REVENUE RULING OUTLINES WHEN TAXPAYERS REQUIRED TO MAKE DEPOSITS BY EFT ARE LIABLE FOR FAILURE-TO-DEPOSIT PENALTY.

Rev. Rul. 95-68

ISSUES

(1) Is a taxpayer that is required to deposit federal taxes by electronic funds transfer (EFT) subject to the failure-to-deposit penalty imposed by section 6656 of the Internal Revenue Code if the taxpayer deposits the taxes by means other than EFT, or by EFT after the date on which the taxes are due?

(2) Is a taxpayer that is not required to deposit taxes by EFT, but has done so on a voluntary basis, subject to the failure-to- deposit penalty imposed by section 6656 if the taxpayer instead timely deposits the taxes at an authorized depository?

FACTS

Situation 1. A was required to make a federal tax deposit of $100x by EFT on or before January 5, in accordance with section 6302(h) and section 31.6302-1T of the Employment Taxes and Collection of Income Tax at Source Regulations. A did not make the $100x deposit by EFT. Instead, A used a Form 8109, Federal Tax Deposit Coupon, to make the $100x deposit on January 5 at Bank Z, an authorized depository for deposits made with that form.

Situation 2. The facts are the same as in Situation 1 except that A made the $100x deposit by EFT on January 6.

Situation 3. B was not required to make deposits by EFT but has done so voluntarily in accordance with Rev. Proc. 94-48, 1994-2 C.B. 694. B was required to make a federal tax deposit of $100x on or before January 5. B did not make the $100x deposit by EFT. Instead, B used a Form 8109 to make the $100x deposit on January 5 at Bank Z.

LAW AND ANALYSIS

Section 6656(a) provides that in the case of any failure by any person to deposit (as required by the Code or by regulations of the Secretary under the Code) on the date prescribed therefor any amount of tax imposed by the Code in the government depository authorized under section 6302(c) to receive such deposit, a penalty is imposed on such person equal to the applicable percentage of the amount of the underpayment, unless it is shown that such failure is due to reasonable cause and not due to willful neglect.

Under section 6656(b)(1)(A), the "applicable percentage" is 2 percent of the underpayment if the failure to deposit is for not more than 5 days, 5 percent of the underpayment if the failure is for more than 5 days but not more than 15 days, and 10 percent of the underpayment if the failure is for more than 15 days.

Under section 6656(b)(1)(B), the applicable percentage is 15 percent of the underpayment if the tax is not deposited on or before the earlier of (i) the day 10 days after the date of the first delinquency notice to the taxpayer under section 6303, or (ii) the day on which notice and demand for immediate payment is given under section 6861, 6862, or 6331(a) (last sentence).

Section 6656(b)(2) defines the term "underpayment" as the excess of the amount of the tax required to be deposited over the amount, if any, of the tax deposited on or before the date prescribed therefor.

Section 6302(c) provides that the Secretary may authorize Federal Reserve banks, and incorporated banks, trust companies, domestic building and loan associations, or credit unions which are depositaries or financial agents of the United States, to receive any tax imposed under the internal revenue laws, in such manner, at such times, and under such conditions as the Secretary may prescribe.

Section 6302(h), as added by the North American Free Trade Agreement Implementation Act (NAFTA), Pub. L. No. 103-182, section 523, 107 Stat. 2057 (1993), provides that the Secretary shall prescribe such regulations as may be necessary for the development and implementation of an EFT system for the collection of depository taxes. The section provides further that the system must be designed in such manner as may be necessary to ensure that such taxes are credited to the general account of the Treasury on the date on which such taxes would otherwise have been required to be deposited under the federal tax deposit system.

Section 31.6302-1T(h)(1) describes those taxpayers required to make deposits by means of EFT and when they must commence making such deposits. Section 31.6302-1T(h)(3) defines an EFT as any transfer of depository taxes made in accordance with Rev. Proc. 94-48, or in accordance with procedures subsequently published by the Commissioner.

Rev. Proc. 94-48 describes TAXLINK, an electronic remittance processing system that the Internal Revenue Service uses to accept deposits of federal taxes by EFT, and informs taxpayers and financial institutions that participate in TAXLINK of their obligations to each other and to the Service. Rev. Proc. 94-48 has applicability both to taxpayers required to make deposits by EFT and to taxpayers who choose to participate voluntarily in the EFT program. Section 2.05 of Rev. Proc. 94-48 provides that a taxpayer required by regulations to use an EFT to make a deposit cannot revert to the paper coupon system to make a deposit. However, a taxpayer that voluntarily participates in the EFT program may revert to the paper coupon system (using Form 8109) to make a deposit so long as the deposit and the paper coupon are received by an authorized depository bank before the close of business on the deposit due date.

Rev. Proc. 90-58, 1990-2 C.B. 642, describes how a deposit will be credited to a taxpayer's account in determining whether the failure-to-deposit penalty imposed by section 6656 will apply. In Example 5 of Rev. Proc. 90-58, an employer timely hand-delivered a check to the local Internal Revenue Service office to satisfy a deposit obligation rather than depositing the check in an authorized government depository as required by regulations under section 6302. Rev. Proc. 90-58 holds that because the amount due was not deposited as required by the regulations, the section 6656 failure-to-deposit penalty will apply.

In Situation 1, A was required to make a $100x federal tax deposit using EFT. Instead of using EFT, however, A made the deposit at Bank Z using a Form 8109. Thus, A's deposit was not made in the manner required by section 6302 and the underlying regulations. Accordingly, absent reasonable cause, A is subject to the 10 percent failure-to-deposit penalty under section 6656(b)(1)(A) because A failed for more than 15 days to make the $100x federal tax deposit in the manner required by section 6302 and the underlying regulations. However, A is not subject to the 15 percent failure-to-deposit penalty under section 6656(b)(1)(B) because the $100x is credited to A's account as of January 5 and, thus, the Internal Revenue Service will not subsequently demand the payment of that amount under a provision specified in section 6656(b)(1)(B).

In Situation 2, A properly made the required $100x deposit by EFT, but the deposit was made one day late. Therefore, absent reasonable cause, A is subject to the 2 percent failure-to-deposit penalty under section 6656(b)(1)(A) because A's deposit was not more than 5 days late.

In Situation 3, B is not subject to any failure-to-deposit penalty under section 6656 because B's participation in the EFT program was on a voluntary basis, and B timely made the required $100x deposit at Bank Z, an authorized depository, using Form 8109 (which EFT volunteers are permitted to do under Rev. Proc. 94-48).

HOLDINGS

(1) Absent reasonable cause, a taxpayer that is required to deposit federal taxes by EFT is subject to the failure-to-deposit penalty imposed by section 6656 if the taxpayer deposits the taxes by means other than EFT, or by EFT after the date on which the taxes are due.

(2) A taxpayer that is not required to deposit taxes by EFT, but has done so on a voluntary basis, is not subject to the failure-to- deposit penalty imposed by section 6656 if the taxpayer instead timely deposits the taxes at an authorized depository using Form 8109.

DRAFTING INFORMATION

The principal author of this revenue ruling is Vincent Surabian of the Office of the Assistant Chief Counsel (Income Tax and Accounting). For further information regarding this revenue ruling, contact Mr. Surabian on (202) 622-4940 (not a toll-free call.)