Federal Tax Deposits by Electronic Funds Transfer

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DEPARTMENT OF THE TREASURY

26 CFR Parts 1 and 31

[TD 8661]

RIN 1545-AU10

Federal Tax Deposits by Electronic Funds Transfer

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Temporary regulations.

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SUMMARY: This document contains temporary regulations relating to the

deposit of Federal taxes by electronic funds transfer (EFT) under

section 6302 of the Internal Revenue Code. The document also includes

temporary regulations providing authority for the voluntary payment of

certain Federal taxes by EFT. The regulations would provide the public

with additional guidance needed to make deposits by EFT and would

affect certain taxpayers not previously required to make deposits by

EFT. The text of these temporary regulations also serves as the text of

a cross-reference notice of proposed rulemaking on this subject in the

Proposed Rules section of this issue of the Federal Register.

EFFECTIVE DATE: March 21, 1996.

FOR FURTHER INFORMATION CONTACT: Vincent G. Surabian, 202-622- 6232

(not a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

On July 11, 1994, the IRS issued Treasury Decision 8553 (59 FR

35414), setting forth temporary regulations relating to the deposit of

Federal taxes by EFT. Those temporary regulations explained which

taxpayers must make deposits by electronic funds transfer, which taxes

must be so deposited, and when the deposits must commence. The text of

those temporary regulations also served as the text of a cross-

reference notice of proposed rulemaking published in the same issue of

the Federal Register at 59 FR 35418.

The IRS received many comment letters in response to the

publication of those temporary regulations. In addition, a number of

oral comments were made at the public hearing held on October 3, 1994.

With limited exceptions, those comments will not be addressed in this

document, but instead will be addressed in final regulations that the

IRS expects to publish in the near future.

Under the temporary regulations currently in place, the requirement

to begin EFT deposits is based on the taxpayer's total deposits of the

taxes imposed by chapters 21 (FICA taxes), 22 (railroad retirement

taxes) and 24 (income tax withheld at source) of the Internal Revenue

Code during certain ``determination periods.'' If the taxpayer's

deposits of those taxes during a determination period exceed a

prescribed dollar threshold, the taxpayer must begin to deposit by EFT

on and after the applicable effective date prescribed in the temporary

regulations, unless otherwise exempted.

The amendments to the temporary regulations set forth in this

document provide a special rule for any taxpayer that does not make

deposits of the taxes imposed by chapters 21, 22, and 24, but that does

make deposits of other taxes required to be deposited pursuant to

regulations issued under section 6302 (for instance, corporate income

taxes). If the taxpayer's total deposits for all other depository taxes

during a prescribed determination period exceed a prescribed dollar

threshold, the taxpayer must begin depositing by EFT on and after the

applicable effective date prescribed in these amendments to the

temporary regulations, unless otherwise exempted. (A taxpayer will

become subject to the EFT requirement for the January 1, 1998,

applicable effective date by exceeding the threshold amount during

either calendar year 1995 or calendar year 1996.) The phase-in schedule

is as follows:

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

Determination Applicable

Threshold amount period effective date

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

$50 thousand.................... 1-1-95 to 12-31-95 January 1, 1998.

$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 current temporary regulations provide that a taxpayer subject

to the EFT requirement must use EFT for all deposits required to be

made on and after the applicable effective date. This requirement may

subject a taxpayer to two different modes of deposit with respect to

the same return period. For example, assume an employer is required to

deposit by EFT beginning with the January 1, 1997, applicable effective

date. The employer pays its employees weekly and has a paydate on

December 31, 1996. The employment taxes incurred for that paydate would

be reportable on the fourth quarter 1996 Form 941, but the due date for

the deposit of those taxes would occur in early January 1997. Under the

current rule, all the deposits relating to the fourth quarter 1996 Form

941 would be made by paper coupon (FTD coupon) with the exception of

the deposit for the December 31 payroll, which would be made by EFT.

For purposes of consistency, this rule is being changed with respect to

the January 1, 1997, applicable effective date and thereafter to

provide that the first deposit required to be made by EFT is the first

deposit with respect to a deposit obligation incurred for a return

period beginning on or after the applicable effective date. Thus, under

the revised rule, the deposit with respect to the December 31 paydate

in the example would be made by FTD coupon rather than by EFT.

The current temporary regulations provide that a deposit by EFT is

deemed made (i) at the time a debit is made (the amount is withdrawn

from the taxpayer's account) if the Government's authorized financial

agent debits the taxpayer's account; or (ii) in all other cases, at the

time the funds are credited to the Treasury's general account. Comments

by the Federal Reserve Board, the Financial Management Service, and IRS

personnel recommended a clarification of that provision. Based on those

recommendations, the current temporary regulations are amended to

provide that a deposit by EFT is deemed made (i) at the time a debit is

made (the amount is withdrawn from the taxpayer's account and not

returned or reversed) if the Government's authorized agent originates a

debit entry which instructs the taxpayer's financial institution to

debit the taxpayer's account for a Federal tax payment; or (ii) in all

other cases (assuming the amount is not returned or reversed), either

at the time the funds are paid into the Treasury's general account at

the Federal Reserve Bank of New York or at the time the funds are

invested under Treasury's Tax and Loan program (see 31 CFR Part 203).

Investment occurs when the funds are credited by the Federal Reserve

Bank to the depositary institution's note balance.

These temporary regulations also define the term taxpayer. For

purposes of the EFT requirement, a taxpayer is any person required to

deposit federal taxes, including not only individuals, but also any

trust, estate, partnership, association, company or corporation. This

definition responds to numerous inquiries following the issuance of the

current temporary regulations.

Sections 31.6302-1T(h)(2) (describing the taxes required to be

deposited by EFT) and 31.6302-1T(h)(8) (describing when a deposit of

tax by EFT is deemed to be a payment of tax) have been revised solely

for purposes of clarity. No substantive change is being made to either

of the provisions.

These temporary regulations allow individual taxpayers to make

voluntary

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payments of income tax by EFT, even though individual income tax is not

required to be deposited with a government depositary. The voluntary

EFT payments are to be made in accordance with instructions provided in

procedures to be prescribed by the Commissioner at a future date.

Special Analyses

It has been determined that this Treasury decision is 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 rules and, therefore, a Regulatory Flexibility Analysis is not

required. Pursuant to section 7805(f) of the Internal Revenue Code, a

copy of these temporary regulations will be submitted to the Chief

Counsel for Advocacy of the Small Business Administration for comment

on their 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.

Adoption of Amendments to the Regulations

Accordingly, 26 CFR parts 1 and 31 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 * * *

Section 1.6302-4T also issued under 26 U.S.C. 6302(a) and (c). * *

*

Par. 2. Section 1.6302-4T is added to read as follows:

Sec. 1.6302-4T Use of financial institutions in connection with

individual income taxes (temporary).

Voluntary payments by electronic funds transfer. An individual may

voluntarily remit by electronic funds transfer all payments of tax

imposed by subtitle A of the Code, including any payments of estimated

tax. Such payments must be made in accordance with procedures to be

prescribed by the Commissioner.

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

Par. 3. The authority citation for part 31 continues to read in

part as follows:

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

Par. 4. Section 31.6302-1T is amended as follows:

1. Paragraph (h)(1)(ii)(A) is redesignated as paragraph

(h)(1)(ii)(A)(1); the first sentence in newly designated paragraph

(h)(1)(ii)(A)(1) is removed, and three new sentences are added in its

place; and, in the last sentence of the newly designated paragraph, the

text preceding the table is revised.

2. Paragraph (h)(1)(ii)(A)(2) is added.

3. Paragraphs (h)(2), (h)(3), (h)(7) and (h)(8) are revised.

The additions and revisions 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).

* * * * *

(h) * * * (1) * * *

(ii) Periods after December 31, 1994. (A)(1) 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 described

in paragraph (h)(2) of this section by electronic funds transfer (as

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

paragraph (h)(4) of this section. If the applicable effective date is

January 1, 1995, or January 1, 1996, the requirement to deposit by

electronic funds transfer applies to all deposits required to be made

on and after the applicable effective date. If the applicable effective

date is January 1, 1997, or thereafter, the requirement to deposit by

electronic funds transfer applies to all deposits required to be made

with respect to deposit obligations incurred for return periods

beginning on and after the applicable effective date. * * * The

threshold amounts, determination periods and applicable effective dates

for purposes of this paragraph (h)(1)(ii)(A)(1) are as follows: * * *

(2) Unless exempted under paragraph (h)(4) of this section, a

taxpayer that does not deposit any of the taxes imposed by chapters 21,

22, and 24 during the applicable determination periods set forth in

paragraph (h)(1)(ii)(A)(1) of this section, but that does make deposits

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

section), is nevertheless subject to the requirement to deposit by

electronic funds transfer if the taxpayer's aggregate deposits of all

depository taxes exceed the threshold amount set forth in this

paragraph (h)(1)(ii)(A)(2) during an applicable 12-month determination

period. This requirement to deposit by electronic funds transfer

applies to all depository taxes due with respect to deposit obligations

incurred on and after the applicable effective date. The threshold

amount, determination periods, and applicable effective dates for

purposes of this paragraph (h)(1)(ii)(A)(2) are as follows:

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

Determination Applicable

Threshold amount period effective date

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

$50 thousand.................... 1-1-95 to 12-31-95 January 1, 1998.

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

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

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

* * * * *

(2) Taxes required to be deposited by electronic funds transfer.

The requirement to deposit by electronic funds transfer under paragraph

(h)(1)(ii) of this section applies to all the taxes required to be

deposited under Secs. 1.6302-1, 1.6302-2, and 1.6302-3 of this chapter;

Secs. 31.6302-1, 31.6302-2, 31.6302-3, 31.6302-4, and 31.6302(c)-3; and

Sec. 40.6302(c)-1 of this chapter.

(3) Definitions--(i) Electronic funds transfer. An electronic funds

transfer is any transfer of depository taxes made in accordance with

Revenue Procedure 94-48 (1994-2 C.B. 694), (see Sec. 601.601(d)(2) of

this chapter), or in accordance with procedures subsequently prescribed

by the Commissioner.

(ii) Taxpayer. For purposes of this section, a taxpayer is any

person required to deposit federal taxes, including not only

individuals, but also

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any trust, estate, partnership, association, company or corporation.

* * * * *

(7) Time deemed deposited. A deposit of taxes by electronic funds

transfer will be deemed made--

(i) At the time a debit is made (the amount is withdrawn from the

taxpayer's account and not returned or reversed) if the Government's

authorized agent originates a debit entry which instructs the

taxpayer's financial institution to debit the taxpayer's account for a

Federal tax payment; or

(ii) In all other cases (assuming the amount is not returned or

reversed), either at the time that the funds are paid into the

Treasury's general account at the Federal Reserve Bank of New York, or

at the time that the funds are invested under Treasury's Tax and Loan

program (see 31 CFR part 203). Investment occurs when the funds are

credited by the Federal Reserve Bank to the depository institution's

note balance.

(8) Time deemed paid. In general, an amount deposited under this

paragraph (h) will be considered to be a payment of tax on the last day

prescribed for filing the applicable return for the return period

(determined without regard to any extension of time for filing the

return) or, if later, at the time deemed deposited under paragraph

(h)(7) of this section. In the case of the taxes imposed by chapters 21

and 24 of the Internal Revenue Code, solely for purposes of section

6511 and the regulations thereunder (relating to the period of

limitation on credit or refund), if an amount is deposited prior to

April 15th of the calendar year immediately succeeding the calendar

year that includes the period for which the amount was deposited, the

amount will be considered paid on April 15th.

Margaret Milner Richardson,

Commissioner of Internal Revenue.

Approved: December 22, 1995.

Leslie Samuels,

Assistant Secretary of the Treasury.

[FR Doc. 96-6718 Filed 3-20-96; 8:45 am]

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