Electronic Funds Transfers of Federal Deposits

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Parts 1, 20, 25, 31, and 40

[TD 8828]

RIN 1545-AW41

Electronic Funds Transfers of Federal Deposits

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations.

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SUMMARY: This document contains final regulations relating to the

deposit of Federal taxes by electronic funds transfer (EFT). The final

regulations affect certain taxpayers required to make deposits of

Federal taxes. For calendar years beginning after 1999, the final

regulations provide rules under which certain taxpayers must make

deposits by EFT.

DATES: Effective Date: These regulations are effective July 13, 1999.

Applicability Date: For dates of applicability, see Sec. 31.6302-

1(h)(2).

FOR FURTHER INFORMATION CONTACT: Vincent Surabian, (202) 622-4940 (not

a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

This document contains amendments to the Income Tax Regulations (26

CFR part 1), the Estate Tax Regulations (26 CFR part 20), the Gift Tax

Regulations (26 CFR part 25), the Employment Taxes and Collection of

Income Tax at Source Regulations (26 CFR part 31), and the Excise Tax

Procedural Regulations (26 CFR part 40). On March 23, 1999, a notice of

proposed rulemaking was published in the Federal Register (64 FR

13940). A public hearing originally scheduled in the notice of proposed

rulemaking for May 11, 1999, was canceled as there were no requests to

speak. Three written comments were received. After consideration of all

comments, the proposed regulations are adopted by this Treasury

decision.

Explanation of Provisions

Section 6302(h) requires that, beginning in fiscal year 1999, 94

percent of employment taxes and 94 percent of other depository taxes be

collected by EFT. The IRS and Treasury Department previously concluded

that the deposit threshold had to be set at $50,000 to satisfy this

statutory requirement. More recent experience suggests, however, that

the statutory requirement can be satisfied even if the threshold is set

at a substantially higher level. Moreover, an increase in the threshold

would allow small businesses to make the transition to the EFT system

at their own pace as they adopt electronic funds transfer in their

other business operations. Accordingly, the final regulations increase

the deposit threshold to $200,000 in aggregate Federal tax deposits

during a calendar year.

The new $200,000 aggregate deposits threshold will be applied

initially to 1998 deposits, and taxpayers that exceed the threshold in

1998 will be required to deposit by EFT beginning in 2000. Taxpayers

that first exceed the threshold in 1999 or a subsequent year will

similarly be required to deposit by EFT beginning in the second

succeeding calendar year. A taxpayer that exceeds the threshold will

not be permitted to resume making paper coupon deposits if its deposits

fall below $200,000 in a subsequent year. Although a similar rule

applies under the current regulations, taxpayers that are currently

required to deposit by EFT will be given a fresh start and will not be

required to use EFT unless they exceed the $200,000 threshold in 1998

or a subsequent calendar year.

The final regulations also expand the types of nondepository tax

payments for which voluntary payment by EFT is allowed to include

nondepository payments of Federal income, estate and gift, employment,

and various specified excise taxes.

Public Comments

Two commentators on the proposed regulations opposed the increase

in the threshold to $200,000. They were concerned that financial

institutions

[[Page 37676]]

and the Federal government would have to continue to process large

volumes of checks and paper coupons.

In addition, they stated that the increase in threshold does not

seem justified since the requirement to deposit by EFT does not require

an investment by the taxpayer in new technology and greater use of EFT

payment methods will contribute to the maintenance of a secure and

efficient payment system. The two commentators conclude that the

Federal government should continue to use penalty waivers until

taxpayers become adept at using the system of depositing by EFT

efficiently and accurately. The two commentators did, however, agree

with the use of an aggregate deposits test to determine whether a

taxpayer is required to deposit by EFT.

As stated in the notice of proposed rulemaking, the IRS and

Treasury Department are confident that most taxpayers currently

required to deposit by EFT have come to appreciate the simplicity and

convenience of the EFT system and will continue to deposit by EFT on a

voluntary basis. Despite the increase in the threshold, the continued

participation of these taxpayers, coupled with continuing efforts to

encourage voluntary enrollment, should ensure the Congressionally-

mandated 94 percent of collections by EFT. A lower threshold would, as

the commentators suggest, result in even greater use of the EFT system.

The IRS and Treasury Department have concluded, however, that the

$200,000 threshold appropriately balances concerns relating to small

businesses against the benefit of reduced paper transactions.

A third comment suggested removal of the rule in 31 CFR part 203

prohibiting banks from charging fees for processing paper coupon

deposits. The regulations in 31 CFR part 203 are issued by the

Financial Management Service (FMS) of the Treasury Department, rather

than by the Internal Revenue Service. FMS has received similar comments

and announced, in the preamble of the 1998 regulations revising 31 CFR

part 203 (63 FR 5643), that it intends to issue a notice of proposed

rulemaking on removing this prohibition.

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)

does not apply to these regulations and, because these regulations do

not impose a collection of information requirement on small entities,

the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not apply.

Pursuant to section 7805(f) of the Internal Revenue Code, the notice of

proposed rulemaking that preceded these regulations was 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 Surabian, Office of

Assistant Chief Counsel (Income Tax & Accounting). 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 20

Estate taxes, Reporting and recordkeeping requirements.

26 CFR Part 25

Gift 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.

Adoption of Amendments to the Regulations

Accordingly, 26 CFR parts 1, 20, 25, 31, and 40 are amended as

follows:

PART 1--INCOME TAXES

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

revising the entry for Sec. 1.6302-4 to read in part as follows:

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

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

* * *

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

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

taxes; voluntary payments by electronic funds transfer.

Any person may voluntarily remit by electronic funds transfer any

payment of tax imposed by subtitle A of the Internal Revenue Code,

including any payment of estimated tax. Such payment must be made in

accordance with procedures prescribed by the Commissioner.

PART 20--ESTATE TAX; ESTATES OF DECEDENTS DYING AFTER AUGUST 16,

1954

Par. 3. The authority citation for part 20 is amended by adding an

entry in numerical order to read in part as follows:

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

Section 20.6302-1 also issued under 26 U.S.C. 6302(a) and (h). * *

*

Par. 4. Section 20.6302-1 is added to read as follows:

Sec. 20.6302-1 Voluntary payments of estate taxes by electronic funds

transfer.

Any person may voluntarily remit by electronic funds transfer any

payment of tax to which this part 20 applies. Such payment must be made

in accordance with procedures prescribed by the Commissioner.

PART 25--GIFT TAX; GIFTS MADE AFTER DECEMBER 31, 1954

Par. 5. The authority citation for part 25 is amended by adding an

entry in numerical order to read in part as follows:

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

Section 25.6302-1 also issued under 26 U.S.C. 6302(a) and (h). * *

*

Par. 6. Section 25.6302-1 is added to read as follows:

Sec. 25.6302-1 Voluntary payments of gift taxes by electronic funds

transfer.

Any person may voluntarily remit by electronic funds transfer any

payment of tax to which this part 25 applies. Such payment must be made

in accordance with procedures prescribed by the Commissioner.

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

Par. 7. The authority citation for part 31 continues to read in

part as follows:

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

Par. 8. Section 31.6302-1 is amended as follows:

1. The heading for paragraph (h)(2) is revised.

2. A heading is added for paragraph (h)(2)(i).

3. New paragraph (h)(2)(i)(C) is added.

4. Paragraph (h)(2)(ii) is revised

5. Paragraph (h)(2)(iii) is added.

6. Paragraph (m) is redesignated as paragraph (n).

7. Paragraph (k) is redesignated as new paragraph (m).

8. Paragraph (j) is redesignated as new paragraph (k).

9. New paragraph (j) is added.

The additions and revisions read as follows:

[[Page 37677]]

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

taxes under the Federal Insurance Contributions Act (FICA) attributable

to payments made after December 31, 1992.

* * * * *

(h) * * *

(2) Applicability of requirement--(i) Deposits for return periods

beginning before January 1, 2000. (A) * * *

(C) This paragraph (h)(2)(i) applies only to deposits required to

be made for return periods beginning before January 1, 2000. Thus, a

taxpayer, including a taxpayer that is required under this paragraph

(h)(2)(i) to make deposits by electronic funds transfer beginning in

1999 or an earlier year, is not required to use electronic funds

transfer to make deposits for return periods beginning after December

31, 1999, unless deposits by electronic funds transfer are required

under paragraph (h)(2)(ii) of this section.

(ii) Deposits for return periods beginning after December 31, 1999.

Unless exempted under paragraph (h)(5) of this section, a taxpayer that

deposits more than $200,000 of taxes described in paragraph (h)(3) of

this section during a calendar year beginning after December 31, 1997,

must use electronic funds transfer (as defined in paragraph (h)(4) of

this section) to make all deposits of those taxes that are required to

be made for return periods beginning after December 31 of the following

year and must continue to deposit by electronic funds transfer in all

succeeding years. Thus, a taxpayer that exceeds the $200,000 deposit

threshold during calendar year 1998 is required to make deposits for

return periods beginning in or after calendar year 2000 by electronic

funds transfer.

(iii) Voluntary deposits. A taxpayer that is not required by this

section to use electronic funds transfer to make a deposit of taxes

described in paragraph (h)(3) of this section may voluntarily make the

deposit by electronic funds transfer, but remains subject to the rules

of paragraph (i) of this section, pertaining to deposits by Federal tax

deposit (FTD) coupon, in making deposits other than by electronic funds

transfer.

* * * * *

(j) Voluntary payments by electronic funds transfer. Any person may

voluntarily remit by electronic funds transfer any payment of tax

imposed by subtitle C of the Internal Revenue

Code. Such payment must be made in accordance with procedures

prescribed by the Commissioner.

* * * * *

PART 40--EXCISE TAX PROCEDURAL REGULATIONS

Par. 9. The authority citation for part 40 is amended by adding an

entry in numerical order to read in part as follows:

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

Section 40.6302(a)-1 also issued under 26 U.S.C. 6302 (a) and (h).

Par. 10. Section 40.6302(a)-1 is added to read as follows:

Sec. 40.6302(a)-1 Voluntary payments of excise taxes by electronic

funds transfer.

Any person may voluntarily remit by electronic funds transfer any

payment of tax to which this part 40 applies. Such payment must be made

in accordance with procedures prescribed by the Commissioner.

Charles O. Rossotti,

Commissioner of Internal Revenue.

Approved: July 2, 1999.

Donald C. Lubick,

Assistant Secretary of the Treasury.

[FR Doc. 99-17517 Filed 7-12-99; 8:45 am]

BILLING CODE 4830-01-U