Federal Tax Deposits by Electronic Funds Transfer; Temporary Regulation and Proposed Rule DEPARTMENT OF THE TREASURY

Federal RegisterJul 11, 1994

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SUMMARY: This document contains temporary regulations relating to the

deposit of taxes by electronic funds transfer. The temporary

regulations describe the taxpayers that must make deposits by means of

electronic funds transfer, the types of taxes that must be so

deposited, and when the deposits must commence. The temporary

regulations reflect changes to the Internal Revenue Code made by

section 523 of the North American Free Trade Agreement Implementation

Act (NAFTA). The text of the temporary regulations also serves as the

text of the cross-reference notice of proposed rulemaking on this

subject in the Proposed Rules section of this issue of the Federal

DATES: These temporary regulations are effective July 11, 1994.

For dates of applicability, see Sec. 31.6302-1T(h) of these

regulations.

FOR FURTHER INFORMATION CONTACT: Vincent G. Surabian, 202-622-6232 (not

a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

Section 523 of NAFTA amended section 6302 of the Internal Revenue

Code of 1986 (Code) by enacting a new subsection (h) authorizing the

Secretary of the Treasury to prescribe such regulations as may be

necessary for the development and implementation of an electronic funds

transfer (EFT) system to be used for the collection of depository

taxes. The depository taxes are the taxes required to be deposited with

an authorized financial institution or Federal Reserve bank pursuant to

any regulations prescribed by the Secretary (generally FICA and

railroad retirement taxes, income tax withheld, corporate income and

estimated taxes, and various Federal excise taxes). The new system will

be designed to ensure that the depository taxes are credited to the

Treasury's general account by the due date of the deposit.

Explanation of Provisions

A. Current Tax Deposit System

At present, taxpayers are required to deposit taxes with an

authorized government depository (generally, a commercial bank or

savings institution or a Federal Reserve bank) by various dates

specified in regulations. Each deposit must be accompanied by Form

8109, Federal Tax Deposit Coupon, which contains the taxpayer's name,

identification number, the amount and type of tax being deposited, and

the tax period for which the deposit is being made. The government

depository forwards the coupon to the appropriate IRS Service Center.

The Service Center compares the information entered on the coupon with

the liabilities reported by the taxpayer on the return for the

applicable tax period. The funds are transferred by the depository to

the Treasury on the business date following the date of the deposit.

B. An Electronic Tax Deposit System

Section 6302(h) of the Code authorizes a new system which will

allow for the transfer of tax deposit amounts electronically from

taxpayer accounts to the Treasury's general account. The new system

will be phased in over a period of several fiscal years, beginning with

fiscal year 1994 (October 1, 1993, to September 30, 1994), by gradually

increasing the percentage of the total depository taxes required to be

collected by EFT. The temporary regulations implement this phase-in by

gradually increasing the number of taxpayers that must deposit all of

their depository taxes by EFT.

The requirement to deposit by EFT under these temporary regulations

applies only to those taxpayers required to make deposits pursuant to

regulations under section 6302 of the Code, and only for those taxes

required to be deposited. At present, many small taxpayers are excluded

from the various deposit requirements imposed by regulations under

section 6302. For example, filers of Form 720, Quarterly Federal Excise

Tax Return, are not required to make deposits for any calendar quarter

in which the net tax liability reported on the Form 720 does not exceed

$2,000. Similarly, filers of Form 941, Employer's Quarterly Federal Tax

Return, are not required to make deposits for any calendar quarter in

which the liability reported on the Form 941 is less than $500.

The temporary regulations, with one exception, do not apply to

taxes with respect to wages for domestic service in the private home of

an employer because these taxes are not required to be deposited but

are remitted quarterly with Form 942, Employer's Quarterly Federal Tax

Return for Household Employees. The sole exception is if the employer

is a sole proprietor filing Form 941, Employer's Quarterly Federal Tax

Return, who chooses to report wages to household employees on that

form.

In order to achieve an expedited and orderly conversion to an EFT

system, NAFTA prescribed a schedule of minimum percentages of taxes

that must be deposited by EFT during a phase-in period. These

percentages depend in part on whether the taxes are: (a) The taxes

imposed by chapters 21 (Federal Insurance Contributions Act), 22

(Railroad Retirement Tax Act), and 24 (Collection of Income Tax at

Source on Wages) of the Code, or (b) ``other'' depository taxes

(generally corporate income taxes and various excise taxes). The

statutorily prescribed minimum percentages for each year are as

follows:

------------------------------------------------------------------------

Chapter

21, 22, & Other

Fiscal year 24 taxes taxes

(percent) (percent)

------------------------------------------------------------------------

1994.............................................. 3 3

1995.............................................. 16.9 20

1996.............................................. 20.1 30

1997 & 1998....................................... 58.3 60

1999 and later.................................... 94 94

------------------------------------------------------------------------

For the period prior to January 1, 1995, the first step of the

phase-in of the EFT system will be carried out through binding

agreements entered into between the Commissioner of Internal Revenue

and certain third party bulk data processors (processors) under which

the processors have committed to make deposits of Federal depository

taxes of certain of their customers by EFT in such a manner as to

ensure that the amounts are credited to the general account of the

Treasury by the deposit due date. These agreements will take effect

beginning in the latter part of fiscal year 1994 and will continue for

a period of time into fiscal year 1995. A taxpayer who is a customer of

a processor that is a party to one of these agreements may have its

deposits that are subject to such an agreement made by the processor

pursuant to the terms of the agreement until the expiration or

termination of the agreement. However, the taxpayer continues to be

responsible for the deposit of those depository taxes that are not

subject to such agreement. If a taxpayer whose deposits are being made

by a processor pursuant to such an agreement becomes required to

deposit by electronic funds transfer pursuant to Sec. 31.6302-

1T(h)(1)(ii) of these temporary regulations, the taxpayer is

responsible for making deposits by electronic funds transfer of those

depository taxes not subject to the agreement.

For periods after December 31, 1994, the temporary regulations

require that deposits be made by EFT based on the taxpayer's total

deposits of taxes imposed by chapters 21, 22, and 24 during certain

``determination'' periods. If a taxpayer's total deposits of the taxes

imposed by chapters 21, 22, and 24 during the determination period

exceed a prescribed dollar threshold, the taxpayer must begin

depositing by EFT on and after the applicable effective date prescribed

in the regulations, unless otherwise exempted. (A taxpayer will become

subject to the EFT requirement for the applicable effective date

``January 1, 1996'' by exceeding the threshold amount during either

calendar years 1993 or 1994). The phase-in schedule is as follows:

------------------------------------------------------------------------

Applicable effective

Threshold amount Determination period date

------------------------------------------------------------------------

$78 million............ 1-1-93 to 12-31-93..... January 1, 1995.

47 million............. 1-1-93 to 12-31-93..... January 1, 1996.

47 million............. 1-1-94 to 12-31-94..... January 1, 1996.

50 thousand............ 1-1-95 to 12-31-95..... January 1, 1997.

50 thousand............ 1-1-96 to 12-31-96..... January 1, 1998.

20 thousand............ 1-1-97 to 12-31-97..... January 1, 1999.

------------------------------------------------------------------------

The thresholds set forth in this phase-in schedule have been set by

taking into account the minimum percentages prescribed by NAFTA, the

need for administrative convenience and simplicity, and the potential

need for exemptions from the EFT system for certain small businesses.

Therefore, the thresholds for the January 1, 1995 and January 1, 1996

effective dates were specifically set to satisfy the statutory minimum

percentages. The $50,000 threshold for the January 1, 1997 effective

date will result in receipts of depository taxes somewhat in excess of

the percentage prescribed by NAFTA. For purposes of administrative

convenience and simplicity, this threshold was adopted to require the

participation of an entire class of taxpayers, that is, those taxpayers

that are classified as ``semi-weekly'' depositors of employment taxes

(the taxes imposed by chapters 21, 22, and 24). Finally, the $20,000

threshold for the January 1, 1999 effective date was set to satisfy the

statutory percentage while allowing for the possibility that the

smallest of depositors will be exempted from the EFT system. As

described in paragraph C of this preamble, the IRS solicits comments on

the impact of these regulations on small businesses. Based on those

comments, the IRS will determine those categories of small businesses,

if any, that should be exempted from the EFT requirements, and may

adjust the threshold for the January 1, 1999 effective date to bring in

additional taxpayers while at the same time accommodating any

appropriate exemptions.

Although only the taxes imposed by chapters 21, 22, and 24 are used

to determine whether a taxpayer is subject to the EFT deposit

requirement, the requirement, once triggered, applies to all federal

taxes (not just the taxes imposed by chapters 21, 22, and 24) that the

taxpayer is required to deposit pursuant to regulations prescribed

under section 6302 of the Code. Once a taxpayer becomes subject to the

EFT deposit requirement, the taxpayer must continue to deposit by EFT.

At present the IRS has in place a voluntary electronic funds

transfer (EFT) system in which a taxpayer may by telephone or computer

effectuate an electronic funds transfer through the use of one of two

payment options: debit and credit. The debit option is effected by

using a Financial Agent of the Department of Treasury. The taxpayer

requests the Financial Agent to initiate the transfer of funds from the

taxpayer's bank account(s) to Treasury's general account and transmit

the related tax payment data, supplied by the taxpayer, to the IRS. The

credit option is effected by using the taxpayer's financial

institution. The taxpayer requests the financial institution to

initiate the transfer of funds to the Treasury's general account and

submit the related tax data, supplied by the taxpayer, to a Financial

Agent for transmission to the IRS. The EFT system required to be used

in connection with these regulations will employ similar options and

procedures.

C. Exemptions

Section 6302(h)(1)(B) of the Code, as added by NAFTA, provides that

the regulations may contain such exemptions as the Secretary may deem

appropriate. The Senate Report accompanying section 6302(h) strongly

encourages the Secretary of the Treasury to consider the impact of the

regulations on small businesses. S. Rep. No. 103-189, 103d Cong., 1st

Sess., at 61 et. seq. (1993). The report recommends that the

regulations should not create hardships for small businesses and that

no small business should be required to purchase computers or gain

access to any electronic equipment other than a touch-tone telephone.

Further, the report urges the Secretary to take into account the

specific needs of small employers, including possible exemption for the

very smallest businesses from the new electronic funds transfer system.

The phase-in schedule included in the temporary regulations defers use

of the EFT system by the smallest businesses until at least calendar

year 2000. The IRS welcomes comments about the impact of the temporary

regulations on small businesses and will consider any suggestions

regarding how small businesses should be treated under the regulations

in order to implement Congressional intent. Based on the comments and

suggestions received, the IRS will determine those categories of small

businesses, if any, that should be exempted from the EFT requirements

and publish such determinations in the Internal Revenue Bulletin. (See

Sec. 601.601(d)(2)(ii)(b)).

Special Analyses

It has been determined that these temporary regulations are not a

significant regulatory action as defined in EO 12866. Therefore, a

regulatory assessment is not required. It also has been determined that

section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5)

and the Regulatory Flexibility Act (5 U.S.C. chapter 6) do not apply to

these regulations and, therefore, a Regulatory Flexibility Analysis is

not required. Pursuant to section 7805(f) of the Internal Revenue Code,

a copy of these regulations will be submitted to the Chief Counsel for

Advocacy of the Small Business Administration for comment on its impact

on small business.

Drafting Information

The principal author of these regulations is Vincent G. Surabian,

Office of the Assistant Chief Counsel (Income Tax & Accounting), IRS.

However, other personnel from the IRS and Treasury Department

participated in their development.

List of Subjects

26 CFR Part 1

Income taxes, Reporting and recordkeeping requirements.

26 CFR Part 31

Employment taxes, Income taxes, Penalties, Pensions, Railroad

retirement, Reporting and recordkeeping requirements, Social Security,

Unemployment compensation.

26 CFR Part 40

Excise taxes, Reporting and recordkeeping requirements.

Amendments to the Regulations

Accordingly, 26 CFR parts 1, 31, and 40 are amended as follows:

PART 1--INCOME TAXES

Paragraph 1. The authority citation for part 1 is amended by adding

an entry in numerical order to read as follows:

Authority: 26 U.S.C. 7805. * * *

Sections 1.6302-1T, 1.6302-2T and 1.6302-3T also issued under 26

U.S.C. 6302(h). * * *

Par. 2. Section 1.6302-1T is added to read as follows:

Sec. 1.6302-1T Use of Government depositaries in connection with

corporation income and estimated income taxes and certain taxes of tax-

exempt organizations--deposits required to be made by electronic funds

transfer after December 31, 1994 (temporary).

(a) through (b)(1) [Reserved].

(b)(2) Deposits by electronic funds transfer. For the requirement

to deposit corporation income and estimated income taxes and certain

taxes of tax-exempt organizations by electronic funds transfer, see

Sec. 31.6302-1T(h) of this chapter. A taxpayer not required to deposit

by electronic funds transfer pursuant to Sec. 31.6302-1T(h) of this

chapter remains subject to the rules of Sec. 1.6302-1(b).

Par. 3. Section 1.6302-2T is added to read as follows:

Sec. 1.6302-2T Use of Government depositaries for payment of tax

withheld on nonresident aliens and foreign corporations--deposits

required to be made by electronic funds transfer after December 31,

1994 (temporary).

(a) through (b) [Reserved].

deposit taxes withheld on nonresident aliens and foreign corporations

by electronic funds transfer, see Sec. 31.6302-1T(h) of this chapter. A

taxpayer not required to deposit by electronic funds transfer pursuant

to Sec. 31.6302-1T(h) of this chapter remains subject to the rules of

Sec. 1.6302-2(b).

Par. 4. Section 1.6302-3T is added to read as follows:

Sec. 1.6302-3T Use of Government depositaries in connection with

estimated taxes of certain trusts--deposits required to be made by

electronic funds transfer after December 31, 1994 (temporary).

(a) through (b) [Reserved].

certain banks and financial institutions acting as fiduciaries with

respect to taxable trusts, see Revenue Procedure 89-49, 1989-2 C.B. 615

(see Sec. 601.601(d)(2) of this chapter) or any successor revenue

procedure. For the requirement to deposit estimated tax payments of

taxable trusts by electronic funds transfer, see Sec. 31.6302-1T(h) of

this chapter.

PART 31--EMPLOYMENT TAXES AND COLLECTION OF INCOME TAX AT THE

SOURCE

Par. 5. The authority citation for part 31 is amended by adding

entries in numerical order to read as follows:

Authority: 26 U.S.C. 7805. * * *

Section 31.6302-1T also issued under 26 U.S.C. 6302(h). * * *

Section 31.6302(c)-3T also issued under 26 U.S.C. 6302(h). * * *

Par. 6. Section 31.6302-1T is added to read as follows:

Sec. 31.6302-1T Federal tax deposit rules for withheld income taxes

and taxes under the Federal Insurance Contributions Act (FICA)--

deposits required to be made by electronic funds transfer after

December 31, 1994 (temporary).

(a) through (g) [Reserved].

(h) Time and manner of deposit--deposits required to be made by

electronic funds transfer--(1) In general. Section 6302(h) of the

Internal Revenue Code requires the Secretary to prescribe regulations

as may be necessary for the development and implementation of an

electronic funds transfer system to be used for the collection of

depository taxes as described in paragraph (h)(2) of this section.

Section 6302(h)(2) of the Code provides a phase-in schedule which sets

forth escalating minimum percentages of those depository taxes to be

deposited by electronic funds transfer, starting with the fiscal year

beginning October 1, 1993, and ending September 30, 1994. This section

prescribes the rules necessary for implementing an electronic funds

transfer system for collection of depository taxes and for effecting an

orderly and expeditious phase-in of that system.

(i) Period prior to January 1, 1995. The Commissioner of Internal

Revenue has entered into binding agreements with third party bulk data

processors. These agreements require that the third party bulk

processors deposit certain depository taxes of certain of their

customers by electronic funds transfer in a manner designed to ensure

that those amounts are credited to the general account of the Treasury

by the deposit due date. A taxpayer who is a customer of a third party

bulk data processor that is a party to such an agreement may have its

deposits that are subject to such agreement made by the processor until

the expiration or termination of the agreement. However, the taxpayer

continues to be responsible for the deposit of those depository taxes

that are not subject to such agreement.

(ii) Periods after December 31, 1994. (A) Taxpayers whose aggregate

deposits of the taxes imposed by Chapters 21 (Federal Insurance

Contributions Act), 22 (Railroad Retirement Tax Act), and 24

(Collection of Income Tax at Source on Wages) of the Internal Revenue

Code during a 12-month determination period exceed the applicable

threshold amount are required to deposit all depository taxes (as

described in paragraph (h)(2) of this section) due on and after the

applicable effective date by electronic funds transfer (as defined in

paragraph (h)(3) of this section) unless exempted under paragraph

(h)(4) of this section. In general, each applicable effective date has

one 12-month determination period. However, for the applicable

effective date January 1, 1996, there are two determination periods. If

the applicable threshold amount is exceeded in either of those

determination periods, the taxpayer becomes subject to the requirement

to deposit by electronic funds transfer, effective January 1, 1996. The

threshold amounts, determination periods, and applicable effective

dates are as follows: