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An update on electronic tax deposits.

More than 1.2 million businesses have been relieved--temporarily--from the mandatory use of the Internal Revenue Service's electronic federal tax payment system (EFTPS). This relief comes from a provision in the Small Business Job Protection Act and an IRS announcement. The act extends the statutorily mandated implementation of EFTPS for many businesses from January 1, 1997, to July 1, 1997. The announcement provides that penalties for failure to deposit electronically will not be imposed until after June 30, 1997.

Regardless of these extensions, businesses should prepare for the inevitable and enroll in EFTPS and begin making tax deposits electronically as soon as possible. In late October, the IRS began sending confirmation packages including an enrollment letter, an enrollment confirmation-update form and a payment instruction booklet to depositors enrolled in EFTPS. A personal identification number was sent separately. A business can begin making electronic payments as soon as it receives this material from the IRS.

It started with NAFTA

The North American Free Trade Agreement (NAFTA) mandated the use of an electronic deposit system to collect business taxes. Such a system ensures that funds are credited to the Treasury Department on their due dates, accelerating by at least one day the Treasury's receipt of the money. NAFTA included a phase-in schedule imposing minimum percentages of taxes that had to be deposited electronically starting in 1994.

To implement that schedule, the IRS issued regulations requiring depositors of more than $78 million of payroll taxes in 1993 to begin making electronic deposits on January 1, 1995. Depositors of more than $47 million of payroll taxes in 1993 or 1994 were required to begin making electronic deposits on January 1, 1996. The regulations also required depositors of more than $50,000 of payroll taxes in 1995 to begin making electronic deposits as of January 1, 1997, and depositors of more than $20,000 in 1997 to begin making such deposits in 1999.

Although the Small Business Job Protection Act extended the January 1, 1997, implementation date by six months to give the IRS adequate tune to develop and test EFTPS and the IRS postponed imposition of penalties, depositors of more than $50,000 of payroll taxes in 1995 are still technically required by existing regulations to make their 1997 deposits electronically. However, they will not be penalized for failing to do so until after June 30, 1997.

Affected depositors

Corporations, businesses operated by individuals (sole proprietorships), trusts, estates, partnerships and associations are all required to deposit electronically once they meet applicable thresholds. Individuals, however, do not have to pay their own income tax liabilities electronically.

Earlier this year the IRS issued regulations closing a rather large loophole in the original phase-in schedule. Under the regulations, businesses that have not deposited payroll taxes during the appropriate determination period but have deposited any other type of tax exceeding $50,000 during either 1995 or 1996 must deposit electronically in 1998. Businesses that deposit any other type of tax exceeding $20,000 in 1997 must deposit electronically in 1999. Before the loophole was closed, many large holding companies and special purpose subsidiaries with no payrolls would not have been required to make tax deposits electronically.

Once a business is required to deposit electronically, all tax deposits must be made in this way, including payroll taxes, other taxes withheld at the source, income taxes and excise taxes. Businesses that use third-party payroll processors to deposit their payroll taxes must enroll in EFTPS. Although several of the larger payroll processors may ultimately be able to facilitate the electronic deposit of customers' nonpayroll tax liabilities, businesses should be familiar with the electronic deposit rules to ensure proper payment of all tax liabilities.

Mechanics of EFTPS

EFTPS will replace TAXLINK, the current electronic funds transfer system. Two Treasury financial agents will process EFTPS payments: First Chicago/Mercantile Services (in the North) and NationsBank (in the South). EFTPS payments will be processed through the Automated Clearing House (ACH) financial network, which will transfer funds and tax payment information to the IRS.

Types of payments. EFTPS payments can be made via ACH debit or ACH credit. Both types of payments must be initiated the day before they actually are due. In extenuating circumstances, depositors also will be able to make same-day deposits.

* ACH debit. When a depositor makes an ACH debit, it instructs the appropriate Treasury financial agent to withdraw funds directly from its bank account and route them to the Treasury's account at the Federal Reserve Bank. When it issues this instruction, the agent provides the depositor with a confirmation number and it is then the agent's responsibility to process the payment.

* ACH credit. When a depositor makes an ACH credit, it instructs its own bank to send a payment directly to the Treasury's account. The depositor remains liable for the payment until it is credited to the Treasury. Upon request, the bank must provide the depositor with a "transaction trace number" as evidence the bank completed the actions necessary to initiate an ACH credit. This number, and the confirmation number issued in debit transactions, will be useful in challenging any penalties incorrectly imposed by the IRS for late deposits.

* Same-day deposits. Same-day payment methods will be available. The Treasury considers such methods to be exceptional, and they are to be used by depositors who do not have the information needed to initiate an ACH payment on the day before the tax is due.

The IRS, its Treasury financial agents and the Federal Reserve Bank will not charge fees for making debit and credit payments. However, a business's bank may charge fees for these transactions.

Enrollment. Businesses required to use EFTPS must enroll in the system by filing Form 9779, EFTPS Business Enrollment Form. The IRS mailed the form to all depositors required to begin making electronic tax deposits in 1997. Businesses can request copies of the form by calling 1-800-945-8400 or 1-800-555-4477.

Penalties. Penalties for failure to make electronic deposits will be harsh. Deposits that should have been made electronically but were made with a federal tax deposit coupon at an authorized depository will be subject to a 10% late payment penalty because they were not made "in the manner required." This penalty will be abated if the depositor can establish a reasonable cause for failing to deposit properly.

Simplify the system

Ultimately, electronic tax deposits will simplify making federal tax payments for most businesses. However, until the system has been fully phased-in, practitioners should make sure their clients are aware of this radical change in how tax deposits must be made and when they have to comply.

--Deborah J. Pflieger, JD, LLM, is a manager in Coopers & Lybrand LLP's national tax office in Washington, D.C.

Taxes to Be Paid Using EFPTS
Form no. Type of tax
720 Quarterly federal excise tax
940 Employer's annual federal unemployment tax
941 Employer's quarterly federal tax
943 Employers annual tax return for agricultural
945 Annual return of withheld federal income tax
1120 U.S. corporation income tax
990C Farmer's cooperative association income tax
CT-1 Employer's annual railroad retirement and
 unemployment tax
990PF Return of private foundation
990T Exempt organization business income tax
1042 Annual withholding tax return for U.S. source
 income of foreign persons

Who's Ready To Make the Switch?

A survey earlier this year of almost 600 businesses of various sizes found that more than 70% were unaware of the IRS regulation that would have required them to make electronic tax deposits on January 1, 1997 (now delayed until July 1, 1997). Among those that were aware, most had done little to prepare for the change.

Here's a breakdown by company size of businesses that were not ready to comply:

 52% of companies with 100
or fewer employees

 17% of companies with 1,000
or fewer employees

 9% companies with 3,000 or
70 more employees

Source: Automatic Data Processing, Roseland, New Jersey
COPYRIGHT 1996 American Institute of CPA's
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1996, Gale Group. All rights reserved. Gale Group is a Thomson Corporation Company.

Article Details
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Publication:Journal of Accountancy
Date:Dec 1, 1996
Previous Article:GAO suggests ways to correct IRS management and technical weaknesses.
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