Electronic Funds Transfers of Federal Deposits

DEPARTMENT OF THE TREASURY
Internal Revenue Service 26 CFR Parts 1, 20, 25, 31, and 40
[REG-100729-98] RIN 1545-AW41

TITLE: Electronic Funds Transfers of Federal Deposits

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking and notice of public hearing.

SUMMARY: This document contains proposed regulations relating to the
deposit of Federal taxes by electronic funds transfer (EFT).

The proposed regulations affect certain taxpayers required to make
deposits of Federal taxes. For calendar years beginning after 1999,
the proposed regulations provide rules under which certain taxpayers
must make deposits by EFT.

DATES: Written and electronic comments must be received by May 24,
1999. Outlines and topics to be discussed at the public hearing
scheduled for May 11, 1999, at 10 a.m. must be received by April 20,
1999.

ADDRESSES: Send submissions to: CC:DOM:CORP:R (REG-100729-98), room
5226, Internal Revenue Service, POB 7604, Ben Franklin Station,
Washington, DC 20044. Submissions may be hand delivered Monday
through Friday between the hours of 8 a.m. and 5 p.m. to:
CC:DOM:CORP:R (REG-100729-98), Courier's Desk, Internal Revenue
Service, 1111 Constitution Avenue NW., Washington, DC.
Alternatively, taxpayers may submit comments electronically via the
Internet by selecting the "Tax Regs" option on the IRS Home Page, or
by submitting comments directly to
http://www.irs.ustreas.gov/prod/tax_regs/comments.html (the IRS
Internet address). The public hearing will be held in room 2615,
Internal Revenue Building, 1111 Constitution Ave. NW, Washington,
DC.

FOR FURTHER INFORMATION CONTACT: Concerning the proposed
regulations, Vincent Surabian, (202) 622-4940; concerning submission
of comments, the hearing, and/or to be placed on the building access
list to attend the hearing, Michael Slaughter, (202) 622-7190 (not
toll-free numbers).

SUPPLEMENTARY INFORMATION:

Background

This document contains proposed 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 July 14, 1997, the IRS issued final regulations under section
6302(h) of the Internal Revenue Code relating to the deposit of
Federal taxes by EFT (TD 8723, 62 FR 37490).

Those final regulations gradually phase taxpayers into the EFT
system through 1999. In the final stages of the phase-in under those
regulations, taxpayers with more than $50,000 in employment tax
deposits during calendar year 1995, 1996, or 1997, and taxpayers
that, in any of those years, had no employment tax deposits but made
deposits of other depository taxes exceeding $50,000, were required
to begin to deposit by EFT.

At present, the regulations do not require EFT use by a new or
growing taxpayer with annual deposits that did not exceed the
prescribed threshold for the first time before 1998.

Explanation of Provisions

1. Increase in Current $50,000 Threshold Section 6302(h) requires
that in fiscal year 1999 and subsequent years 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 proposed regulations increase the deposit threshold
to $200,000 in aggregate Federal tax deposits during a calendar
year.

The new threshold will be applied initially to 1998 deposits, and
taxpayers that exceed the threshold in 1998 will be required to
deposit by EFT in 2000 and subsequent years.

Taxpayers that first exceed the threshold in 1999 or a subsequent
year will similarly be required to deposit by EFT after a one-year
grace period. 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.

Under the new rules, only 9 percent of all business taxpayers that
make Federal tax deposits will be required to deposit by EFT. The
fresh start will allow 65 percent of the taxpayers subject to the
EFT requirement under the current regulations to resume making paper
coupon deposits beginning in 2000. The IRS and Treasury Department
are confident, however, that most of these taxpayers have come to
appreciate the simplicity and convenience of the EFT system and will
continue to deposit by EFT on a voluntary basis. The continued
participation of these taxpayers, coupled with ongoing efforts to
encourage voluntary enrollment, should assure 94 percent collections
by EFT notwithstanding the increase in the threshold.

2. Taxes Taken into Account in Applying Threshold

The current regulations prescribe one threshold ($50,000 in
employment taxes) for depositors liable for employment taxes and a
separate threshold ($50,000 in other taxes) for taxpayers with no
employment tax liability. Thus, taxpayers that deposit employment
taxes but do not exceed the applicable $50,000 threshold are not
subject to the EFT requirement even if they deposit large amounts of
other depository taxes. In Notice 97-43 (1997-2 C.B. 294), the IRS
and Treasury Department invited public comment on two alternatives
to these rules and also welcomed any suggestions for a different
rule. The first alternative presented in Notice 97-43 is a two-
pronged test under which a taxpayer that deposits more than the
threshold amount of the employment taxes imposed by chapters 21, 22,
and 24 or more than the threshold amount of other depository taxes
would be required to deposit by EFT. The second alternative is an
aggregate deposits test under which a taxpayer that deposits more
than the threshold amount of employment and other taxes combined
would be required to deposit by EFT.

The IRS received six comments in response to Notice 97-43.

Two commentators stated that the aggregate deposits test would be
the most satisfactory. One of these commentators stated that an
aggregate test (1) is simple for taxpayers to calculate; (2) is easy
for financial institutions to calculate; and (3) is easy for the IRS
to monitor and maintain. The second commentator favored an aggregate
deposits test because it would introduce a larger number of
taxpayers to the advantages and efficiencies of the EFT system.

Two commentators stated that the present system should be retained
because of its simplicity. One of these commentators stated that a
taxpayer need consider only one set of figures, its employment
taxes, to determine if it is subject to EFT. If the taxpayer has no
employment taxes, then the taxpayer would simply look at its other
depository taxes. The second commentator favored the present rule
because of its belief that the adoption of either of the two
proposals described in Notice 97-43 would bring additional smaller
employers into the EFT system. The commentator stated that it is
unnecessary to bring additional employers into the EFT system
because, under the current rule, the IRS is satisfying the
requirement of section 6302(h) that more than 94 percent of all
depository taxes be deposited by EFT for fiscal year 1999 and
thereafter.

The proposed regulations adopt an aggregate deposits test.

As the comments illustrate, there is disagreement concerning the
relative simplicity of the various options. The view of the IRS and
Treasury Department, based on experience with the current system, is
that an aggregate deposits test would be, on balance, simpler, less
confusing to taxpayers, and more easily administered than a two-
threshold rule. The aggregate deposits test also has the advantage
of eliminating the anomalous current treatment of taxpayers that
deposit small amounts of employment taxes and large amounts of other
taxes as if they were smaller than taxpayers that deposit no
employment taxes but are otherwise similarly situated. The IRS and
Treasury Department believe that the other concern expressed in the
comments, that the aggregate deposits test would unnecessarily
extend the EFT system to additional small employers, has been
adequately addressed by the proposed increase in the threshold.

A fifth commentator suggested that a rule be considered under which
a taxpayer could be relieved of the EFT deposit requirement if the
taxpayer, after being mandated into the system, fails to deposit the
threshold amount during succeeding calendar years. This suggestion
has not been adopted because of concerns that it would be more
complex and more difficult to administer than the proposed rule.

A final commentator stated that the current regulations make no
provision for the consciences of persons whose religious beliefs
restrict the use of computer equipment in their businesses. The IRS
and Treasury Department are continually sensitive to the limited
nature of the technology available to many taxpayers and, for that
reason, have developed a system under which, using the ACH debit
option, equipment no more complex than a rotary or touch-tone
telephone is all that is necessary to make an EFT deposit. A
computer is not required.

3. Expansion of Voluntary Payments by EFT Finally, the current
regulations allow the voluntary payment by EFT of certain
nondepository taxes, specifically individual income taxes (including
estimated taxes). These proposed regulations 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.

Special Analyses

It has been determined that this notice of proposed rulemaking 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, this
notice of proposed rulemaking will be submitted to the Chief Counsel
for Advocacy of the Small Business Administration for comment on its
impact on small business.

Proposed Effective Date

The regulations are proposed to become effective on the date final
regulations are published in the Federal Register.

Comments and Public Hearing

Before these proposed regulations are adopted as final regulations,
consideration will be given to any electronic and written comments
(a signed original and eight (8) copies) that are submitted timely
to the IRS. The IRS and Treasury Department specifically request
comments on the clarity of the proposed regulations and how they can
be made easier to understand. All comments will be available for
public inspection and copying.

A public hearing has been scheduled for May 11, 1999, beginning at
10 a.m. The hearing will be held in room 2615, Internal Revenue
Building, 1111 Constitution Avenue, NW., Washington, DC. Due to
building security procedures, visitors must enter at the 10th Street
entrance, located between Constitution and Pennsylvania Avenues, NW.
In addition, all visitors must present photo identification to enter
the building.

Because of access restrictions, visitors will not be admitted beyond
the immediate entrance area more than 15 minutes before the hearing
starts. For information about having your name placed on the
building access list to attend the hearing, see the FOR FURTHER
INFORMATION CONTACT section of this preamble.

The rules of 26 CFR 601.601(a)(3) apply to the hearing.

Persons who wish to present oral comments at the hearing must submit
written or electronic comments by May 24, 1999, and submit an
outline of topics to be discussed and the time to be devoted to each
topic (a signed original and eight (8) copies) by April 20, 1999.

A period of 10 minutes will be allotted to each person for making
comments.

An agenda showing the scheduling of the speakers will be prepared
after the deadline for receiving outlines has passed.

Copies of the agenda will be available free of charge at the
hearing.

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.

Proposed Amendments to the Regulations

Accordingly, 26 CFR parts 1, 20, 25, 31, and 40 are proposed to be
amended as follows:

PART 1--INCOME TAXES

Paragraph 1. The authority citation for part 1 is amended by
revising the entry for §1.6302-4 to read as follows: Authority: 26
U.S.C. 7805 * * *

Section 1.6302-4 also issued under sections 6302(a), (c), and (h). *
* *

Par. 2. Section 1.6302-4 is revised to read as follows: §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 as follows: Authority: 26 U.S.C.
7805 * * *

Section 20.6302-1 also issued under sections 6302(a) and (h). * * *

Par. 4. Section 20.6302-1 is added to read as follows: §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 as follows: Authority: 26 U.S.C. 7805 * * *

Section 25.6302-1 also issued under sections 6302(a) and (h). * * *

Par. 6. Section 25.6302-1 is added to read as follows: §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 paragraph (m).

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

9. New paragraph (j) is added.

The additions and revisions read as follows:

§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. * * *

(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 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:

§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.

Deputy Commissioner of Internal Revenue

SEARCH:

You can search the entire Tax Professionals section, or all of Uncle Fed's Tax*Board. For a more focused search, put your search word(s) in quotes.

1999 Regulations Main | IRS Regulations Main | Home