 1.2 million employers required to use EFTPS, approximately 97% have enrolled in the system through August 30. Another 450,000 businesses not included in the 1.2 million required to use EFTPS have enrolled voluntarily. Through this period, more than $147 billion has been collected via EFTPS.

The IRS is anxious for enrolled employers to begin using and benefiting from EFTPS. Practitioners should remind their clients that they can begin using EFTPS as soon as they receive their payment instruction packet and personal identification number.