Temporary and Proposed Regs on Tax Deposits by Electronic Funds Transfer

 ACTION: Temporary regulations.

 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 Register.

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

 For dates of applicability, see section 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:

 Fiscal year        Chapter 21, 22, & 24 taxes         "Other" taxes

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:

 Threshold Amount    Determination Period    Applicable Effective Date

 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 section 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.

Treasury Decision 8553

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:

SECTION 1.6302-1T USE OF GOVERNMENT DEPOSITORIES 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 section 31.6302-1T(h) of this chapter. A taxpayer not required to deposit by electronic funds transfer pursuant to section 31.6302-1T(h) of this chapter remains subject to the rules of section 1.6302-1(b).

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

SECTION 1.6302-2T USE OF GOVERNMENT DEPOSITORIES 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].

(c) DEPOSITS BY ELECTRONIC FUNDS TRANSFER. For the requirement to deposit taxes withheld on nonresident aliens and foreign corporations by electronic funds transfer, see section 31.6302-1T(h) of this chapter. A taxpayer not required to deposit by electronic funds transfer pursuant to section 31.6302-1T(h) of this chapter remains subject to the rules of section 1.6302-2(b).

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

SECTION 1.6302-3T USE OF GOVERNMENT DEPOSITORIES 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].

(c) CROSS-REFERENCES. For further guidance and instructions for certain banks and financial institutions acting as fiduciaries with respect to taxable trusts, see Revenue Procedure 89-49, 1989-2 C.B. 615 (see section 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 section 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:

SECTION 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:

 Threshold Amount   Determination Period    Applicable Effective Date

(C) Any taxpayer whose deposits are being made by a third party bulk data processor pursuant to an agreement described in paragraph (h)(1)(i) of this section, and who is required to deposit by electronic funds transfer pursuant to this paragraph (h)(1)(ii), may have its deposits that are subject to such agreement made by the third party bulk data processor until the expiration or termination of the agreement. The taxpayer, however, is responsible for making deposits by electronic funds transfer of those depository taxes not subject to such agreement.

(2) TAXES REQUIRED TO BE DEPOSITED BY ELECTRONIC FUNDS TRANSFER. Any taxpayer who is required under paragraph (h)(1)(ii) of this section to deposit by electronic funds transfer the taxes imposed by chapters 21, 22, and 24 of the Internal Revenue Code must also deposit by electronic funds transfer, beginning with the same applicable effective date, the taxes required to be deposited under sections 1.6302-1, 1.6302-2, 1.6302-3 of this chapter, 31.6302(c)-3, and 40.6302(c)-1 of this chapter.

(3) ELECTRONIC FUNDS TRANSFER DEFINED. For purposes of this section, an ELECTRONIC FUNDS TRANSFER is any transfer of depository taxes made in accordance with Revenue Procedure 94-48, 1994-29 I.R.B. (see section 601.601(d)(2) of this chapter), or in accordance with procedures subsequently published by the Commissioner.

(4) EXEMPTIONS. The Commissioner of Internal Revenue will identify by guidance published in the Internal Revenue Bulletin those categories of taxpayers, if any, that are to be exempted from the requirement to deposit by electronic funds transfer. (See section 601.601(d)(2)(ii)(b) of this chapter.)

(5) SEPARATION OF DEPOSITS. A deposit for one return period must be made separately from a deposit for another return period.

(6) PAYMENT OF BALANCE DUE. If the aggregate amount of taxes reportable on the applicable tax return for the return period exceeds the total amount deposited by the taxpayer with regard to the return period, then the balance due must be remitted in accordance with the applicable form and instructions.

(7) TIME DEEMED DEPOSITED. A deposit 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) 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 Treasury's general account.

(8) TIME DEEMED PAID. In general, amounts deposited under this paragraph (h) will be considered paid at the time deemed deposited under paragraph (h)(7) of this section, or on the last day prescribed for filing the return (determined without regard to any extension of time for filing the return), whichever is later. In the case of the taxes imposed by chapters 21 and 24 of the Internal Revenue Code, 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.

Par. 7. Section 31.6302(c)-3T is added to read as follows:

SECTION 31.6302(c)-3T USE OF GOVERNMENT DEPOSITORIES IN CONNECTION WITH TAX UNDER THE FEDERAL UNEMPLOYMENT TAX ACT -- DEPOSITS REQUIRED TO BE MADE BY ELECTRONIC FUNDS TRANSFER AFTER DECEMBER 31, 1994 (TEMPORARY).

(a) through (b) [Reserved].

(c) MANNER OF DEPOSIT -- DEPOSITS REQUIRED TO BE MADE BY ELECTRONIC FUNDS TRANSFER. For the requirement to deposit tax under the Federal Unemployment Tax Act by electronic funds transfer, see section 31.6302-1T(h). A taxpayer not required to deposit by electronic funds transfer pursuant to section 31.6302-1T(h) remains subject to the rules of section 31.6302(c)-3(b).

PART 40 -- EXCISE TAX PROCEDURAL REGULATIONS

Par. 8. The authority citation for part 40 is amended by adding an entry in numerical order to read as follows:

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

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

Par. 9. Section 40.6302(c)-1T is added to read as follows:

SECTION 40. 6302(c)-1T USE OF GOVERNMENT DEPOSITORIES -- DEPOSITS REQUIRED TO BE MADE BY ELECTRONIC FUNDS TRANSFER AFTER DECEMBER 31, 1994 (TEMPORARY).

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

(d)(2) DEPOSITS BY ELECTRONIC FUNDS TRANSFER. For the requirement to deposit excise taxes by electronic funds transfer, see section 31.6302-1T(h) of this chapter. A taxpayer not required to deposit by electronic funds transfer pursuant to section 31.6302-1T(h) of this chapter remains subject to the rules of section 40.6302(c)-1(d).