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Electronic tax payment: coming soon to a taxpayer near you.

Over one million taxpayers will be required to start making their tax payments electronically on Jan. 1, 1997. The IRS began mailing letters to these taxpayers in June informing them of this requirement to make their Federal tax deposit payments by electronic funds transfer (EFT).

The North Atlantic Free Trade Agreement (NAFTA) mandated the development of an electronic payment method for the collection of business taxes. The purpose of an EFT system is that the Treasury receives a deposit (and thus the interest float on that deposit) one day earlier than under the conventional deposit system. Temp. Regs. Sec. 31.6302-IT, issued in 1994, requires taxpayers who deposited amounts in excess of $50,000 of payroll taxes in 1995 to begin to make their tax deposits electronically effective Jan. 1, 1997. The country's largest payroll tax depositors (those that deposited in excess of $79 million of payroll taxes in 1993) were required to start making electronic deposits on Jan. 1, 1995. Taxpayers that deposited in excess of $47 million of payroll taxes in either 1993 or 1994 were required to begin to use the system effective Jan. 1, 1997. This dramatic drop in the threshold for electronic deposit, from $47 million to $50,000, will cause the number of depositors required to make payments electronically to grow from several thousand to over one million. Depositors of more than $20,000 of payroll taxes in 1997 will be required to make their deposits electronically in 1999.

The Service's current EFT system is known as TAXLINK. However, the Service has announced that a more advanced system, known as the Electronic Federal Tax Payment System (EFTPS), will replace TAXLINK later this year. The new system has been designed to handle the large volume of taxpayers required to begin making their deposits electronically in 1997. These taxpayers must enroll in EFTPS by Nov. 1, 1996, and begin making their payments electronically on Jan. 1, 1997. The IRS has sent enrollment forms to taxpayers required to use EFTPS in 1997 in its June mailing; current TAXLINK users will be notified by the Service as to when they must enroll in EFTPS and convert to the new system. TAXLINK was described in Rev. Proc. 94-48; a similar revenue procedure outlining the requirements of EFTPS is expected from the IRS this summer.

Although the requirement that a taxpayer make Federal tax deposits electronically has historically been dependent solely on the amount of payroll tax deposits it has made during a given year, once a taxpayer is required to use the electronic system, all tax deposits must be made electronically. This includes payroll taxes, other taxes withheld at source, income taxes and excise taxes. Therefore, even though a third-party payroll processor is used to deposit payroll taxes, the taxpayer must still be enrolled in and familiar with EFTPS to ensure proper payment of nonpayroll tax liabilities.

Furthermore, amendments to Temp. Regs. Sec. 1.6302-1T made earlier this spring expand the requirement to transfer funds electronically to taxpayers that have not made payroll tax deposits in excess of the thresholds discussed earlier, but have made deposits with respect to any type of tax in excess of $50,000. Therefore, under the revised regulations, taxpayers making deposits with respect to any type of tax in excess of $50,000 in 1995 or 1996 will be required to make tax deposits electronically in 1998. In addition, taxpayers making deposits with respect to any type of tax in excess of $20,000 in 1997 will be required to make deposits electronically in 1999.

The term "taxpayer" for purposes of the EFT program includes individuals, trusts, estates, partnerships, associations, companies and corporations. However, although an individual is a "taxpayer" for purposes of the EFT program, individuals are not required to pay their individual income tax liabilities electronically; such taxes are not "depository taxes" for purposes of Sec. 6302. However, individuals may voluntarily choose to use EFTPS.

There are two payment methods by which taxpayers can generally make electronic tax deposits, ACH Debit and ACH Credit. Either method can be made by telephone or personal computer. Under the ACH Debit method, the depositor initiates payment by instructing the Treasury Financial Agent to withdraw funds from the bank account and route them to the Treasury's account at the Federal Reserve Bank. When the taxpayer issues this instruction, the financial agent provides an acknowledgment number, at which point the financial agent has assumed responsibility for processing the payment. Under the ACH Credit method, the depositor instructs the bank to send a payment directly to the Treasury's account at the Federal Reserve Bank. Under this method, the taxpayer remains responsible for the payment until it has been credited to the Treasury's account at the Federal Reserve Bank. Debit and Credit payments must typically be generated the day before an actual payment is due. Thus, for example, an employer required to deposit withheld taxes on a "next day basis" must actually begin the payment process on payday.

In Rev. Rul. 95-68, the IRS took the position that a taxpayer who is required to make a tax deposit electronically, but instead makes the deposit with a Federal tax deposit coupon at an authorized depository (i.e., under the existing deposit method), will be subject to a 10% late payment penalty under Sec. 6656: such a taxpayer has not made the deposit "in the manner required" by the provisions of Sec. 6302. Therefore, absent reasonable cause, the depositor is subject to the penalties of Sec. 6656. Deposits made in the proper manner, but on an untimely basis, will continue to be subject to the sliding scale penalty of Sec. 6656 (2% if the failure is for five days or less; 5% if the failure is for more than five days, but not more than 15 days; and 10% if the failure is for more than 15 days, but is corrected before the Service issues a delinquency notice with respect to the tax due).

Rev. Rul. 94-46 explained how a taxpayer making an electronic funds transfer can establish reasonable cause for abating a failure to deposit penalty under Sec. 6656. The ruling concluded that a taxpayer may establish reasonable cause for abating the failure to deposit penalty under Sec. 6656 by using the records of the bank instructed to initiate the transfer and/or the taxpayer's own books and records to establish that the taxpayer timely provided to the bank: payment instructions; the correct amount of tax to be deposited; the correct type of tax to be deposited; the correct tax period for which the deposit was made; the correct date the funds are to be transferred; and the number of the taxpayer's bank account with sufficient funds to cover the deposit.
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Author:Pflieger, Deborah J.
Publication:The Tax Adviser
Date:Jul 1, 1996
Words:1121
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