[House Hearing, 105 Congress]
[From the U.S. Government Publishing Office]




 
                 ELECTRONIC FEDERAL TAX PAYMENT SYSTEM

=======================================================================

                                HEARING

                               before the

                       SUBCOMMITTEE ON OVERSIGHT

                                 of the

                      COMMITTEE ON WAYS AND MEANS
                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED FIFTH CONGRESS

                             FIRST SESSION

                               __________

                             APRIL 16, 1997

                               __________

                             Serial 105-37

                               __________

         Printed for the use of the Committee on Ways and Means

                               ----------

                     U.S. GOVERNMENT PRINTING OFFICE
50-852 cc                    WASHINGTON : 1998







                      COMMITTEE ON WAYS AND MEANS

                      BILL ARCHER, Texas, Chairman

PHILIP M. CRANE, Illinois            CHARLES B. RANGEL, New York
BILL THOMAS, California              FORTNEY PETE STARK, California
E. CLAY SHAW, Jr., Florida           ROBERT T. MATSUI, California
NANCY L. JOHNSON, Connecticut        BARBARA B. KENNELLY, Connecticut
JIM BUNNING, Kentucky                WILLIAM J. COYNE, Pennsylvania
AMO HOUGHTON, New York               SANDER M. LEVIN, Michigan
WALLY HERGER, California             BENJAMIN L. CARDIN, Maryland
JIM McCRERY, Louisiana               JIM McDERMOTT, Washington
DAVE CAMP, Michigan                  GERALD D. KLECZKA, Wisconsin
JIM RAMSTAD, Minnesota               JOHN LEWIS, Georgia
JIM NUSSLE, Iowa                     RICHARD E. NEAL, Massachusetts
SAM JOHNSON, Texas                   MICHAEL R. McNULTY, New York
JENNIFER DUNN, Washington            WILLIAM J. JEFFERSON, Louisiana
MAC COLLINS, Georgia                 JOHN S. TANNER, Tennessee
ROB PORTMAN, Ohio                    XAVIER BECERRA, California
PHILIP S. ENGLISH, Pennsylvania      KAREN L. THURMAN, Florida
JOHN ENSIGN, Nevada
JON CHRISTENSEN, Nebraska
WES WATKINS, Oklahoma
J.D. HAYWORTH, Arizona
JERRY WELLER, Illinois
KENNY HULSHOF, Missouri

                     A.L. Singleton, Chief of Staff

                  Janice Mays, Minority Chief Counsel

                                 ______

                       Subcommittee on Oversight

                NANCY L. JOHNSON, Connecticut, Chairman

ROB PORTMAN, Ohio                    WILLIAM J. COYNE, Pennsylvania
JIM RAMSTAD, Minnesota               GERALD D. KLECZKA, Wisconsin
JENNIFER DUNN, Washington            MICHAEL R. McNULTY, New York
PHILIP S. ENGLISH, Pennsylvania      JOHN S. TANNER, Tennessee
WES WATKINS, Oklahoma                KAREN L. THURMAN, Florida
JERRY WELLER, Illinois
KENNY HULSHOF, Missouri


Pursuant to clause 2(e)(4) of Rule XI of the Rules of the House, public 
hearing records of the Committee on Ways and Means are also published 
in electronic form. The printed hearing record remains the official 
version. Because electronic submissions are used to prepare both 
printed and electronic versions of the hearing record, the process of 
converting between various electronic formats may introduce 
unintentional errors or omissions. Such occurrences are inherent in the 
current publication process and should diminish as the process is 
further refined.


                            C O N T E N T S

                               __________

                                                                   Page

Advisories announcing the hearing................................     2

                               WITNESSES

Internal Revenue Service, James E. Donelson, Chief, Taxpayer 
  Service; accompanied by Robert Albicker, Deputy Chief 
  Information Officer, Systems Development.......................    43
U.S. Department of the Treasury, Russell D. Morris, Commissioner, 
  Financial Management Service...................................    49

                                 ______

 Agrimanagement, T. Gene Cole....................................    94
 American Payroll Association, Carolyn Kelley....................   116
 Automatic Data Processing, Inc., Regina R. Lee..................   110
 First National Bank of Chicago, Lawrence F. Buettner............    28
Hastings, Hon. Richard ``Doc,'' a Representative in Congress from 
  the State of Washington........................................    10
Housing Authority Insurance, John M. Foehl, Jr...................   123
 Mason Mechanical Laboratories, Inc., Randy Mason................    85
 National Association for the Self-Employed, Bennie L. Thayer....    81
 National Association of Enrolled Agents, Judy Akin..............    95
National Federation of Independent Business, Randy Mason.........    85
 NationsBank, Larry Dreyer.......................................    26
 Padgett Business Services, Roger N. Harris......................    89
Smith, Hon. Linda, a Representative in Congress from the State of 
  Washington.....................................................     7
Treasury Management Association, John M. Foehl, Jr., and Arlene 
  S. Chapman.....................................................   123

                       SUBMISSIONS FOR THE RECORD

Ceridian Corp., Minneapolis, MN, James R. Burkle, statement......   135
Klug, Hon. Scott, a Representative in Congress from the State of 
  Wisconsin, statement...........................................   137
LaHood, Hon. Ray, a Representative in Congress from the State of 
  Illinois, statement............................................   138
LoBiondo, Hon. Frank A., a Representative in Congress from the 
  State of New Jersey, statement.................................   139
National Automated Clearing House Association, Herndon, VA, 
  Elliott C. McEntee, statement and attachment...................   139
National Business Owners Association, Alexandria, VA, J. Drew 
  Hiatt, statement...............................................   143
U.S. Chamber of Commerce, William T. Sinclaire, statement........   145


                  ELECTRONIC FEDERAL TAX PAYMENT SYSTEM

                              ----------                              


                        WEDNESDAY, APRIL 16, 1997

                  House of Representatives,
                       Committee on Ways and Means,
                                 Subcommittee on Oversight,
                                                    Washington, DC.
    The Subcommittee met, pursuant to notice, at 9:40 a.m., in 
room 1100, Longworth House Office Building, Hon. Nancy L. 
Johnson (Chairman of the Subcommittee) presiding.
    [The advisories announcing the hearing follow:]

ADVISORY

FROM THE 
COMMITTEE
 ON WAYS 
AND 
MEANS

                       SUBCOMMITTEE ON OVERSIGHT

                                                CONTACT: (202) 225-7601
FOR IMMEDIATE RELEASE

April 9, 1997

No. OV-4

                    Johnson Announces Hearing on the

                 Electronic Federal Tax Payment System

     Congresswoman Nancy L. Johnson (R-CT), Chairman, Subcommittee on 
Oversight of the Committee on Ways and Means, today announced that the 
Subcommittee will hold a hearing to examine the Electronic Federal Tax 
Payment System. The hearing will take place on April 16, 1997, in room 
B-318 Rayburn House Office Building, beginning at 9:30 a.m.
      
     In view of the limited time available to hear witnesses, oral 
testimony will be from invited witnesses only. Witnesses will include 
officials from the Department of the Treasury and the Internal Revenue 
Service (IRS), small businesses, payroll service providers, the banking 
industry, and others. However, any individual or organization not 
scheduled for an oral appearance may submit a written statement for 
consideration by the Committee and for inclusion in the printed record 
of the hearing.
      

BACKGROUND:

      
     Businesses must withhold or pay a variety of Federal taxes, e.g., 
Federal Insurance Contribution Act (FICA), income, excise, and 
corporate estimated taxes. Historically, businesses have been required 
to deposit these taxes in a government depository (i.e., banks and 
savings institutions designated by the Treasury Department as Treasury 
tax and loan depositories), with each deposit accompanied by a Federal 
tax deposit coupon supplying the taxpayer's name, identification 
number, tax period, and the type of tax being paid. The bank then 
processes the payment and coupon information and forwards it to the 
Federal Government.
      
     Legislation enacted in 1993 (section 6302(h) of the Internal 
Revenue Code) required the IRS to implement a nationwide system for 
receiving Federal depository taxes electronically. This system, the 
Electronic Federal Tax Payment System (EFTPS), is intended to replace 
the existing paper coupon system to provide a simple, paperless way for 
taxpayers to make Federal tax deposits.
      
     Under section 6302(h), IRS was required to phase in EFTPS from 
1994-1999 and to collect a statutorily specified percentage of business 
taxes through electronic payment in each year. The IRS issued 
regulations in July 1994 which, among other things, set forth a 
schedule for implementing the program. Under the regulations, 
businesses would be required to begin using EFTPS if their annual 
employment tax deposits exceed certain thresholds. Under the phase-in 
schedule, if a taxpayer:

 $47 million....................  1993/1994.........  1/1/96
 $50 thousand...................  1995..............  1/1/97
 $50 thousand...................  1996..............  1/1/98
 $20 thousand...................  1997..............  1/1/99


    A March 21, 1996, temporary regulation expanded the EFTPS 
requirement to cover businesses which do not make employment tax 
deposits, but whose other Federal tax payments exceed certain 
thresholds. If their other Federal tax deposits were:

 $50 thousand...................  1995/1996.........  1/1/98
 $20 thousand...................  1997..............  1/1/99

      
     Between June 23 and July 1, 1996, IRS sent letters to 
approximately 1.2 million taxpayers to inform them of the requirement 
to enroll in EFTPS and begin paying their Federal depository taxes 
electronically by January 1, 1997. Among other things, the letters 
indicated that taxpayers who failed to enroll in EFTPS and began making 
their Federal tax deposits electronically as of January 1, 1997, would 
be assessed a penalty equal to 10 percent of the amount required to be 
deposited.
      
     For many small businesses, particularly those that do not use 
payroll service providers to handle their payroll accounts, receipt of 
the IRS package was the first time they had heard of EFTPS. In 
response, many small business owners expressed concerns to Congress 
about being mandated to pay their taxes electronically and about the 
possibility that they would be subjected to significant penalties for 
failure to comply with the mandate. At the same time, concerns were 
also being raised that there was insufficient time remaining in the 
year to fully inform the affected businesses about the mandate to 
enroll in EFTPS, to actually enroll all mandated taxpayers on a timely 
basis, and to test the system before it became operational on January 
1, 1997.
      
     To address these concerns, Congress included a provision in the 
Small Business Jobs Protection Act (P.L. 104-188) to delay until July 
1, 1997, the requirement for affected taxpayers to begin paying their 
depository taxes electronically through EFTPS.
      
     In announcing the hearing, Chairman Johnson stated: ``Not only do 
we need to evaluate whether the Electronic Federal Tax Payment System 
is actually ready to serve the 1.2 million taxpayers who are mandated 
to enroll and begin paying their taxes electronically by July 1, 1997, 
but the Subcommittee also needs to consider the full range of costs and 
benefits associated with this system for small business taxpayers.''
      

FOCUS OF THE HEARING:

      
     Effective July 1, 1997, approximately 1.2 million taxpayers will 
be required to begin making their Federal tax deposits electronically 
through EFTPS. The Subcommittee will examine: (1) the current status of 
IRS's efforts to implement EFTPS; (2) concerns which have been 
identified by small businesses, payroll service providers, the banking 
industry, and others about specific features of EFTPS (e.g., whether 
taxpayers will have the ability to quickly correct erroneous payments, 
whether the procedures that have been established to deal with 
emergencies which prevent taxpayers from making timely payments, such 
as natural disasters, are adequate); and (3) whether an additional 
delay in the July 1, 1997, effective date or other changes to the 
program are necessary.
      

DETAILS FOR SUBMISSION OF WRITTEN COMMENTS:

      
     Any person or organization wishing to submit a written statement 
for the printed record of the hearing should submit at least six (6) 
copies of their statement and a 3.5-inch diskette in WordPerfect or 
ASCII format, with their address and date of hearing noted, by the 
close of business, Wednesday, April 30, 1997, to A.L. Singleton, Chief 
of Staff, Committee on Ways and Means, U.S. House of Representatives, 
1102 Longworth House Office Building, Washington, D.C. 20515. If those 
filing written statements wish to have their statements distributed to 
the press and interested public at the hearing, they may deliver 200 
additional copies for this purpose to the Subcommittee on Oversight 
office, room 1136 Longworth House Office Building, at least one hour 
before the hearing begins.

FORMATTING REQUIREMENTS:

      
     Each statement presented for printing to the Committee by a 
witness, any written statement or exhibit submitted for the printed 
record or any written comments in response to a request for written 
comments must conform to the guidelines listed below. Any statement or 
exhibit not in compliance with these guidelines will not be printed, 
but will be maintained in the Committee files for review and use by the 
Committee.
      
     1. All statements and any accompanying exhibits for printing must 
be typed in single space on legal-size paper and may not exceed a total 
of 10 pages including attachments. At the same time written statements 
are submitted to the Committee, witnesses are now requested to submit 
their statements on a 3.5-inch diskette in WordPerfect or ASCII format.
      
     2. Copies of whole documents submitted as exhibit material will 
not be accepted for printing. Instead, exhibit material should be 
referenced and quoted or paraphrased. All exhibit material not meeting 
these specifications will be maintained in the Committee files for 
review and use by the Committee.
      
     3. A witness appearing at a public hearing, or submitting a 
statement for the record of a public hearing, or submitting written 
comments in response to a published request for comments by the 
Committee, must include on his statement or submission a list of all 
clients, persons, or organizations on whose behalf the witness appears.
      
     4. A supplemental sheet must accompany each statement listing the 
name, full address, a telephone number where the witness or the 
designated representative may be reached and a topical outline or 
summary of the comments and recommendations in the full statement. This 
supplemental sheet will not be included in the printed record.
      
     The above restrictions and limitations apply only to material 
being submitted for printing. Statements and exhibits or supplementary 
material submitted solely for distribution to the Members, the press 
and the public during the course of a public hearing may be submitted 
in other forms.
      

    Note: All Committee advisories and news releases are available on 
the World Wide Web at `HTTP://WWW.HOUSE.GOV/WAYS__MEANS/'.
      

     The Committee seeks to make its facilities accessible to persons 
with disabilities. If you are in need of special accommodations, please 
call 202-225-1721 or 202-225-1904 TTD/TTY in advance of the event (four 
business days notice is requested). Questions with regard to special 
accommodation needs in general (including availability of Committee 
materials in alternative formats) may be directed to the Committee as 
noted above.
      

                                

                         NOTICE--CHANGE IN ROOM

ADVISORY

FROM THE 
COMMITTEE
 ON WAYS 
AND 
MEANS

                       SUBCOMMITTEE ON OVERSIGHT

                                                CONTACT: (202) 225-7601
FOR IMMEDIATE RELEASE

April 10, 1997

No. OV-4-Revised

                Room Change for Subcommittee Hearing on

                       Wednesday, April 16, 1997,

              on the Electronic Federal Tax Payment System

     Congresswoman Nancy L. Johnson (R-CT), Chairman of the 
Subcommittee on Oversight, Committee on Ways and Means, today announced 
that the Subcommittee hearing on the Electronic Federal Tax Payment 
System previously scheduled for Wednesday, April 16, 1997, at 9:30 
a.m., in B-318 Rayburn House Office Building, will now be held in the 
main Committee hearing room, 1100 Longworth House Office Building.
      
     All other details for the hearing remain the same. (See 
Subcommittee press release No. OV-4, dated April 9, 1997.)
      

                                

    Chairman Johnson. Good morning, and welcome to this 
important hearing at which we will examine the Electronic 
Federal Tax Payment System, the EFTPS System, and whether this 
new system for receiving Federal tax deposits electronically is 
ready for prime time.
    In 1993, the Internal Revenue Service was mandated by 
Congress to implement a nationwide system for receiving Federal 
tax deposits electronically. This mandate was intended to 
accomplish several goals: First, to largely replace the 
existing FTD paper coupon system with a simple, paperless way 
for taxpayers to make their Federal tax deposits by telephone; 
second, to speed up by 1 day the time it takes banks to 
transmit tax payments to the Treasury; and third, to foster the 
growth of electronic commerce.
    The EFTPS is the result. Today, approximately 1,500 of the 
Nation's largest companies are already mandatorily 
participating in this system, although another 200,000 
companies have enrolled and are voluntarily using the system. 
On July 1, 1.2 million businesses will be required to start 
paying their taxes electronically, but despite good intentions, 
the IRS' mishandling of their first critical communication with 
these 1.2 million mandated taxpayers about this filing system 
last June, and its failure since to address legitimate 
technical concerns about the system's design have caused 
significant concern and controversy which is threatening the 
smooth implementation of the system.
    As a result, the Nation's small businesses have no 
confidence that this system will provide them with true 
benefits. Today, small businesses make their Federal tax 
deposits by taking their tax payments and an accompanying paper 
coupon to their local banks. Under the FTD paper coupon system, 
they receive a receipt showing they have paid their taxes on 
time, and they don't incur additional fees in the process. Many 
resent one more mandate from the Federal Government, 
particularly when new fees may be involved. They want the 
system made voluntary for small business taxpayers.
    The Nation's payroll service industry recognizes the 
benefits offered by this new system, but they, too, are 
concerned about the implementation of the system on July 1. 
They are worried about a number of technical aspects of its 
design, such as whether the system will allow a quick means of 
correcting erroneous payments and whether the IRS has 
established adequate procedures to deal with emergencies.
    They are even more worried that if the tax system flaws 
they fear actually come to pass, thousands of customers will be 
hit with erroneous penalty notices causing chaos and creating a 
terribly unfair situation for our small businessmen.
    Instead of being enthusiastic partners with the government 
in implementing EFTPS, as they have been with other automation 
initiatives such as the TaxLink pilot and the Electronic W-2 
pilot, the payroll service industry today is standing on the 
sidelines with their fingers crossed because the IRS has been 
unresponsive to what they believe are legitimate concerns about 
the system.
    Our job today is to sort through these concerns and work 
together to assure that this system will be ready to serve the 
1.2 million taxpayers who are mandated to enroll in the system 
and begin paying their taxes electronically on July 1.
    EFTPS has been designed to piggyback on the ACH network, an 
electronic payment mechanism developed by the private sector to 
support direct deposits, direct payments, and many other 
consumer and commercial electronic payment applications.
    Has the IRS incorporated design features into the EFTPS 
which conform to the rules in place in the private sector for 
using the ACH network? If not, why not?
    Will the benefits offered by the system, the simplicity of 
making tax deposits by telephone, be worth the potential costs 
to the small business community? What will those costs be?
    What must be done to alleviate the legitimate concerns of 
stakeholders that EFTPS will be able to handle the expected 
workload without mishap?
    These are the questions we must answer to protect 
taxpayers' interests.
    Mr. Coyne.
    Mr. Coyne. Thank you, Madam Chairwoman.
    As you know, in less than 3 months, approximately 1.2 
million business taxpayers will need to be prepared to pay 
their Federal taxes electronically through the Electronic 
Federal Tax Payment System called EFTPS. Importantly, this 
system of paying taxes eliminates the need for paper coupons 
and will facilitate the correct and timely payment of business 
taxes to the Federal Government.
    During today's hearing, we will have the opportunity to 
discuss with the IRS its efforts to enroll businesses in the 
EFTPS System and to ensure that all will go well come this July 
when the law requires businesses to pay their taxes 
electronically.
    I understand that our mutual goal in holding this hearing 
is to see that the EFTPS Program is implemented, as scheduled 
this summer, and to assist in resolution of any outstanding 
problem areas that exist.
    I commend the Chairwoman for scheduling this Oversight 
hearing and look forward to the testimony of our private-sector 
witnesses concerning this very important program.
    Thank you.
    Chairman Johnson. Thank you.
    My warmest welcome to my colleagues who both have been 
champions of small business concerns in this Congress, and we 
look forward to your testimony.
    Congresswoman Smith.

  STATEMENT OF HON. LINDA SMITH, A REPRESENTATIVE IN CONGRESS 
                  FROM THE STATE OF WASHINGTON

    Ms. Smith. Good morning, Madam Chair and Members of the 
Subcommittee.
    First, I want to thank you for taking up this issue. It has 
been an issue in our Small Business Committee.
    Chairman Johnson. Congresswoman Smith, I should add that 
you are Vicechair of the House Small Business Committee, 
Subcommittee on Tax, Finance, and Exports.
    Ms. Smith. Thank you.
    Chairman Johnson. It is a special pleasure to have you. 
Thanks.
    Ms. Smith. This is a big issue in the small business 
community, and Chairman Talent of the Small Business Committee 
and myself and other Subchairs have been getting contacted for 
months, and the concern has been uneasiness, lack of 
understanding, and surprise. As last year, we worked together 
with this Committee to get an extension of penalties, we would 
like to come before you again and express our concerns.
    I am going to summarize this statement, though, and give 
you written testimony combined from Representative Talent and 
myself so that we can expedite the work of this Subcommittee 
and get to your other witnesses.
    First of all, I watched the new training video that was 
given to us and prepared for the banks by the IRS. The video 
opens with a statement that the new EFTPS is, ``one of the most 
aggressive government initiatives taken in centuries,'' and I 
agree, it is.
    Through IRS regulations, the EFTPS mandates businesses to 
report and pay, this is what I don't think most people realize, 
all their Federal taxes electronically, not just their payroll 
taxes.
    This new requirement is based on certain thresholds of 
deposit. On July 1, IRS will mandate that we go from 800 
businesses reporting under the system to 1.2 million. Now, the 
threshold change is going from 50,000 payroll taxes to 47 
million payroll taxes. I said that in reverse. It is from 47 
million to 50,000--50,000 in employee taxes is not very many 
employees. It is a very small business. This change is 
staggering.
    Most of the people getting ahold of us do not understand 
the new obligation. They are not clear that they even have to 
file many, many more taxes than just the payroll taxes.
    What we find in the Small Business Committee is small 
businesses are remarkable. They are flexible. They are 
generating most of our job creation, and they can do a lot of 
things, but we also have found that they come to us not so much 
with taxes, but with regulation as the biggest obstacle to them 
making a living for their families.
    You are going to hear about this later. What we want to ask 
you to do, though, is to consider phasing this in or making it 
optional. We believe that IRS is not ready, given our 
discussions with IRS, to go to 1.2 million filings. We feel 
that, also, it should be voluntary compliance instead of 
mandatory, but at least, if you could allow the small business 
community to phase in, we could show them that it works.
    The concerns we have with IRS is not that we believe that 
we shouldn't do this or that it won't eventually be successful, 
but we believe that if they take in too many too quick, they 
could actually sour the result, and that is to have less paper, 
as more people get into it and file erroneous tax forms because 
if they only, say, file what they think are just the payroll 
taxes and leave off others, they will be subject to this 10-
percent fine.
    We believe, then, if we sour it, you will have a bigger 
mess starting it. So a request of this Committee would be to go 
slow. We like the idea of electronic filing. We do not oppose 
it. We would like the smaller businesses to be voluntary, if 
you could make this happen, and we understand IRS has quite a 
bit of latitude in this. There is nearly $3 billion already 
collected from this system, the ones that have already gone in, 
and then we would like to work with the small business 
community to show them the successes of the larger businesses 
that are already in it and make it voluntary at least for the 
temporary time until they can get used to the idea.
    With that, we want to thank you for this opportunity and 
really do appreciate what you are doing. The small business 
community is important to all of Congress. We know that, but we 
focus on it and appreciate the opportunity to share that 
concern.
    Thank you.
    [The prepared statement follows:]

Statement of Hon. Linda Smith, a Representative in Congress from the 
State of Washington

    Good Morning Chairwoman Johnson and Members of the 
Subcommittee. I thank you on behalf of Representative Jim 
Talent, Chairman of the Small Business Committee, and myself 
for your kind invitation to testify this morning concerning the 
development and implementation by the Internal Revenue Service 
(IRS) of its new ``Electronic Federal Tax Payment System'' 
(EFTPS). I commend your strong leadership as Chair of this 
important subcommittee, and in holding this timely hearing.
    I recently watched a training video on EFTPS prepared by 
the IRS for financial institutions. The video opens with the 
statement that EFTPS is: ``One of the most aggressive 
government initiatives taken in centuries.'' And it is. EFTPS 
is an electronic system for reporting and paying Federal tax 
deposits. EFTPS mandates businesses to report and pay all their 
Federal taxes electronically. IRS regulations dictate which 
businesses are required to begin using EFTPS based on certain 
employment tax deposit thresholds. As scheduled to proceed on 
July 1 of this year, the EFTPS will go from mandating 800 
businesses with Federal tax deposits over $47 million to 
mandating 1.2 million businesses with Federal tax deposits over 
$50 thousand This drop in the EFTPS mandate threshold is 
staggering. It will impact millions of small employers who 
simply are not ready for it, and who do not know or fully 
understand the extent of their compliance obligations under 
EFTPS even though they are required to enroll by May 1.
    Small businesses play a remarkable role in providing 
personal opportunity, security, flexibility and independence 
for millions of Americans. Since the early 1970's, small firms 
have created two of every three net new jobs in this country. 
There are approximately five and one-half million employers in 
the United States, and about 99 percent of them are small 
employers with under 500 employees. At the same time, about 90% 
of small employers--many of them family businesses--have fewer 
than 20 employees. Consequently, tax changes and regulatory 
mandates affect them most.
    In fact, most Americans are a lot like the small business 
witnesses that you will hear from later today: honest, 
hardworking individuals who want to provide for their families, 
build their communities, and pay their fair share of taxes. But 
they face a tax code and tax regulations that stand in the way 
of their success. The tax code's complexity hurts America's 
small working families by killing economic stability and jobs 
in their neighborhoods and communities.
    Yet, the explosion in technology is facilitating their 
entrepreneurial spirit and the growth of new entities and jobs. 
That is why I fully support the development and implementation 
of a successful electronic tax payment system as we enter the 
21st century. But I caution you against supporting IRS efforts 
to force all taxpayers to use EFTPS. In contrast, for example, 
under the existing electronic TAXLINK system, thousands of 
businesses have chosen to use TAXLINK voluntarily.
    The same thing could occur under the EFTPS if it is done 
right. But there is troubling evidence that the EFTPS and the 
IRS may not be fully prepared to handle 1.2 million business 
taxpayers this year, and 1.2 million next year, without 
imposing increased compliance costs and large potential 
penalties on America's small employers. Certainly, while EFTPS 
should be bold, it should also be reasonable and pliant. No 
government initiative, in particular one involving the 
voluntary payment of Federal taxes, should be so aggressive and 
rigid that it penalizes small business families and employers.
    During the last year, I have heard a lot about EFTPS from 
my own constituents back home and from small businesses and 
their representatives here in Washington. Simply put, many 
small employers are unable or reticent to use EFTPS on a 
mandatory basis as proposed by the IRS. Several important 
factors are driving small businesses to oppose EFTPS, 
including:
     Fear of the enormous penalty of up to 10% of 
Federal tax deposits due per transaction;
     Increased compliance costs on small businesses 
(i.e., bank fees, penalties, etc.);
     Perception of IRS access to private bank accounts 
or bank information;
     Loss of paper trail;
     IRS push toward use of one of the two large banks 
serving as financial agents for the IRS, Nation's Bank and 
First Chicago, under the EFTPS' ACH debit system;
     Lack of readiness and meaningful participation 
under EFTPS by taxpayers' own local and community banks, as 
designed and implemented by the IRS;
     Lack of system readiness or procedures for 
taxpayers to correct simple mistakes, erroneous payments, and/
or unauthorized transfers;
     Lack of system readiness or procedures to protect 
taxpayers from a controversy situation in the event of a 
disaster, emergency, or simple power outage which precludes the 
taxpayer from making an electronic payment;
     New paperwork burden from enrollment forms, etc.
     No clear understanding of the rights and 
responsibilities of taxpayers who want to stop payments, 
recover unauthorized or erroneous transfers, and maintain the 
privacy of their transactions; and
     Strong opposition to ``one more government 
mandate.''
    In addition, many large and small employers do not know or 
understand that they need to enroll separately and pay all 
their other taxes, such as corporate estimated taxes, through 
EFTPS. This alone could cripple EFTPS as millions of employers, 
including small and closely-held concerns, learn that they are 
required to pay all their taxes electronically or face EFTPS' 
stiff penalties.
    Consequently, I believe there are two fundamental questions 
before you today: First, is the EFTPS on a mandatory basis too 
aggressive and potentially punitive on small business 
taxpayers? And, second, will we hinder the potential success of 
EFTPS and, thereby, sour future recommendations and efforts to 
modernize our Federal tax payments systems electronically if 
EFTPS is not done right?
    Because Chairman Talent and I are concerned that the answer 
to these two questions is a resounding ``YES,'' we urge you to 
consider legislation to ease small business taxpayers into 
EFTPS along the lines proposed by my friend and colleague, Doc 
Hastings, and by Senators Nickles and Breaux in the Senate. 
Consistent with Congress' legislative intent in 1993, these 
bills would encourage the voluntary participation in EFTPS by 
small employers and individual taxpayers.
    Let's not sour what should be a bold first step to 
encourage American taxpayers to report and pay Federal taxes 
electronically. If we do it right, we can achieve Congress' 
goals of accelerating and improving the flow of information and 
revenue to the Federal government, while benefiting small 
entrepreneurs and invigorating the American taxpayer's 
enthusiasm for change and new technologies.
      

                                

    Chairman Johnson. Thank you very much, Congresswoman Smith.
    Congressman Hastings.

STATEMENT OF HON. RICHARD ``DOC'' HASTINGS, A REPRESENTATIVE IN 
             CONGRESS FROM THE STATE OF WASHINGTON

    Mr. Hastings. Thank you, Madam Chairwoman. I would like to 
commend you for holding this hearing today on the electronic 
tax payment system.
    This is just as an aside. When we start with these 
acronyms, this seems to be typical of the Federal Government, 
and this is another one of those, EFTPS.
    Anyway, with the July 1 deadline coming up and 1.2 million 
businesses that are going to be impacted by that, I appreciate 
your holding this hearing today.
    I am honored to have this opportunity to testify before the 
Subcommittee because as a businessowner for over 25 years, the 
issue of government mandates placed on small businesses are of 
particular concern to me. I hope that today's hearing will help 
to resolve some of the outstanding concerns with EFTPS and at 
the same time, identify how important it is to allow business 
the option of using this system.
    I began working on this legislation during the last 
Congress to make the EFTPS voluntary in response to concerns 
voiced by small business owners in my district, such as Gene 
Cole who will be testifying later on today.
    However, it was too late in the Congress last year for any 
action to be taken. As you are aware, the provision requiring a 
business to file their payroll taxes electronically, was 
included in the NAFTA implementation legislation.
    In February, I reintroduced the legislation from the last 
Congress to make the electronic system voluntary for business. 
In just 2 months, H.R. 722 has been cosponsored by over 65 
Members of Congress and has been endorsed by a number of 
national organizations including the NFIB, the U.S. Chamber of 
Commerce, and the National Restaurant Association.
    As we begin today, let's put the whole issue of collecting 
payroll taxes into perspective. The Federal Government has used 
American businesses as their tax collector for the Treasury 
since 1935 when tax withholding was promulgated under the 
Social Security Act. Congress has never seen fit to compensate 
businesses for these efforts. Now, today, we are forcing 
businesses to file these taxes electronically and making them 
cover any cost that may be associated with that electronic 
filing.
    The NAFTA implementation legislative history indicates that 
there were two reasons for mandating businesses to change from 
the traditional Federal tax deposit coupon system to an 
electronic system.
    The first--and I think it is important to emphasize these 
two reasons that were in the bill report--the first was to 
reduce paperwork for small business. The second was to 
accelerate collection of revenue by $3.3 billion. Now, which do 
you really think was more important from the government's 
perspective, to help small business or to accelerate revenue? 
At any rate, those are the two issues I want to talk about.
    In an effort to ensure that the first goal could be 
achieved, the Secretary of Treasury was granted considerable 
flexibility to take into account the specific needs of small 
employers including possible exemptions for small business.
    As of today, to the best of my knowledge, no exemptions 
have been granted to any businesses in this country. Many 
Members have stated that they were unaware that this provision 
was included in NAFTA. I think that is probably true. For the 
first few years of the implementation, it was not a 
controversial issue because most businesses in question were 
already filing electronically through TaxLink. That is the 
1,500 that you alluded to.
    Now, however, that mandate has reached down to another 1.2 
million businesses which includes the small businesses that are 
the backbone of our economy, and we find that they forgot to 
take into consideration one very important factor, what will be 
the impact on these small businesses.
    Under current law today, the Treasury Department is 
threatening to impose a 10-percent penalty on any small 
business that fails to enroll in EFTPS. That is why it is 
essential that Congress take action now to consider the impact 
and take action to correct this situation.
    My family has owned Columbia Basin Paper Supply in Pasco, 
Washington, since 1947. We are celebrating our fiftieth year in 
business this year. I was the firm's president before I was 
elected to Congress in 1994. Our business was constantly 
subjected to regulations by local, State, and Federal 
Governments.
    When I received notifications of a new regulation, I have 
to admit that I would view it rather suspiciously. As a matter 
of fact, one of the first things I used to do is find someplace 
in the corner that indicated if it was voluntary or 
involuntary. Frankly, if it was voluntary, it would go in the 
round file because I didn't have time to deal with all of those 
sorts of things. That is what all small businesses do. You are 
in the business of whatever enterprises is important to what 
you are doing.
    The reason is, because if there were any decisions made 
with my business, I felt I was much better qualified to make 
that decision than the Federal Government.
    In most cases, regulations imposed on small businesses end 
up costing the businessowner and the consumer more and seldom 
simplify their operations. I think the EFTPS mandate is a good 
example of this.
    Businesses are given two options on how to make their 
payroll tax obligation payments through the automated 
clearinghouse, or ACH, the ACH debit method or the ACH credit 
method, but no option of whether they want to use either one. 
It is just those two options.
    With the debit method, there is no direct cost to the 
businessowner. However, if employees do not want to give the 
Treasury, financial agents, NationsBank or First Bank of 
Chicago access to their bank account, they would have to 
maintain an alternative account, just for their payroll 
transactions. That is obviously a cost.
    If businesses want to avoid opening an alternative account, 
they may choose to make their payments through the ACH credit 
system. This credit option opens a whole new obstacle course 
for business and potentially high costs.
    The first problem that a businessowner will run into with 
the credit option is to try to find a bank to do this. My 
understanding is that only 25 percent of the financial 
institutions across the country would be willing to offer this 
credit option.
    Second, if the business does find a financial institution 
to process the payroll transactions, using a credit system 
could cost as much as $130 a month for this option. Once again, 
another cost to the small business.
    Maintaining a hard-copy paper trail is one of the key 
reasons why businessowners do not want to file electronically.
    I can tell you as a small business owner, when you have a 
letter from the IRS asking something and you have no paper 
trail on this, it is a little disconcerting.
    My company has always kept paper records for all aspects of 
their operations, even in our current technological age. There 
are many businesses that are run just like this. Why should we 
be forced by the government to start filing our taxes 
electronically when sometimes we don't even keep our 
inventories electronically?
    Thousands of small business owners believe that because of 
the ever-present threat of an IRS audit, they must have 
accurate records available immediately. This is the coupon that 
small businesses use right here when they file quarterly. It is 
nice to have a receipt of your transaction.
    I realize, of course, that that transaction could show up 
on your monthly bank statement, but I think that businesses 
should have the peace of mind that they currently enjoy when 
they walk out of the bank with the actual copy of a receipt in 
hand.
    Because of these concerns and others that I know that you 
will hear later today from businessowners themselves, it is 
clear that the goal of reducing paperwork burden on businesses 
has not been met. Compliance with the EFTPS has created an 
administrative nightmare for businessowners, and that is why it 
is imperative that we allow small business owners the option to 
choose for themselves if they feel comfortable with paying 
taxes electronically.
    Again, I want to emphasize, EFTPS may be a very good 
option, but that is a decision that should be made by the small 
business owner. I think that is especially true with the news 
that the IRS has investigated over 1,500 cases of electronic 
snooping by its employees. We passed a bill to take care of 
that yesterday, and the fact that the IRS has spent over $4 
billion on a computer system to expedite the Tax Code.
    I just think that simply asking business to mandatorily 
plug into a system like that doesn't make good sense.
    So that was the first goal that was stated, was to simplify 
the paperwork, and I certainly don't think the facts support 
that that has happened.
    The second reason was to accelerate revenue collections by 
$3.3 billion over a 5-year period. I am pleased to report that 
we are on track to achieve at least the two goals.
    As I stated earlier, the second goal of implementing EFTPS 
was to accelerate revenue collections by $3.3 billion over 5 
years, as estimated by the Joint Taxation Committee.
    The Department of Treasury has recently verified in a 
letter that I would like to submit for the record. I think this 
is it here. I would like to submit for the record that the 
accelerated revenues to date have been $2.89 billion already, 
even though we have not fully implemented the system. So this 
amount does not even include the 1.2 million businesses that we 
are talking about that would be coming into the system by July 
1. To me, this clearly demonstrates that we will far exceed the 
goal of accelerating revenue collections by $3.3 billion during 
the 5-year phase-in.
    Thus, passage of my bill would not reduce the earlier 
revenue estimates. As a matter of fact, I think those revenue 
estimates may, indeed, work out the other way.
    Because of the success in raising the revenue necessary to 
offset the cost of NAFTA, the Secretary of Treasury should have 
even greater flexibility to address the concerns of small 
business owners. That is why I have introduced my Small 
Business Tax Payment Relief Act. My legislation would ensure 
that tax payment decisions are left in the hands of 
businessowners and not the Federal Government.
    So, in conclusion, I would just like to offer this. 
Senators Nickles and Breaux have introduced a similar piece of 
legislation in the Senate, and we have been in discussions, 
with the IRS, Treasury, small business owners, payroll 
services, and other Members of Congress since I have introduced 
H.R. 722.
    On Monday, as I mentioned, legislation was introduced in 
the Senate on this to give flexibility for small business. This 
legislation in the Senate already has been cosponsored by 10 
Senators, 5 of whom are Members of the Senate Finance 
Committee.
    The Senate legislation will slow down the mandated 
enrollment fees of EFTPS, and that will allow the IRS time to 
adequately inform those who need to be informed regarding this, 
but more importantly, it would allow the system to be voluntary 
for small businesses.
    During this tax-filing season, the IRS gave individuals the 
option of filing their returns electronically. Over 25 percent 
of the Americans took advantage of this program. I realize that 
electronic transactions are the wave of the future, but in 
every other aspect, using this technology has been the choice 
of the consumer and not a mandate from the Federal Government, 
and I think that is a very important distinction.
    Rather than allowing a top-down, one-size-fits-all 
government mandate that would have a negative impact on 
business, I would urge the Members of this Subcommittee to take 
swift action on the Small Business Tax Payment Relief Act.
    If it is true that this program would be beneficial to 
business, then, the businessowner should be able to decide for 
themselves under a voluntary program. That, I think, is the 
least that we can do for small business men and women in our 
districts.
    I thank you very much for this opportunity.
    [The prepared statement follows:]

Statement of Hon. Richard ``Doc'' Hastings, a Representative in 
Congress from the State of Washington

                             Introduction:

    Madam Chairwoman:
    I would like to commend you for holding this hearing today 
to discuss the implementation of the Electronic Federal Tax 
Payment System (EFTPS). With a July 1, 1997 deadline looming 
over 1.2 million businesses, I appreciate the expediency with 
which this hearing was scheduled.
    I am honored to have the opportunity to testify before the 
Subcommittee. As a business owner for 25 years, the issue of 
government mandates placed on small businesses is of particular 
concern to me. I hope that today's hearing will help to resolve 
some of the outstanding concerns about EFTPS, and at the same 
time identify how important it is to allow businesses the 
option of using the system.

                              Background:

    I began working on legislation during the last Congress to 
make the Electronic Federal Tax Payment System voluntary in 
response to concerns voiced by small business owners from my 
district, such as Mr. Gene Cole who will be testifying later 
today. However, it was too late in the session for action to be 
taken. As you are aware, the provision requiring businesses to 
file their payroll taxes electronically was included in the 
NAFTA Implementation legislation.
    In February, I reintroduced legislation to make the 
electronic system voluntary for businesses. In just two months 
H.R. 722 has been co-sponsored by over 65 members of Congress 
and has been endorsed by numerous national organizations 
including the National Federation of Independent Businesses, 
the U.S. Chamber of Commerce, and the National Restaurant 
Association.
    As we begin today, let's put the whole issue of collecting 
payroll taxes into perspective. The federal government has used 
American businesses as their tax collector for the Treasury 
since 1935 when tax withholding was promulgated under the 
Social Security Act. Congress has never seen fit to compensate 
them for their efforts. Now we are forcing businesses to file 
these taxes electronically and making them cover any costs 
associated with filing electronically.
    The NAFTA Implementation legislative history indicates that 
there were two reasons for mandating that businesses change 
from the traditional Federal Tax Deposit Coupon system to an 
electronic system. The first was to reduce the paperwork burden 
on businesses. The second was to accelerate the collection of 
revenue by $3.3 billion to offset the costs of NAFTA. In an 
effort to ensure that the first goal could be achieved, the 
Secretary of the Treasury was granted considerable flexibility 
to take into account the specific needs of small employers, 
including possible exemptions for small businesses from the new 
electronic system. As of today, to the best of my knowledge, no 
exemptions have been granted.
    Many members have stated that they were unaware that this 
provision was included in the NAFTA Implementation Act. And, 
for the first few years of implementation it was not a 
controversial issue because most of the businesses in question 
were already filing electronically through TAXLINK. Now that 
the mandate has reached the 1.2 million businesses that are the 
backbone of our economy--small businesses--we find that we 
forgot to consider one very important factor: the impact on 
these businesses.
    Under current law the Treasury Department is threatening to 
impose a 10% penalty on any small business that fails to enroll 
in EFTPS. That is why it is essential that Congress take action 
now to consider the impact and take action to correct this 
situation.

                        Small Business Concerns:

    My family has owned the Columbia Basin Paper and Supply 
Company since 1947. I was the firm's president before I was 
elected to Congress in 1994. Our business was constantly 
subjected to regulations by the local, state, and federal 
government. When I received notifications of a new regulation, 
I have to admit that I would often view it suspiciously, 
because I firmly believed that I was more qualified to make 
decisions concerning the daily operations of my businesses than 
the federal government. In most cases, regulations imposed on 
small businesses end up costing the business owner--and thus, 
consumers--more, and seldom simplify their operations. The 
EFTPS mandate is a perfect example.
    Businesses are given two options on how to make their 
payroll tax obligation payments through the Automated Clearing 
House (ACH): the ACH Debit method or the ACH Credit method, but 
no option of whether to use the electronic method. With the 
debit method, there is no direct cost to the business owner. 
However, if employers do not want to give the Treasury 
Financial Agents, NationsBank and First Bank of Chicago, access 
to their bank account, they will have to maintain an 
alternative account just for their payroll transactions. This 
is an unnecessary cost that business owners will now have to 
incur, solely for the purpose of maintaining the privacy they 
currently enjoy.
    If businesses want to avoid opening an alternative account, 
they may choose to make their payments through the ACH credit 
option. The credit option presents a whole new obstacle course 
for businesses and potentially high costs. The first problem a 
business owner will run into with the credit option is finding 
a bank that is offering this service. I understand that only 25 
percent of financial institutions in the country will be 
offering this credit option. Secondly, if a business does find 
a financial institution to process their payroll transactions 
using the credit system, it can cost them as much as $130 a 
month to use the credit option.
    Maintaining a hard copy paper trail is one of the key 
reasons why business owners do not want to file electronically. 
My company always kept paper records for all aspects of our 
operations. Even in our current technological age, there are 
many businesses that are run just like mine. Why should we be 
forced by the government to start filing our taxes 
electronically when we don't even keep our own records 
electronically? And thousands of small businesses believe that 
because of the ever present threat of an IRS audit, they must 
have accurate records available immediately. I realize that the 
transaction will be printed on the monthly bank statement, but 
businesses should have the peace of mind that they currently 
enjoy when they walk out of the bank with the actual copy of 
their Federal Tax Deposit Coupon.
    Because of these concerns and others that you will hear 
later today from business owners themselves, it is clear that 
the goal of reducing the paperwork burden on businesses has not 
been met. Complying with the EFTPS has created an 
administrative nightmare for business owners and that is why it 
is imperative that we allow small businesses to choose for 
themselves whether or not they feel comfortable processing 
their payroll obligation transactions electronically.
    With the news that the IRS has already investigated 1,515 
cases of electronic snooping by its employees in confidential 
taxpayer files and wasted $4.4 billion since 1987 on what they 
promised would be a state-of-the-art computer system for the 
21st Century, Congress needs to seriously consider how can we 
justify forcing businesses to file their tax obligation with 
another IRS initiated electronic system.

                 The Second Goal--Raising $3.3 billion:

    I am pleased to report however, that we are on track to 
achieve at least one of the two goals of transferring to an 
electronic tax filing system. As I stated earlier, the second 
goal of implementing EFTPS was to accelerate revenue 
collections by $3.3 billion over a period of five years as 
estimated by the Joint Committee on Taxation. The Treasury 
Department has recently verified in a letter that I would like 
to submit for the record, that in just three years, they have 
accelerated revenue collections by $2.89 billion through the 
use of electronic funds transfers. This amount does not even 
include the 1.2 million taxpayers that are scheduled to begin 
using the EFTPS for their payroll obligations on July 1, 1997. 
This clearly demonstrates that we will far exceed the goal of 
accelerating revenue collections by $3.3 billion during the 
five year phase-in. Thus, passage of my legislation will not 
reduce earlier revenue estimates.
    Because of the success in raising the revenue necessary to 
offset the costs of NAFTA, the Secretary of the Treasury should 
have even greater flexibility to address the concerns of the 
small business owner. That is why I introduced the ``Small 
Business Tax Payment Relief Act.'' My legislation will ensure 
that tax payment decisions are left in the hands of business 
owners--not the federal government.

                              Conclusion:

    Senator Nickels, Senator Breaux and I have been in 
discussions with the IRS, Treasury, small business owners, 
payroll services, and other Members of Congress since I 
introduced H.R. 722. And on Monday, legislation was introduced 
in the Senate in an attempt to resolve the concerns of all 
parties involved with the EFTPS and most importantly to meet 
the goal of allowing flexibility for small businesses. This 
legislation has already been co-sponsored by 10 Senators, five 
of whom are members of the Senate Finance Committee. The Senate 
legislation will slow down the mandated enrollment phase-in of 
the EFTPS that will allow the IRS time to adequately inform 
those who need to enroll in the EFTPS. Most importantly, it 
will allow the system to be voluntary for small businesses.
    During this tax filing season, the IRS gave individuals the 
option of filing their returns electronically. Over 25 percent 
of Americans took advantage of this program. I realize that 
electronic transactions are the wave of the future, but in 
every other aspect, using new technology has been the choice of 
the consumer, not a mandate from the government.
    Rather than allowing a top down, one-size-fits all 
government mandate that will have a negative impact on 
businesses, I would urge the members of the Subcommittee to 
take swift action on the ``Small Business Tax Payment Relief 
Act.'' If it is true that this program will be beneficial to 
businesses, then the business owner should be able to decide 
that for themselves under a voluntary program. That is the 
least that we can do for the small businessmen and women of our 
districts.
    Thank you Madam Chairwoman.
      

                                

    Chairman Johnson. Thank you very much for your testimony, 
and I think you very clearly separated the two problems that we 
face today.
    One is to see what needs to be done to assure that a 
national electronic filing system is well structured, will work 
well, and is easily accessible to the business community, and 
the problems that have developed in the implementation of this 
system are problems that we need to examine and address.
    The second issue is, for how many taxpayers should this be 
mandatory, and it is absolutely true that in the NAFTA law, 
there was no legal requirement to go down to businesses as 
small as 50,000? Whether or not that is necessary is really a 
debatable point at this time, but there are two issues, the 
quality of the system which I think is very important because I 
think this is an alternative that as more and more small 
businesses get familiar with the power of new technology and 
new information management capabilities, they will want and it 
will, in fact, save them time, effort, and money, but we do 
need to do it in such a way that the system is well organized 
for small businesses to understand their obligations and their 
opportunities under this system and the government is well 
organized to respond and to inform.
    So we will be looking at all the problems that have 
developed with this system, and hoping to resolve them, we will 
look also at the problem that you raise, Mr. Hastings, in your 
legislation, and I know Ms. Smith has been a part of this, 
whether or not it is necessary for this to be mandatory for 
very small businesses.
    Thank you for your testimony.
    Mr. Coyne.
    Mr. Coyne. Thank you, Madam Chairwoman.
    In the absence of the program moving forward toward 
implementation on July 1, I wonder if you would have any 
recommendations for the IRS about how they could get the 
remaining 200,000 businesses enrolled in this program.
    I know your position on the program, but in the absence of 
it not going forward, I wonder if there are any recommendations 
that you might have to the IRS to make it a better 
implementation process.
    Mr. Hastings. Well, I would say that the record speaks for 
itself that if it is a good business decision and an individual 
feels comfortable with what the IRS is proposing that it will 
flow very smoothly, and I think what supports that fact is the 
fact that the revenue estimates was an acceleration of revenue 
of $3.3 billion over 5 years, and in fact, in 2 years, already, 
because people have enrolled for a variety of reasons, there 
already has been an increase of $2.89 billion. I just think 
because we are moving into an electronic age that it will 
happen if it makes good business sense.
    Now, some of the concerns, however, that we have heard is 
if there is a breakdown in the computer. I just got to tell 
you, just today, just as an aside to that, as we were preparing 
for this, the computers in our office broke down, and so my 
staff was struggling to try to get all of this put together for 
today.
    I would just suggest, what would happen, unless there is 
some sort of a way that IRS will be very clear on how they are 
going to let a business off if there is a breakdown someplace? 
What happens if they are electronically filing and they are 
using a credit method and they have their home institution and 
a car crashes into a telephone pole and knocks down all the 
power and there is no backup system in that bank and it happens 
to be the 15th of the month? How do you let that business off 
because it wasn't his or her fault? Those are the things that 
have to be answered in my mind, and if they are adequately, 
then I think people will probably get into this system because 
it makes good business sense.
    Again, pointing it out, I think that has already been 
proven, but I still want to go back to the point that I think 
irritates probably a lot of Americans, and certainly 
entrepreneurs, is they don't want to be forced into something. 
They want to make that decision on their own, and that is why 
it should be voluntary, but IRS can certainly answer those 
questions in a very forthright way if there is a deadline 
missed on when, or if there is an overpayment, when are they 
going to get refunded. Keep in mind, businesses are collecting 
these payroll taxes, and if there is an overpayment or some of 
that sort of stuff, when are they going to get refunded? Is it 
going to be in a timely manner? Do they have to wait 6 months 
for that? All of these things, I think, should be answered 
before somebody gets into the system.
    Mr. Coyne. Do you think it would be helpful if the IRS was 
to waive the 10-percent penalty for first-time filers of the 
program?
    Mr. Hastings. I think I would waive the 10 percent and not 
even have it. If it makes good business sense, somebody will do 
it. Why penalize somebody because they decided that they wanted 
to stay with the same system?
    Thank you.
    Ms. Smith. Just a brief comment.
    You know, in business, and I am sure a lot of you Members 
have been in business, the best way to get compliance is to 
advertise well. I think we are having this Subcommittee meeting 
today because of poor communications and public relations and I 
believe IRS just needs to step up their public relations in 
selling this. Because as a businessperson, I know that if you 
could have gotten rid of paper and I was confident that when I 
sent it electronically they really got it and they would not 
hassle me, I would do it in a heartbeat.
    But my concern would be that they are not ready to receive 
it, they would lose it, they are getting a whole bunch and I am 
not sure I am giving them what they really wanted to begin 
with. Now, that is the feeling I have as a businessperson.
    So, I think that if we said, you have already got $3 
billion, you have got the biggest businesses--what is it 70,000 
or so--coming in on TaxLink, market your successes and 
encourage that growth but stay with the big ones and just wait.
    They have the opportunity. NAFTA does not tell them to go 
to the bottom. Just start with the biggest and show you are 
succeeding and then encourage the rest in. And then come back 
to us again and show us your success of how you have marketed. 
That is probably the best thing they could do to get 
compliance.
    Mr. Coyne. Thank you.
    Chairman Johnson. Mr. Portman.
    Mr. Portman. Thank you, Madam Chair, and both of you for 
your good testimony. I really appreciate it as a former Member 
of the Small Business Committee. Linda, I appreciated your 
perspective and Doc, your talking about the fact that 
withholding provides most of our taxes. I think about 80 
percent of our taxes are collected in this country through 
withholding. And often, we, as policymakers, forget that. 
Certainly, I think, Americans would be surprised to learn that.
    Other countries who are putting together an income tax 
system call that privatization. But it is an important part of 
our system and people talk about voluntary compliance and it is 
a voluntary system. It is also a system where we rely heavily 
on the employer and I think that is a very efficient way to 
collect taxes, undoubtedly, and it is something that we should 
be encouraging. But we also have to keep that in mind as we 
look at these sorts of mandates, we want to make it easier not 
harder for employers to do the job they do of collecting these 
taxes and getting them into the Federal Treasury.
    So, I am very sympathetic to your point of view, both of 
you, and would like to think that there is some way to move to 
electronic filing without undue hardship, particularly for 
smaller businesses.
    I also agree with Linda's statement, which I thought was 
very good, with regard to the promise that electronic filing 
holds and Doc, you also said it is the wave of the future. The 
fact is that most small businesses over time will find great 
benefits to this but initially there are going to be some costs 
and there is a lot of skepticism.
    Doc, you talked about the need for keeping hard copies of 
the records and so on for audits and that sort of thing. So, I 
think there has got to be a way for us to work through this and 
I guess what I would hope, Doc, is that the Senate bill offers 
some hope.
    You talked about the fact that it slows down the process. 
Is there a time lag, is there another 6 months after July 1, or 
how does it go about phasing in the program, do you know?
    Mr. Hastings. I have not seen the legislation but they 
lower the threshold. Right now we are at--if we were to pass my 
bill right now and freeze things in time, the threshold would 
be $47 million obligation, the tax obligation that business 
has.
    I think the Senate's version would lower that down to $10 
million. Anybody that has an obligation of $10 million or more 
would be obligated to file their taxes electronically. Anybody 
under that would have the option of doing it as I pointed out 
in my testimony or as in my bill.
    Mr. Portman. So, that is the voluntary amount. The new 
threshold will be established not at $50,000----
    Mr. Hastings. That is correct.
    Mr. Portman [continuing]. But at $10 million or $5 million 
or something in that area.
    Mr. Hastings. Yes. And I would suspect that probably most 
businesses that fall into that category, frankly, are probably 
filing electronically already.
    Mr. Portman. I would think at $10 million that would be 
true from the information we have had before the Subcommittee.
    Well, I think, again, we want to continue to work with you 
all to come up with something that makes sense that moves us to 
that eventually. I agree with Linda in that if we have time to 
explain the benefits of this, I think, people will go to it. 
And one final comment, Doc, I appreciate your raising the 
emergency situation and also the underpayment/overpayment 
situation.
    I think there are ways to do this which give flexibility to 
businesses that we do not currently have in the program and 
that would include permitting businesses in cases of 
electricity going down, as you mentioned, or a flood or an 
earthquake or something like that, to have a break which they 
do not have in the current regulations. And also to work in 
something with regard to the ability to go ahead and pay the 
taxes, then do the calculation, which often you cannot do 
immediately to add that lag time flexibility that many small 
businesses want. So, there are ways to do this, I think, that 
makes more sense, too, over time.
    I thank you all for your testimony.
    Mr. Hastings. I would just add, if I could, Rob, the Senate 
bill does phase it down to $10 million in 1998 and then the 
final threshold is $5 million in 1999 and thereafter and that 
is their limit.
    Mr. Portman. Thank you.
    Chairman Johnson. Congresswoman Dunn.
    Ms. Dunn. Thank you, Madam Chair.
    I want to join my colleagues on this Subcommittee in 
welcoming the members of the panel today and especially the 
Members of Congress from Washington State for their great work 
in focusing on this issue. We have been known to focus on 
issues of this sort. Congressman George Nethercutt recently was 
able to convince the IRS that they ought to wait a while on 
collecting AMT taxes from farmers and we believe that is the 
right way to go and he has legislation that will plug that 
loophole as well.
    Madam Chair, I want to thank you for having these hearings. 
I think it is terribly important for us to be listening to the 
small business people in our districts now. I first heard of 
the problem, the glitch in this reporting, from a close friend 
at home who called me last June and mentioned that they had 
been notified that they were mandated to report in the way this 
legislation required. And she was very concerned because she 
wanted to do the right thing, being an honest taxpayer, but she 
was not prepared to go to the expense and through the amount of 
time required to report electronically. Certainly, I believe 
both the Members of Congress testifying have focused on the 
choice that ought to be allowed to the small business people 
or, in broader terms, to the consumers of the United States.
    I am very uncomfortable with the mandate that this ruling 
puts on our small businesses and it seems to me that one of the 
reasons this hearing is important is to determine whether the 
goals of the legislation are, indeed, being met and that is to 
reduce the paperwork and to accelerate the collection of 
revenue by $3.3 billion. It appears to me that neither of those 
goals is being met.
    Exemptions are not being taken advantage of by the 
Secretary of Treasury. I am astounded to learn that those have 
been available to him and he could have made that move to 
provide flexibility to the folks who are trying to do the right 
thing by fulfilling their commitment to the Internal Revenue 
Service.
    There are some constituents in my district who are very 
nervous about this. A small business woman from Bellevue, 
Washington: The new law is costly to small business, it is 
another intrusion by the Federal Government. The costs to 
implement this tax collection system are wasteful to all 
taxpayers.
    Another small business man in Redmond, Washington: It is 
already nearly impossible to run a small business and follow 
all the regulations and the rules that the government imposes. 
I certainly hope this hastily thrown together proposal will not 
be jammed down our throats while you are still trying to work 
out the bugs in it.
    And, last, a small business woman in Maple Valley, 
Washington: We have always done what has been asked of us when 
it comes to our businesses but this is the straw that breaks 
the camel's back. This is like a slap in the face, a punishment 
for something we did not do wrong.
    I believe, through what you have said this morning and 
through my knowledge, that the IRS has been very lax in 
notifying people and in the way that they notified small 
business people about this change. That concerns me greatly and 
while I commend you, Congressman Hastings, for providing this 
legislation--which I signed on very early and Congresswoman 
Smith has signed on and 65 others as I understand in the 
Congress have signed on--do you think that the public outcry on 
this issue would have been less if the IRS had phased it in and 
given proper notification to the small business people who, I 
believe, would have been happy to comply had they been given 
warning?
    Mr. Hastings. Well, my observation in reading that letter 
that came out from the IRS regarding this--a couple of things 
stuck out in my mind when I saw a copy of that letter. They 
said that you have to do this and right up front it says, or be 
subjected to a 10-percent penalty. And then they said in that 
letter to do it as soon as possible because it is going to take 
10 weeks to process, which I thought was rather interesting. 
Here we are trying to make a system simple, and they said, File 
because it is going to take 10 weeks for us to process you 
before we even get into the system.
    And had I been on the receiving end as a businessman, I 
would have thought, wow, what do they think is going on? I mean 
this is really kind of silly. So, in that regard, I would say 
that first letter that came out did not have enough facts and 
figures in there. In fact, I think there is only one or two 
paragraphs that even associated itself with how you are going 
to pay these things.
    So, a combination, but I do not think it was done well. And 
I spoke to a small business group earlier this week and the 
observation came up from one of the individuals in that 
organization that the IRS has done a poor job in marketing 
this, so to speak.
    Ms. Dunn. Thank you, Congressman, and Madam Chairman, 
thanks again for holding these hearings. I believe that this 
optional participation, at least for the time being, is the 
proper way to go and I would encourage both of our members of 
our panel this morning to cooperate with Senator Nickles, 
because I think it could make a strong partnership and get what 
we need to do for small business.
    Thank you, Madam Chair.
    Chairman Johnson. Thank you.
    Mr. Kleczka.
    Mr. Kleczka. Thank you, Madam Chair.
    Congresswoman Smith, in your testimony you indicated that 
businesses are not aware that many other taxes are also covered 
under the electronic filing system, outside of the payroll tax. 
Outside of the payroll tax and FICA tax, what other taxes are 
covered?
    Ms. Smith. I could get you a list. All of your corporate 
taxes and your business taxes that you would pay quarterly.
    Mr. Kleczka. OK, what, could you give me a feel for what 
those are?
    Ms. Smith. Well, as a businessperson, you pay your tax, 
some of us pay them monthly, some of us pay them quarterly 
depending on your size and the flow of the taxes.
    Mr. Kleczka. Are the estimated taxes also covered?
    Ms. Smith. Yes, all taxes would be covered, yes.
    Mr. Kleczka. OK, thanks.
    Mr. Hastings. I might add, if I may, your employment tax is 
one. If you have an excise tax, if you are in a business that 
pays excise taxes that comes into it. All Federal tax 
obligations fall into that category. The big ones, of course, 
are FICA and Federal withholding, but everything else falls in 
that category also.
    Ms. Smith. Most people that are talking understand the 
FICA, they understand if it says, payroll. They do not 
understand that their quarterlies, their monthlies now have to 
be paid electronically, and that is our understanding that they 
are not filing those in all cases or understanding they have 
to.
    Chairman Johnson. Mr. Hulshof.
    Mr. Hulshof. Thank you, Madam Chair.
    Congressman Hastings, I assume back in the good old days of 
1947 and beyond, when the Columbia Basin Paper and Supply Co. 
would make your tax deposit at the local bank--and I think you 
showed us a copy of a coupon--and would have that hard record 
that you would take back to your business; and on the other 
side of it the bank would process that information, forward the 
tax payment to Treasury and under that old system banks had 
that 1-day float.
    As you know, under the present Treasury regulations banks 
are now prohibited from charging fees for processing these FTD 
paper coupons because the processing costs were offset by the 
interest on the float and now that float has been eliminated.
    If we took your approach to make electronic filing 
voluntary, should there be a corresponding lifting of the 
regulatory ban and allow banks to perhaps go back to charging 
fees to deal with small businesses or what suggestions might 
you have?
    Mr. Hastings. Well, if we get into an electronic filing 
system that would be a determination for the businessowner. 
Because I certainly would not want to mandate to financial 
institutions that if you are handling these transactions you 
have to do it for free, if it is a cost to you.
    So, I would certainly say that the financial institutions 
should have the options of having a service charge on that and, 
of course, the businessowner then would make that determination 
which is in his best interest. If he wants, desires a paper 
trail and the cost is something that he can live with and he 
feels comfortable with it then go ahead and work through the 
financial institution. But at that point, the decision may be 
made to file electronically but it should be the 
businessowner's option and not something mandatory.
    But I certainly would not mandatorily say the banks could 
not charge any fee because of the costs that they incur in 
this.
    Mr. Hulshof. One question to each of you. Ms. Smith, you 
mentioned that had this been marketed better--and I think, Doc, 
you also mentioned we have a copy of the initial letter from 
the IRS with the bold headlines, you must enroll and deposit 
electronically--are there any other--and, you mentioned 
marketing, are there any other ways to provide incentives for 
small business other than just doing a better job of marketing?
    Ms. Smith. Well, I guess the best incentive for me is 
making my life easier and if I can see that it works, I am glad 
to do it. And, so, I do not know that there is. Except one 
thing they could have done better, and they might differ with 
this, is that they could have gone, back when NAFTA passed, and 
started working more closely with the small business community, 
the associations, and had them start training the people in 
this wonderful opportunity coming up to make your life easier. 
Instead, it came in as a club instead of a carrot.
    And, so, now we have got a communication and a public 
relations problem that the government is doing something to us 
again, instead of the government is making our life easier. So, 
I do not think it is simple from here on out. We can make it 
simpler by making it voluntary, taking the pressure off and 
marketing it, and probably we will get better compliance.
    I would imagine the costs of implementing are going to be 
higher because of the problems of people sending in 
inaccurate--can you imagine IRS getting 1.2 million filings 
that are probably either not complete or misunderstood and the 
mess they are going to have with that? I would imagine that is 
going to slow down collections and cause some real problems.
    Mr. Hulshof. Anything else, Doc?
    Mr. Hastings. Well, I would go back to the basic premise 
that I mentioned. In 1935, when the Congress, in its wisdom 
under the Social Security Act, essentially made businesses the 
tax collector and they have not compensated them for being the 
tax collector. In fact, there are penalties, as you know, if 
you do not send your payment in on time.
    I would entertain the thought that maybe you ought to find 
some way of allowing a businessowner to deduct a fraction of a 
percent for the privilege of collecting taxes for the 
government and keeping it. That may be an incentive.
    Obviously, you have to look at the fiscal impact of that 
but it is something to consider because businesses are the tax 
collector for the Federal Government.
    Mr. Hulshof. Thank you both.
    Madam Chair, I yield back.
    Mr. Hastings. Madam Chair, I wanted to insert this into the 
record.
    Chairman Johnson. Yes, your testimony will be included in 
its entirety in the record and we will insert that into the 
record and we will also give it our attention.
    Mr. Hastings. Yes. This letter also is the one that I 
mentioned from the Treasury regarding the collections from the 
Department of Revenue. It used to be the Department of Revenue, 
what is it now anyway?
    Chairman Johnson. We will certainly tend to that.
    Ms. Thurman.
    Ms. Thurman. Thank you, Madam Chair.
    Thank you for holding this hearing and I thank our two 
colleagues for coming here today. I need some clarification in 
the numbers that I am hearing here.
    In both of your testimonies, I believe you talk about 1.2 
million businesses that would be involved in this. It is my 
understanding that already there are 960,000 that are going to 
be participating one way or the other in this program to date. 
Is that your understanding?
    Mr. Hastings. My understanding the way the phase-in was, it 
was a formula by which you were supposed to raise so many 
dollars over a period of time and that would dictate how many 
people were involved. And so, as this was projected out, this 
year it was supposed to hit 1.2 million businesses that are 
otherwise not enrolled.
    Ms. Thurman. But of those?
    Mr. Hastings. Yes, that is what the figure is. Clearly 
some, within that 1.2 million, have already enrolled into the 
system because they thought it made good sense for them.
    Ms. Thurman. Do you know what those numbers are? I mean the 
numbers that voluntarily enrolled.
    Mr. Hastings. No, I have not heard but I think that is what 
that figure is.
    Ms. Thurman. OK. Because what I have been told is, it is 
about 960,000 that have either enrolled, are using the system 
or are using the system already voluntarily. Is that correct?
    Ms. Smith. I think that you are right but not complete. 
Because I did not understand that either. I think there are 
around 70,000 already participating through the other system.
    Ms. Thurman. Right.
    Ms. Smith. And 960,000 have filed the paperwork but are not 
participating and will not until it kicks in, until the 
mandatory time. So, they have not started filing. And 1.2 
million are who they sent the request to. So, out of that they 
have 75 percent of those who have sent their paperwork back in 
to enroll.
    The rub comes in the fact that these are people that are 
pretty small. They have sent it because they knew they had to 
send something back in for fear of a penalty, but they have not 
started paying yet. They have not found the vendor, they have 
not connected. When they connect and do their first filing the 
anticipation is there is going to be 1.2 million of which 
really only 70,000-plus--and I am sure these can be corrected 
by IRS when they come--who have actually participated in the 
system.
    And, so, we believe that that--given Internal Revenue 
Service's record with the problem and I am not talking about 
individual agents or their determination--that this is a flood. 
That even the best business setup with the best system it would 
hit pretty hard. So, that is the reason we would like them to 
back up a little bit.
    Ms. Thurman. When they do that--meaning the 960,000 or 
whatever the number that have volunteered to sign up--do we 
know of any information they receive back to make that 
transition easier for them? If they file something saying they 
have gotten some kind of a notice requiring them to file 
electronically, do they then receive from the IRS or from maybe 
an area business or bank any information that would show them 
how to do this?
    Ms. Smith. What I have so far are the training videos for 
the banks. Just a moment. Do we have anything that they send 
back? Yes, there is a confirmation slip and a 30-page guide 
that they send back. But, obviously, the 30-page guide is 
clarification but it is confusion also.
    Ms. Thurman. IRS sends that?
    Ms. Smith. Yes.
    Ms. Thurman. So, they do give them some feedback?
    Ms. Smith. Yes, training to prepare for this, if, in fact--
--
    Ms. Thurman. I was wondering if they have a personal 
contact or just the 30-page guide and a confirmation.
    I think there is so much confusion even in the written 
material that it points to the problem that we have.
    Ms. Smith. But, yes, I think they are trying, it is just 
that they are trying to bring too many people in with too much 
of a change at one time.
    Ms. Thurman. Out of that number that you talked about with 
the Senate thresholds, of the $10 and the $5 million, what is 
the breakdown of the businesses that then have that, if we use 
the 1.2 million, what would then be the number left over of 
those coming in?
    Mr. Hastings. I would have to research that because I do 
not know. That is the Senate version and I do not know what it 
would be. But I cannot answer that.
    Ms. Thurman. If I may, I have one more comment and 
question. I have not heard anything from our small businesses 
on this matter. Is the 10-percent penalty the issue for a lot 
of them? Is that what has gotten them scared?
    Mr. Hastings. I think the biggest issue that I heard from 
my constituents--and maybe this is just my district, I do not 
know--is the fact that they do not want the IRS to have access 
to their account, whether electronically or any way. They want 
to have this coupon here because they are used to that coupon, 
it works for them and they want the option, frankly, and I 
probably have some businesses that would never want to file 
electronically, just the nature of them.
    But I would say that is the biggest part is that danger. 
And the second part that comes with that is having to be told 
to do that. When you are talking about businesses generally 
entrepreneurs, you are talking about pretty independent people 
and they want to make that decision on their own and not be 
told.
    If it were offered as a voluntary situation, which is what 
my bill does, then it makes it much easier. Then they can look 
at this and say, Hey, this makes sense, why not do it? I think 
the combination should be both of those; I do not think there 
is one overpowering reason that I have heard from my 
constituents.
    Ms. Thurman. Thank you.
    Chairman Johnson. Thank you very much for your comments, 
both of you, they have been very helpful and we appreciate 
them. I think it is important to remember that Congress has 
pressured IRS to modernize its management and its business 
systems. And to be a strong economy in the decades ahead, we 
need businesses to modernize their management systems as well.
    So, the thinking behind the government developing a good 
electronic payment system, I think is absolutely right, and the 
fact that this system is working very well in those sectors 
where it is up and running is a good thing for us all.
    The issues you raised about how small businesses are going 
to participate and under what circumstances are very legitimate 
issues and we need to address them. Having delayed the 
implementation of this system for 6 months which we did last 
session to avoid these problems, that we should be here holding 
this hearing is, in and of itself, a statement about how 
difficult it has been for IRS to make change.
    We should not have to deal with a letter that went out to 
small businesses that stressed penalties, stressed compliance, 
a 30-page booklet with a few months' notice after a 6-month 
delay. We should have been sitting here looking at a letter 
that clearly laid out the options, that helped small businesses 
to see that this does not give the IRS access to their 
accounts.
    This is not very different from the way that individuals 
choose to let mortgageholders debit their accounts so that they 
pay their mortgage payments automatically and do not have to 
write checks. No effort was made to educate, to communicate in 
a way that was user-friendly, and that is really just terribly 
unfortunate.
    It is something that this Subcommittee has worked very hard 
on and made some progress. But we are here today both because 
we want to make sure that we do provide the leadership and work 
with the bureaucracy to modernize its systems, and to better 
serve the public through that modernization, but that we do it 
in a way that is user-friendly, that is intelligent, that 
educates, that leads, that guides and that at the appropriate 
level is voluntary.
    So, I thank you very much for your testimony and we will 
examine all the problems that have developed with this system 
and we will make sure, in the end, that we work together to 
address both the interests of the government and the taxpayers 
and the interests of the small business taxpayers. I think it 
is important to remember that this is money due and these are 
taxes that people are obliged to pay. And the big difference 
here is that instead of the banks getting the earnings on 1 
day's interest, the government is getting the earnings. And 
that is really an efficient tax system that uses our resources 
wisely to support the services that the public needs. We just 
have to do it well and we have to implement it well and that is 
what we are looking at today. And thank you for your testimony 
and input.
    Ms. Smith. Thank you, Madam Chair.
    Chairman Johnson. The next panel will please come forward.
    Mr. Donelson, who is the Chief, Taxpayer Service Division, 
Internal Revenue Service; Russell Morris, Commissioner, 
Financial Management Services, Treasury Department; Lawrence 
Buettner, senior vice president, First National Bank of 
Chicago; Larry Dreyer, senior vice president of NationsBank, 
Atlanta, Georgia.
    And I am going to start in reverse order, calling on Larry 
Dreyer first, because through our banking officials we will, I 
think, get a better understanding of how this system is 
actually going to function and whether or not some of the 
processes are in place that the small business community is 
concerned about.
    Mr. Dreyer.

STATEMENT OF LARRY DREYER, SENIOR VICE PRESIDENT, NATIONSBANK, 
                        ATLANTA, GEORGIA

    Mr. Dreyer. Thank you, Madam Chair.
    Good morning, Madam Chair and Members of the Subcommittee. 
This morning the representatives from FMS, IRS, my colleague 
from First Chicago, and I would like to provide you with an 
update on the initial operation of EFTPS, the current status of 
the system and the role and the responsibilities of the 
Treasury financial agents.
    NationsBank and First Chicago were selected during a 
competitive bid process to assist FMS and IRS in the design, 
development, implementation and operation of EFTPS. Both 
financial institutions are nationally recognized as being among 
the leading providers of the Electronic Treasury Management 
Services for the commercial market.
    In 1996, we completed the design and development of the 
system. Even though required participation in EFTPS is 
currently deferred until July 1, 1997, we began operation of 
EFTPS last November. On November 7, we processed our first 
payments for those taxpayers that had enrolled in the system as 
a result of the initial IRS notifications. Since that date, we 
have collected over $73 billion through this system. Just 
yesterday, we collected approximately $5.3 billion through 
EFTPS.
    The responsibilities of the Treasury financial agents 
include enrollment of the taxpayer in EFTPS, processing the 
payment, and providing customer service. Please note that I 
stated processing the payment. This system has sometimes been 
referred to as an electronic filing program, however, EFTPS 
does not change or impact the filing requirements that are 
currently in place. It is just a payment mechanism.
    As of last week, approximately 982,000 or 85 percent of the 
required taxpayers had enrolled in EFTPS. Only 177,000 remain 
to be enrolled and we are receiving approximately 15,000 new 
enrollments per week and estimate that over 87 percent of the 
required taxpayers will have responded by May 1. This will 
enable them to participate in the EFTPS by July 1.
    Upon completions or successful completion of the enrollment 
process, the taxpayer receives a confirmation form, a payment 
instruction booklet, and by separate cover, separate envelope, 
a PIN, or personal identification number.
    Unenrolled taxpayers have received three notices starting 
last summer, again in October, and in February. In addition to 
that, within the next couple of weeks, we will be sending out 
notices to those taxpayers that are enrolled but not yet using 
the system.
    As part of the enrollment process, taxpayers can elect to 
make their payment via an automated clearinghouse debit, ACH 
credit or same day payment. If the taxpayer should elect to use 
ACH credits, they would instruct their bank to initiate the 
payment to EFTPS. If the taxpayer chooses to use the ACH data 
process, they would provide the financial agents with their 
bank account information. This information is necessary so that 
the taxpayer can initiate the transfer of their payments from 
their account to a special receipt account at the Federal 
Reserve. It does not move through either of the financial 
agents.
    Even though the transfer of funds has to be reported at 
least 1 day prior to tax-due date, the money does not leave 
their account until tax-due date. All taxpayers are 
automatically enrolled for same-day payment and taxpayers that 
elect the debit payment method are also able to use the credit 
payment method.
    In the testimony provided, the chart Payment Methods shows 
that 61 percent of enrolled taxpayers have selected the debit 
payment method and 38 percent the credit payment method. The 
next chart shows the actual payment methods currently being 
used by the taxpayers. Over 94 percent are using the debit 
payment method, slightly less than 5 percent the credit payment 
method, and less than 1 percent the same-day payment method. 
The next chart gives the breakdown of the dollars received by 
payment method.
    During the enrollment process, the taxpayer who elected to 
pay via ACH debit also selects the method that they will use to 
report into EFTPS. The options available to the taxpayer 
include touch-tone telephone, voice operator or personal 
computer. If they select the personal computer method the 
financial agent provides the taxpayer with the software that 
will enable the taxpayer to report their payment directly into 
EFTPS.
    In the design of the system, financial agents determine the 
amount of capacity that would be necessary to accommodate 
expected volume in July and we currently have a capacity that 
exceeds that expected amount. During the first 6 months of 
operations we made the following observations. Eleven percent 
of the payments are made during nonbusiness hours and on 
weekends, 55 percent are made on days other than due date, 83 
percent of the taxpayers are using the touch-tone system and 
only 7 percent of the touch-tone callers choose to request 
assistance from an operator. We had projected 15 to 20 percent.
    In customer service, we provide information to the 
taxpayers on their enrollment status, payments process, PINs, 
request for additional forms, and general information and 
education. During March the financial agents received 128,000 
customer service calls. The average speed of answer for each 
call was 16 seconds. This compares favorably to other 
commercial applications that range from 9 to 30 seconds.
    We anticipate the number of calls in late June and into 
July will increase dramatically due to the July 1 date and are 
preparing to expand our capacity to handle a substantial 
increase in call volume.
    That concludes my oral comments and I will ask my 
colleague, Larry Buettner, to make his statement next.
    Chairman Johnson. I thank you.
    Mr. Buettner.

STATEMENT OF LAWRENCE F. BUETTNER, SENIOR VICE PRESIDENT, FIRST 
                    NATIONAL BANK OF CHICAGO

    Mr. Buettner. Good morning.
    I will not reiterate the comments of my colleague from 
NationsBank concerning the enrollment and payment process of 
EFTPS. I will stress, however, First Chicago also believes it 
has taken all the necessary steps to prepare for the processing 
of electronic tax payments and the answering of taxpayer 
questions. In addition, we have gained considerable confidence 
in the ability of EFTPS since it has been operational for the 
last 6 months. We feel we are fully prepared and ready for July 
1.
    Both banks were designated as financial agents in October 
1994. Although this is only 3 years ago, we need to step back a 
minute and recall the events of the time. TaxLink, the 
predecessor of EFTPS, was a pilot. Electronic bill payment 
systems were in their infancy. Fax machines and voice mail were 
only becoming universally available as a means to conduct 
business. Something called the Internet was still very much a 
toy of computer geeks. Yet, States were already requiring 
business taxpayers to make their tax payments electronically.
    When we began our development of EFTPS it was grounded in 
the realities of the time. Technology, especially personal 
computers were not used by everyone. EFTPS today allows the 
taxpayer to utilize many different means to pay their taxes 
electronically. The set of features was developed as a result 
of market research data gathered from taxpayers. The EFTPS 
represents the broadest possible set of reporting options which 
are reasonable to introduce with a project of this size and, 
yet, allow taxpayers the greatest number of choices to select 
from to make their payments. At a minimum, EFTPS does not 
require taxpayers to purchase or utilize technology beyond 
their telephone.
    There are a number of specific concerns which have been 
raised about EFTPS. First, both financial agents have gone to 
extensive ends to provide sufficient capacity to process tax 
payments. During the last 6 months we have been in production, 
we have gained significant understanding of taxpayer usage of 
EFTPS. We have learned the length of the time a taxpayer takes 
to make a payment, the pattern of when payments are made, the 
extent of the use of the warehouse capability and other 
features. All of these factors have been evaluated to ensure we 
have adequate system capacity.
    We do have capacity which will ensure that the taxpayer can 
initiate a payment and make it successfully. We have gone to 
extensive efforts to ensure taxpayers will not encounter a 
service issue when they utilize EFTPS. Our overall system 
capacity well exceeds the total number of payments expected on 
a peak day with a significant safety cushion.
    Just a few examples. We are able to process almost 1 
million transactions an hour received from ACH credits. We have 
more than three times the capacity of telephone call capacity 
than the number of calls we are forecasting on a peak day. 
Second, both NationsBank and First Chicago are among the top 10 
providers of ACH services. We handle thousands of ACH files and 
tens of thousands of transactions daily as banks. We have 
considerable experience in ACH processing and it is extremely 
uncommon for a customer or a bank to duplicate an ACH file or 
transaction, but it can happen.
    EFTPS offers more solutions to this problem than the normal 
commercial practice. In the case of service bureaus or payroll 
processors our systems are designed to detect duplicate files. 
If a file were truly duplicated we would be able to detect it. 
For some reason a service bureau or payroll processor should 
feel a duplicate file were processed, they only need to call 
their bank to place a stop payment.
    In the case of a business making the payment through EFTPS 
our software checks for duplicate tax payments are initiated 
through the telephone or the PC. In the event the taxpayer 
inadvertently duplicated a payment they could cancel the 
payment through EFTPS or place a stop payment through their 
bank for the duplicate transaction. Mr. Donelson will shortly 
address the concerns about duplicative ACH transactions.
    Third, security and access to computer systems and data are 
headline news. EFTPS utilizes proven security features to 
prevent the unauthorized access to taxpayer information or 
accounts. In order for us to process an ACH debit to a taxpayer 
account the taxpayer must initiate the payment utilizing their 
employer identification number, the EIN, and their PIN. Without 
the combination of the EIN and PIN the taxpayer would not be 
granted access to the system.
    The IRS does not have access to the PIN and, therefore, is 
unable to execute a debit to a taxpayer's account through 
EFTPS. The IRS currently has greater access to more taxpayer 
bank information from checks provided by taxpayers. Both 
financial agents have a fiduciary and a legal responsibility to 
keep taxpayer account information confidential.
    Finally, the pace of change is accelerating tremendously. 
The Internet and related technology is redefining the way we 
conduct our everyday lives, whether that is our children 
completing research on the Internet for their homework, a 
business conducting electronic commerce, or paying taxes 
electronically through EFTPS, the fact is the pace will only 
quicken in the next few years.
    EFTPS is part of this change process. Given the explosive 
growth in technology with the Internet population estimated to 
be more than 35 million, it is clear that the desire of the 
general public is for more services similar to EFTPS. The 
Federal Government, given the large scale and the number of 
participants and transactions each program involves, can be a 
tremendous force behind the redefinition of how business is 
conducted in the United States. We believe EFTPS positively 
contributes to the future ease of doing business with the 
Federal Government, the system has worked well for the last 6 
months, there are only a small percentage of taxpayers yet to 
enroll and the program should continue as it currently is 
designed.
    Thank you.
    [The joint statement and attachments follow:]

Joint statement of Lawrence F. Buettner, Senior Vice President, First 
National Bank of Chicago; and Larry Dreyer, Senior Vice President, 
NationsBank, Atlanta, Georgia

    As EFTPS Financial Agents, for presentation to the House 
Committee on Ways and Means, Subcommittee on Oversight, thank 
you for the opportunity to appear today to discuss the 
Electronic Federal Tax Payment System.

                               Background

    In March 1994, the Financial Management Service (FMS) 
issued an Invitation to Express Interest (IEI) for the 
development and operation of the Electronic Federal Tax Payment 
System (EFTPS) for the Internal Revenue Service (IRS) and the 
Department of Treasury. At the conclusion of this process, The 
First National Bank of Chicago and NationsBank were designated 
as financial agents for EFTPS in October, 1994. First Chicago 
was designated to serve the northern tier of the country and 
NationsBank the southern tier.
    First Chicago and NationsBank are among the top tier of 
cash management banks in the United States. Both banks have 
earned reputations for their broad array and leadership in the 
development of innovative cash management products. The 
development and operation of EFTPS is consistent with our 
experience and performance in the service of corporate and 
government customers.
    First Chicago and NationsBank have developed an extensive 
relationship with the FMS and IRS through the cash management 
services provided by both banks. We currently provide lockbox 
products and comprehensive ACH services to the IRS and more 
than 120 other federal agencies or departments. We are very 
familiar with the service requirements of federal government 
customers.
    Immediately upon designation, both banks began development 
of their respective systems. We share a common architectural 
design and have implemented a similar look and feel for 
taxpayers between each system. After thorough testing and 
validation, both systems were placed into production in June, 
1996. The first payment was processed on November 7, 1996.
    EFTPS represents a significant accomplishment for both 
banks in the development of what some consider the world's 
largest electronic collection system. We are confident the 
system we have built is well prepared to provide uninterrupted 
processing of taxpayer payments. We recognize the sensitivity 
of taxpayers in their interaction with the federal government 
in one of their most critical transactions, their tax payment. 
We believe we are well prepared for the task.
    EFTPS represents a positive example of the joint 
collaboration of government and the private sector in the 
development of a key government system. Although we are 
utilizing well proven technology, the task to integrate all of 
the components into a working EFTPS solution was a huge 
undertaking for each bank. It was accomplished in a remarkably 
short period of time. Our experience in the operation of the 
system for the last six months reinforces our belief that the 
system is capable of successfully handling the migration of 
taxpayers from paper to electronics.
    The remainder of this document details our experience since 
EFTPS has gone live and addresses some of the most frequently 
mentioned concerns about the use of EFTPS. We believe EFTPS is 
ready and fully prepared for the taxpayers required to utilize 
the system in July. It is a service which can readily be 
utilized by all taxpayers as they are required to make their 
tax payments electronically.

                            EFTPS Operation

    Taxpayer interaction with EFTPS centers around three 
primary functions: enrollment, payments and customer service.
    Taxpayers required to enroll into EFTPS received their 
initial notice and enrollment forms in July, 1996. The current 
number of taxpayers enrolled in EFTPS is as follows:
[GRAPHIC] [TIFF OMITTED] T0852.001

    As of April 7, more than 84.2% of the 1,158,865 required 
taxpayers have successfully completed the EFTPS enrollment 
process. We are receiving approximately 15,000 new enrollments 
per week. We estimate that 87.4% of the taxpayers will have 
responded by May 1st which would allow for their enrollment to 
be successfully processed prior to July 1 for the first 
electronic payment of taxes. Enrollments received after May 1 
will be expedited by us. Unenrolled taxpayers have received 
three notices (July, 1996, October, 1996, February, 1997) which 
included instructions regarding the enrollment process and an 
enrollment form. In addition to the taxpayers required to 
utilize EFTPS for electronic tax payment, we have received 
370,355 voluntary enrollments.
    Given the large number of taxpayers required to enroll into 
EFTPS, the percentage of successfully enrolled taxpayers is 
remarkably high. In comparable private sector initiatives, 
there are early adapters of new products who respond to new 
ideas and initiatives. On the opposite extreme, there are the 
laggards, who will be the last to adopt until faced with 
overwhelming need or external market pressures. The 
introduction of EFTPS in some respects is no different than any 
other new product or service either offered by the government 
or the private sector.
    There is an analogy between EFTPS and another government 
service which encountered initial public scrutiny. The direct 
deposit of Social Security payments encountered initial public 
skepticism. SSA deposits have become an accepted means for 
deposit of social security payments and dramatically moved a 
large portion of paper payments into electronics utilizing the 
``same'' Automated Clearinghouse House (ACH) process used by 
EFTPS. The leadership role played by the government in SSA 
direct deposit reshaped and legitimatized retail electronic 
payments. EFTPS offers the federal government the opportunity 
to demonstrate the same leadership as the country moves to 
embrace electronic commerce (e.g. electronic bill payment, home 
banking, Internet payments, etc). The number of EFTPS payments 
expected to be processed over the next few years will provide 
the jump start and impetus for the general public to migrate to 
the use of other electronic payments products.
    As part of the EFTPS enrollment process, the taxpayer can 
elect to make their tax payment via an ACH debit, ACH credit, 
or a Same Day payment. If the taxpayer chooses to utilize ACH 
credits, they would instruct their bank to initiate a payment 
to EFTPS. No bank account information is required from the 
taxpayer on the EFTPS enrollment form if they choose the ACH 
credit method. If the taxpayer chooses ACH debit, they would 
provide their bank account information on the EFTPS enrollment 
form to the Financial Agent. This information is necessary when 
the taxpayer initiates a transaction through EFTPS to debit 
their account. Although taxpayers initiate an ACH debit 
transaction the day before their tax is due, the funds are not 
debited from their account until the tax due date. All 
taxpayers are automatically enrolled for the Same Day payment 
option. Taxpayers electing to use ACH debits are automatically 
enrolled for ACH credits. The following chart depicts the 
choice of payment methods chosen by taxpayers:
[GRAPHIC] [TIFF OMITTED] T0852.002

    The following charts represent the percentage of EFTPS 
payments processed by the Financial Agents between ACH debit, 
ACH credit, and Same Day payments and the percentage of dollars 
processed by each method.
[GRAPHIC] [TIFF OMITTED] T0852.003




[GRAPHIC] [TIFF OMITTED] T0852.004

    We believe the above charts provide us with the following 
insights:
     The vast majority of taxpayers are utilizing the 
ACH debit method. We believe there is a comfort level on the 
part of the taxpayer and their ability to chose the time when 
they are able to initiate a tax payment by telephone or PC.
     ACH credits are not being used as frequently as 
originally anticipated in EFTPS. The experience in TAXLINK, 
which is the predecessor system to EFTPS and is being utilized 
by the largest taxpayers, indicates 54% of the dollars and 58% 
of the transactions are from ACH credits. We believe smaller 
companies will utilize the ACH debit method since they do not 
subscribe to the banking services which execute ACH credit 
transactions. This is consistent with the broader bank cash 
management market where middle market and smaller companies 
utilize less sophisticated and more cost effective electronic 
banking products.
     Same Day transactions will remain a very small 
subset of the total transactions processed through EFTPS. Among 
the largest taxpayers in TAXLINK, Same Day payments represent 
1.5% of the dollars collected and .28% of the transactions. 
Although available to all EFTPS users, Same Day payments will 
probably be a back-up alternative for emergency situations with 
a few number of transactions once EFTPS is fully utilized by 
all required taxpayers.

                            Customer Service

    If taxpayers are to successfully transition to EFTPS, both 
Financial Agents must be prepared to provide customer service 
to taxpayers to assist them with their questions and concerns. 
Both financial agents are providing two forms of customer 
assistance:
     Taxpayer assistance--for answers to enrollment and 
payment related questions. The Financial Agents do not provide 
answers to tax related matters.
     Financial Institution assistance--to resolve 
bank's questions concerning EFTPS, ACH credit format 
requirements, and enrollment.
    Customer service assistance is available Monday thru Friday 
from 8:30 a.m. to 8:00 p.m. E.S.T.
    Customers who call the service centers for assistance have 
the option to speak to a customer service representative or 
utilize a self-service audio response service which provides 
answers to the most frequently asked questions. Approximately 
30% of taxpayers have opted for the self-service option.
    On a typical day, the customer service centers receive 
questions which fall into the following categories:

------------------------------------------------------------------------
                 Customer Service Questions                   Percentage
------------------------------------------------------------------------
Enrollment.................................................           20
Payment....................................................           15
PIN........................................................            4
Fulfillment (add'l forms, etc).............................           23
General Education..........................................           38
                                                            ------------
    Total..................................................          100
------------------------------------------------------------------------

    In the month of March, the financial agents received 
128,807 customer service calls. The average speed of answer for 
a call was 16 seconds. This compares favorably to external 
benchmark data:

------------------------------------------------------------------------
                                                               Speed of
                          Company                            Answer* (in
                                                               seconds)
------------------------------------------------------------------------
Federal Express............................................           30
Charles Schwab.............................................           18
Commonwealth Edison........................................           15
Ameritech**................................................         9-12
Average....................................................           18
EFTPS Financial Agents.....................................           16
------------------------------------------------------------------------
* One ring on the telephone = six seconds
** Chicago office

    We anticipate the number of calls in late June and into 
July will increase dramatically due to the July 1 date. We are 
preparing to expand our capacity to handle a substantial 
increase in call volume. The logistical preparation for the 
expansion in capacity is currently underway. Additional staff 
will be hired and trained in advance of the expected call 
volume growth.
    With the increase in customer service capacity, our goal is 
to handle 80% of the calls with 30 second speed of answer. This 
does not indicate in any one hour or in any one day we would 
not experience a longer speed of answer. With the availability 
of our self-service call center features and a moderate wait, 
we should be able to service all taxpayers requiring 
assistance. We recognize the potential concern on the part of 
taxpayers who are trying to initiate their first electronic 
payment if they are unable to resolve a service issue. We 
believe we are taking all of the necessary steps (i.e. 
staffing, equipment, training, etc) to be prepared for July 1.

                                Security

    As part of the implementation of the EFTPS systems 
developed by each Financial Agent, both systems went through 
extensive testing. The certification process was conducted by 
an independent audit company hired by the Internal Revenue 
Service. Testing consisted of two major categories:
     functionality testing to insure the solutions 
developed by the Financial Agents met all of the required 
specifications
     security testing to insure the system access was 
secure from third party access and taxpayer initiated payments 
were appropriately controlled to insure data integrity.
    The systems of both Financial Agents successfully completed 
this process. In addition, since the initial certification of 
the systems, the Financial Agents have delivered subsequent 
system enhancements. Each of these system enhancements has 
successfully completed and passed a subsequent audit review 
performed by the independent auditors selected by the IRS.
    Access to the EFTPS system is controlled through use of the 
taxpayer's Employer Identification Number (EIN) for 
corporations or the Social Security number (SSN) for 
individuals and a personal identification number (PIN) which is 
assigned to the taxpayer during the enrollment process. The 
system will not allow the taxpayer access to the system for 
initiation of a payment without providing both the EIN and PIN. 
The successful entry of the EIN and PIN allows the taxpayer to 
enter the data required for each specific tax payment. Once the 
data has been entered, the EFTPS system generates an ACH debit 
transaction which will result in the funds being debited from 
the taxpayers account at their bank and forwarded on to the 
U.S. Treasury. The taxpayer will immediately receive an EFT 
acknowledgment number as evidence they completed the first step 
in the payment of their taxes. Obviously, the tax is considered 
paid if the taxpayer has sufficient funds in their bank account 
to cover the ACH debit for the tax.
    EFTPS is utilizing standard banking industry security 
procedures for the initiation of EFTPS tax payments. Without 
the combination of the EIN and PIN, access to the system will 
be denied. The PIN is kept by the taxpayer.
    The Financial Agents have access to the PIN through their 
systems and the access is protected from general use by 
unauthorized personnel. The PIN is not provided to the IRS. 
Without access to the PIN controlled by the system and the 
taxpayer, it is impossible for the IRS to initiate an ACH debit 
payment against a taxpayer's account through EFTPS.

                              Ease of Use

    EFTPS was designed with the intention to make the ease of 
use as simple and quick as possible for the taxpayer. EFTPS 
also was designed to accommodate varying degrees of technology 
acceptance by taxpayers. With this in mind, taxpayers have the 
choice of utilizing the most commonly available technology, the 
telephone, or more sophisticated devices such as a personal 
computer when interacting with EFTPS. The taxpayer also has the 
opportunity to complete the tax payment through their bank via 
ACH credit or Fedwire.
    EFTPS allows taxpayers the ability to initiate tax payments 
through a number of different means: touch tone phone, 
operator, personal computer, service bureau (payroll processor) 
or through their bank by ACH credit. In all cases except ACH 
credit, the taxpayer has the ability to control when they 
initiate a tax payment transaction through EFTPS. Taxpayers 
must deliver their ACH credit requests to their bank within the 
bank's prescribed processing windows.
[GRAPHIC] [TIFF OMITTED] T0852.007

    Based on the number of taxpayer payments processed since 
implementation, we are able to determine:
     the vast majority of taxpayers are utilizing the 
ACH debit option which is the result of the use of a touch tone 
phone, operator assistance, or personal computer.
     since EFTPS does not require a taxpayer to utilize 
or purchase any new technology beyond the use of their 
telephone, the 84% payment by audio response technology 
demonstrates the system poses no undue burden on taxpayers.
     as compared to other audio response applications, 
the need for human operator intervention at 4.6% is about half 
of other similar banking related products. Taxpayers are able 
to utilize the system with minimal difficulty.
     Both ACH credits and Same Day payments remain a 
small proportion of the total transactions initiated by 
taxpayers.
    The average time for the completion of a tax payment 
through EFTPS is approximately 3 minutes. The system was 
engineered for minimal data entry and the current taxpayer 
experience indicates they are not requiring an excessive amount 
of time to complete a transaction. Exhibit A is the worksheet 
provided to taxpayers to complete prior to initiation of a 
payment and illustrates the limited amount of data required to 
make a payment. An EFTPS demonstration system is available for 
taxpayers to practice on prior to making their first payment. 
The system is available to members of the Committee, at their 
request, for them to experience the relative ease of making a 
tax payment.
    Since the taxpayer maintains control of their PIN and the 
taxpayer has the ability to choose when he or she wishes to 
initiate a transaction, approximately 11% of the transactions 
the taxpayer initiated have been received outside normal 
business hours. Taxpayers have the flexibility to execute a 
transaction at a time when it is most convenient to them. The 
system provides the flexibility to initiate a tax payment from 
their home or office at a time most suitable to them. In 
addition, approximately 30% of payments are initiated by 
taxpayers two (2) days before the required tax payment date 
utilizing the warehouse feature of the system. Although entered 
into the system 2+ days before the tax is due, the funds are 
still debited from the taxpayers account on the tax due date. 
The combination of readily available technology (i.e telephone) 
and system features makes the use of EFTPS easy and convenient 
for taxpayers.

                            EFTPS Technology

    Although the requirements from the IRS for EFTPS are quite 
extensive to insure both ease of use by the taxpayer and the 
gathering of data necessary for internal IRS systems, EFTPS is 
utilizing technology which is commonly employed by banks for 
electronic banking. EFTPS is very similar to electronic bill 
payment systems utilized by banks to allow their retail 
customers to pay routine household bills electronically. Except 
for the specific data reporting layouts required by internal 
IRS systems, EFTPS does not contain any unique or custom 
technology specifically built for the IRS.
    The EFTPS system developed by First Chicago and NationsBank 
each utilize proven technology. The system developed by First 
Chicago has been nominated for national recognition and within 
the computer industry for its approach in building EFTPS. The 
First Chicago solution is a finalist for the 1997 Computerworld 
Smithsonian Award as an example of the positive impact of 
technology. It will be included in the time capsule created by 
the Smithsonian as an example of a notable technology 
advancement.
    Bank customers have become discerning buyers of financial 
services. Customers evaluate banks beyond the old paradigm of 
the convenience of a local branch but by their access to ATM 
machines, customer service, and access to new innovative 
products (e.g. electronic bill payment, home banking, etc). 
Financial service providers (i.e. large money center, regional 
and community banks) are employing new technology to provide 
new services to their customers. This is both out of necessity, 
as they are overwhelmed with highly labor intensive paper 
products, and survival, as many non-banks try to enter into 
their markets and leave them with the low margin commodity 
services. EFTPS is illustrative of the many new products and 
services which are being developed for the general public as 
they migrate from paper to electronics. Financial service 
providers must reduce the high fixed costs associated with 
branch banking and replace it with more efficient and 
responsive services. The trend within the industry is to close 
and consolidate branches and replace them with more effective 
delivery means such as service centers located in supermarkets 
and electronic home banking services.
    Concern has been raised about the service fees potentially 
imposed by banks for the initiation of ACH credits for tax 
payments. The above scenario highlights the industry trend to 
streamline the services provided through branch locations. Not 
all bank customers have access to a full-service branch 
location. Wire transfers and ACH processing are considered 
labor intensive and high risk transactions which all branches 
are not equipped to handle. Banks are inclined to steer their 
customers into other alternatives which do not require the 
exception processing associated with electronic wire transfers. 
It is not surprising that banks are encouraging their customers 
to utilize the ACH debit method offered by EFTPS since it is 
less costly for them to service and results in a service charge 
essentially equal to that of processing a check for the 
taxpayer. This is a service which is easily provided by both 
large and small community banks. If required, banks will 
initiate electronic payments only after a thorough credit 
evaluation and the completion of a service contract by the 
customer. If demand for the execution of ACH credit transfers 
for EFTPS were to become a competitive requirement, the pricing 
for these services would reflect the costs of the service, the 
liability incurred, and market competition. We do not foresee 
this occurring given the current trends in the industry.
    General customer acceptance of the use of self-service 
electronic products is verified by current market research 
data:
     600,000 establishments use the Internet for 
business purposes (Computer Intelligence 1997)
     50% of office-based employees have personal 
computers and 86% of small and mid-sized businesses have 
computers (Survey of Small and Mid-sized Businesses, Arthur 
Andersen, 1996)
     In 1996, almost 5 million US households used phone 
bill payment and about 2 million used PC bill payment; usage is 
expected to grow to over 7 million and 6 million respectively 
by 2000, with 3 million using Internet banking.(Electronic Bill 
Payment and Remote Banking Final Report, Mentis Corp. Published 
in Bank Systems & Technology 4/97)
     Estimates of the on-line population in mid-96 
ranged from under 9 million to more than 35 million, with 
several studies in the 15 million range (Internet World, 12/96)
    In a soon to be released comprehensive study of change in 
the US payments system, ``several key trends and conclusions 
have already been documented:
     Government initiatives, which are riding on the 
existing infrastructure, will result in universal access to 
electronic payments systems for consumers and businesses.
     Cost and competitive marketing demands are putting 
pressure on both POS and bill payment environments, promising 
growing use of card transactions and electronic payment 
alternatives.
     Historical rates of adoption of electronic payment 
alternatives by consumers and businesses have been slow, but 
there is an indication that the pace of change is accelerating.
     Revolutionary system changes will occur at the 
back end, with new processing alternatives that lower 
transaction processing costs and broaden transaction 
information exchange.
     Consumer and business use of the Internet for 
commerce and transaction could fuel revolutionary change.
    This market research is encouraging banks to develop 
products which will accommodate their customer's desire to use 
services which are: electronic, self-service, and low cost. 
EFTPS is consistent with this customer preference. EFTPS is a 
key ingredient in the change occurring in the payments system. 
If actively encouraged by the requirement of taxpayers at lower 
tax thresholds to participate, it will potentially further 
accelerate these trends.

                                Summary

    As Financial Agents, we believe we have developed a 
solution which is prepared to begin the transition of taxpayers 
from the current paper process to electronics.
    There a number of points which must be stressed:
     EFTPS has been live for six months. We have had 
the opportunity to correct any deficiencies. The system is 
performing well.
     EFTPS is a new service or product. Like any new 
product it will take time for it to be accepted and embraced by 
all customers.
     EFTPS represents a tremendous opportunity for the 
government to achieve efficiency in the tax collection process 
utilizing technology commonly used by everyone in their daily 
lives.
     EFTPS represents the future of electronic 
commerce. The federal government can accelerate the acceptance 
through EFTPS.
    Finally, EFTPS represents change. Change is a disruptive 
process. The introduction of change on a wide scale is bound to 
be uncomfortable for some. Introduce change in the tax process, 
added by the fear of the IRS, and change turns to fear. We 
believe the fear is disproportionate to the actual benefit 
being achieved. The IRS and the Treasury Department are 
sensitive to the concerns of taxpayers. They have required the 
Financial Agents to take steps to insure taxpayer bank accounts 
cannot be accessed by the government.
    EFTPS will not only serve the taxpayers currently required 
by the July 1 mandate but is well positioned to make the tax 
process easier for the vast majority of taxpayers. We encourage 
the Committee to maintain the July 1 mandate and the original 
plan for the years beyond.
[GRAPHIC] [TIFF OMITTED] T0852.008

[GRAPHIC] [TIFF OMITTED] T0852.009

[GRAPHIC] [TIFF OMITTED] T0852.010

[GRAPHIC] [TIFF OMITTED] T0852.011



      

                                

    Mr. Portman [presiding]. Thank you, Mr. Buettner. We are 
now going to hear from Jim Donelson who is Chief, Taxpayer 
Service, Internal Revenue Service. And, Mr. Donelson, you are 
accompanied today by Bob Albicker, Deputy Chief Information 
Officer, Systems Development of the Internal Revenue Service.
    Mr. Donelson.

   STATEMENT OF JAMES E. DONELSON, CHIEF, TAXPAYER SERVICE, 
   INTERNAL REVENUE SERVICE; ACCOMPANIED BY ROBERT ALBICKER, 
DEPUTY CHIEF INFORMATION OFFICER, SYSTEMS DEVELOPMENT, INTERNAL 
                        REVENUE SERVICE

    Mr. Donelson. Mr. Portman, and distinguished Members of the 
Subcommittee, thank you and we are pleased to be here this 
morning.
    I would like to submit my written testimony for the record 
and I would like to give you a summary testimony orally.
    This morning I want to give a brief overview of our EFTPS 
System which we consider to be one of our major success 
stories. EFTPS is the new paperless system designed to meet the 
congressional requirements of section 6302(h) of the Internal 
Revenue Code. Its objective is to implement an electronic funds 
transfer system for the payment of Federal tax deposits. EFTPS 
largely replaces the current paper coupon system that taxpayers 
now use.
    I am pleased to tell you that EFTPS is fully operational as 
we have already heard. Since November 1996, EFTPS has been 
successfully processing payments from over 200,000 volunteer 
businesses. To date, EFTPS has processed more than 1.5 million 
transactions, representing over $50 billion in Federal tax 
deposits. As of April 5, 1997, over 970,000 of the 
approximately 1.2 million taxpayers that will be using the 
EFTPS on July 1 have enrolled to use EFTPS. In addition, over 
365,000 taxpayers that are not mandated have already enrolled 
voluntarily.
    I would like to take this opportunity to extend my 
appreciation to all the parties that have participated in 
making EFTPS a success. The IRS members, Treasury's financial 
management team and the Treasury financial agents, NationsBank 
and First National Bank of Chicago, developed a safe, secure 
system with payment and reporting choices for all types of 
businesses.
    To cancel or dramatically alter the provisions of EFTPS, 
which has been suggested by some, would be a disservice to 
those taxpayers who have already enrolled and are using the 
system now. In my opinion, it would cause significant 
disruption and confusion to the hundreds of thousands of 
taxpayers who are trying to comply with the law.
    Here is a sampling of what a number of tax professionals 
from the National Association of Enrolled Agents recently said 
about EFTPS: ``It works great. I was amazed the first time I 
used it in how easy it was. The IRS has really done a great job 
on this one.'' ``EFTPS is working fine. I have signed up and 
plan to start this month.'' ``Electronic payment is working 
great here in South Carolina.'' And finally, ``So far I have 
had much success with this program for payroll tax deposits in 
the San Francisco Bay area.'' Those are the people who are 
using the system and that is the testimony, I think, as to its 
ease.
    The IRS, FMS, and Treasury financial agents worked together 
to provide as many benefits to taxpayers as possible. We 
incorporated the successful features of TaxLink, the 
predecessor electronic payment system which, to date, has 
successfully collected nearly $800 billion. We also consulted 
with taxpayers to learn what other features they desired. These 
benefits include ease of use, flexible payment options, privacy 
and security, and increased accuracy and better taxpayer 
service.
    I recognize that some businesses may be comfortable with 
the current FTD coupon system that Congressman Hastings 
demonstrated earlier today. I know the IRS is also comfortable 
with the current paper coupon system. We have been using it for 
years. I would like to digress for a second and explain.
    In my career I was a revenue officer and one of my jobs was 
to help taxpayers who had problems with that coupon system. One 
of the types of cases that was the most difficult for us to 
untangle was when taxpayers used the wrong coupons, did not 
receive their coupons from the IRS in the mail or did not know 
where to get a coupon. I had to deal with taxpayers and help 
them untangle that mess.
    This system is so much better than that I cannot 
overemphasize that. So, from a real on-the-ground, dealing with 
taxpayers, this is an improvement, and I really mean that 
sincerely.
    However, even though we are comfortable with this system, 
the current paper system, we recognize that the world is 
changing. Electronic commerce is here and adjustments are 
necessary. Our experience to this point indicates that there is 
little to fear except some change. I believe that it is change 
for the better.
    The IRS has aggressively faced its obligation to inform the 
1.2 million taxpayers required to participate in the EFTPS by 
July 1 of their new electronic payment requirement. The IRS 
worked closely with FMS to ensure that the banking community 
was fully informed of the new system so that banks could answer 
their customers' questions about EFTPS. The IRS used every 
opportunity to get our message out to taxpayers through 
speeches, presentations at professional association seminars 
across the country, including small business, at special EFTPS 
forums and through work with other Federal agencies.
    All these efforts were very useful in providing information 
to taxpayers and professional organizations. However, direct 
mailing is the most effective way to provide taxpayers with our 
information. Thus, the IRS sent a series of direct mailings to 
taxpayers and organizations starting in the summer of 1996. 
And, since that has raised a number of concerns both by 
witnesses that preceded me and also by members of this panel, I 
would like to address the issue of that first notice that went 
out last summer.
    I am the Chief of Taxpayer Service at Internal Revenue 
Service. That letter went out under my auspices. I recognize 
that it has raised the ire of many Members of Congress and 
certainly the constituents, and I want to publicly and 
personally apologize for the tone and the timing of that 
letter. If it was a mistake, it was my mistake and I apologize 
and I want that to be on the record.
    I never meant, nor did my organization ever mean to be 
disruptive or bother taxpayers and get them stirred up to a 
point where they were afraid of the system. On the other hand, 
we had to get a notice out and if we did a bad job in that 
regard in terms of how it was designed, I will take personal 
responsibility for that and apologize. But I digress.
    When over 1 million taxpayers move into the electronic age 
for making tax deposits we understand that these taxpayers may 
need to make adjustments in the way they do business. 
Commissioner Richardson announced on April 7 that special 
penalty relief would be available to encourage early use of 
EFTPS for those people that are experimenting with us. The 
extra steps the IRS is taking should assist business taxpayers 
in making the switch to EFTPS go more smoothly. The IRS will 
not impose any penalties on taxpayers who enroll in the EFTPS 
and attempt to make payments through the system before July 1, 
1997.
    In effect, a penalty-free period for those using EFTPS is 
in place right now. This approach to penalties should give more 
businesses the confidence they need to begin using EFTPS. Those 
970,000 people that have enrolled already, they should try 
using it. If businesses encounter any problems, they will have 
time to make adjustments, to get comfortable with the system 
without penalties.
    Let me now turn to some emergency procedures. In the event 
taxpayers make a late tax deposit due to emergency situations 
the IRS has a number of procedures in place to prevent penalty 
notices from being issued to taxpayers. Taxpayers who have 
trouble accessing the financial agent systems to initiate a 
payment should notify the financial agent probably the next 
business day. The financial agent will verify the problem and 
forward the information to the IRS. The Service will then be 
able to prevent notices from being issued in error. Taxpayers 
in this instance should use the same-day method option that was 
mentioned earlier, or FedWire, to make the payment.
    In addition, the financial agents have been required to 
establish redundant systems to overcome technological failures 
and unexpected events. I am sure they can provide extensive 
details on their preparations during questions and answers.
    We have procedures currently in place to cover natural 
disasters or emergency situations in the paper world. These 
procedures should prevent the issuance of notices to EFTPS 
taxpayers in areas affected by either disasters or emergency 
situations. I can cite numerous examples recently when we 
employed these procedures. Unfortunately, the storms, the snows 
in the Midwest and floods have given us plenty of recent 
experience in that regard. These procedures work and we are 
quite liberal in their application.
    Payroll processing companies who experience an emergency 
situation at their sites will be able to provide a listing of 
customers to their local IRS service center describing the 
emergency problem and ask for consideration of penalty relief. 
This will normally be granted using expanded definitions of 
reasonable cause due to the widespread locations of their 
clientele.
    For those occurrences where a penalty notice is issued we 
will, of course, consider a company's request for penalty 
relief based on the facts and the circumstances of the case. In 
recent meetings we heard from service providers and others that 
use of reversal procedures approved in NAFTA guidelines was 
desirable. We agree and have begun working on internal 
solutions.
    In cases where reversal is needed to fix a duplicate 
payment we would not require preapproval, only documentation 
after the fact.
    Before I summarize, one last concern that has come up over 
and over again involves emergencies that would prevent 
transmission of data and funds simultaneously. We have heard 
that concern loud and clear. Our struggle, though, is to 
balance that legitimate concern that has been raised to us and 
our desire to create an auditable set of books with which GAO 
and IRS can be satisfied. And this Committee certainly is 
familiar with our difficulties in dealing with GAO and getting 
a clean financial audit opinion.
    Separating the data and the funds creates a challenge for 
us but we believe every problem has a solution and we are 
determined to unlock the formula to solve this one. We will 
continue our dialog over the coming weeks to reach a reasonable 
solution as we complete our trial period leading to July 1.
    In summary, I would once again like to stress that EFTPS is 
up and running. We are servicing 200,000 businesses as I speak. 
It is an easy-to-use, secure system with flexible payment 
options. It promotes accuracy and efficiency in processing. We 
continue to receive recommendations from the private sector on 
how to improve the EFTPS and are looking at ways to implement 
some of those recommendations. My advice to those who have not 
yet enrolled, that 170,000 group of people that still has to 
enroll by July 1, is try it, it works, you will like it.
    Thank you, Madam Chairman.
    [The prepared statement follows:]

Statement of James E. Donelson, Chief, Taxpayer Service, Internal 
Revenue Service

    Madame Chairman and Distinguished Members of the 
Subcommittee:
    I am pleased to be here today to discuss the Electronic 
Federal Tax Payment System (EFTPS). The Internal Revenue 
Service (IRS), Treasury Department's Financial Management 
Service (FMS), and the Treasury Financial Agents worked 
together to design EFTPS to meet the Congressional requirement 
imposed in Section 6302 (h) of the Internal Revenue Code to 
implement an electronic funds transfer system for the payment 
of federal tax deposits. EFTPS largely replaces the paper 
coupon system that taxpayers currently use to make their 
federal tax deposits.
    I am pleased to tell you today that EFTPS is fully 
operational and has been successfully processing payments since 
November 1996. To date, EFTPS has processed more than 1.5 
million transactions, representing over $50 billion in federal 
tax deposits.
    In addition to directing the Treasury Department to develop 
an electronic tax payment system, Congress in section 6302 (h) 
also required the IRS to collect electronically an increasing 
percentage of total business tax deposits over a phase in 
period from 1994 to 1999. To implement the phase-in 
requirements of section 6302 (h), the Treasury Department 
issued temporary regulations requiring all taxpayers with a 
semi-weekly deposit tax obligation (which translates into a 
yearly employment tax obligation of over $50,000 in 1995) to 
begin making their federal tax deposits electronically by 
January 1, 1997, (later extended to July 1, 1997, by Congress 
in the Small Business Jobs Protection Act). IRS and the 
Treasury Department deliberately drafted the electronic payment 
regulations to parallel the federal tax deposit rules in order 
to simplify these related rules for taxpayers as much as 
possible. Approximately 1.2 million taxpayers must begin using 
EFTPS by July 1, 1997.
    The IRS has made significant efforts to inform these 1.2 
million taxpayers of their obligation to begin making their 
federal tax deposits through EFTPS. As a result, as of April 5, 
1997, over 970,000 of the 1.2 million taxpayers have enrolled 
to use EFTPS. In addition, over 365,000 taxpayers have enrolled 
voluntarily. These volunteers, who are not required to begin 
using EFTPS on July 1, are all drawn from the small business 
community, since they have annual tax deposit obligations of 
less than $50,000 per year.
    We are particularly pleased that these small businesses 
heard our message about the advantages of EFTPS to their 
businesses and enrolled voluntarily. The reaction of these 
small businesses to EFTPS is a good indication that EFTPS 
answers the concerns voiced by the Ways and Means Committee in 
its 1993 House Report 103-361, Part 1:
    ``The [Federal Tax Deposit] coupon system and use of 
Government depositories is paperwork intensive. Phasing in a 
new electronic fund transfer system will significantly reduce 
paperwork and will result in greater accuracy. Technological 
advances in the electronic fund transfer process will permit 
businesses to utilize the electronic fund transfer system 
without needing to purchase new computers or equipment . . . . 
Use of an electronic fund transfer system for the collection of 
tax will promote accuracy and efficiency in processing, and 
consequently, is expected to result in significant cost savings 
to the Government. Taxpayers will benefit from increased 
accuracy, reduction in paperwork burden, and availability of a 
user-friendly tax collection system.'' (p. 106)
    We at the IRS are confident that EFTPS meets the goals set 
by Congress for an electronic payment system. As Commissioner 
Richardson testified during this year's House Appropriations 
Committee hearing on the IRS' budget, EFTPS combined with the 
IRS' earlier pilot program known as TaxLink, is a faster, 
easier and more accurate system for tax collectors and 
taxpayers alike.

                      How EFTPS Benefits Taxpayers

    The IRS, FMS and the Treasury Financial Agents worked 
together to design EFTPS to provide as many benefits to 
taxpayers as possible. We incorporated the successful features 
of TaxLink, the predecessor electronic payment system to EFTPS, 
which to date has successfully collected nearly $800 billion. 
We also consulted with taxpayers to learn what other features 
they desired. The benefits that EFTPS provides to taxpayers 
include:
     Ease of use. EFTPS is easier to use than the paper 
FTD coupon system. A taxpayer can make a payment with a short 
phone call by either pushing the buttons on a touch tone phone 
or talking with an operator if they have a rotary phone. 
Taxpayers can also use personal computers to initiate a tax 
payment with free software supplied by the Financial Agents.
     Flexible payment options. EFTPS lets taxpayers 
choose among various payment options based on their business 
requirements. EFTPS has both Automated Clearing House (ACH) 
debit and credit payment options. It also offers a same day 
payment option through Fedwire.
     Privacy and security. EFTPS is a fully secure 
electronic payment system. Payments can only be initiated with 
both a proper taxpayer identification number and personal 
identification number. Neither the IRS nor the Treasury 
Department have access to the taxpayers' personal 
identification numbers.
     Increased accuracy and better taxpayer service. 
Taxpayers' tax payment account information can be updated 
almost immediately. With the paper coupon system, it takes 5 to 
7 days. Safeguards and prompts built into EFTPS help minimize 
errors and lessen the need for contact between the IRS and 
taxpayers to correct tax accounts.

               How the IRS Notified Taxpayers About EFTPS

    The IRS has worked very hard to inform the taxpayers 
required to participate in EFTPS by July 1, 1997, of their new 
electronic payment requirement. The IRS has used a number of 
different ways to reach these taxpayers. As a result, over 
970,000 taxpayers of the 1.2 million taxpayers required to 
enroll in EFTPS by July 1, 1997, have already enrolled. Another 
365,000 small businesses heard our message and voluntarily 
enrolled.
    Since many taxpayers were likely to ask their banks about 
EFTPS, the IRS worked closely with FMS to ensure that the 
banking community was fully informed of the new system. FMS 
conducted extensive educational activities for the banks and 
mailed them information about the system. The Treasury 
Financial Agents routinely provide taxpayers information about 
EFTPS through their EFTPS customer service lines which are 
prominently displayed in all materials directed to taxpayers.
    For its part, the IRS used every opportunity to get the 
message out to taxpayers about EFTPS. IRS officials at all 
levels of the organization, including the Commissioner and 
Deputy Commissioner, addressed EFTPS in speeches and 
presentations at hundreds of professional association seminars 
across the country including, the American Institute of CPAs, 
the American Bar Association, the American Payroll Association, 
the American Society for Payroll Management, the National 
Association of Enrolled Agents, the National Association of Tax 
Practitioners, the Tax Executives Institute, the Independent 
Bankers of America Association, National Small Business United, 
and many others. The IRS mailed EFTPS informational packages to 
more than 200 associations across the country.
    We held several special EFTPS forums in Washington, D.C. to 
share information about EFTPS with small business 
organizations, payroll processors, the banking community, 
practitioner associations and all other interested parties. 
Because of the favorable reaction from these groups, we are 
planning another forum this month. These events have resulted 
in many articles in trade journals, newsletters, newspapers, 
and magazines.
    We have also worked with the Small Business Administration 
(SBA) to educate businesses about EFTPS through their Small 
Business Development Centers, Business Information Centers, and 
the Women's Business Centers. Both the IRS and the SBA have 
information about EFTPS on their websites. We also include 
information about EFTPS each quarter in the IRS/SSA Reporter, a 
newsletter mailed to more than 6 million businesses.
    We have shared information internally on EFTPS with all of 
our Regional, District and Service Center offices and have 
trained IRS representatives from field offices to answer 
questions and inform taxpayers about the new system.
    We have made a commitment to work with the private sector 
and other government agencies to bring the EFTPS message to 
businesses across this country and will continue to do so.
    We sent letters and information to all Members of Congress. 
On July 31, 1996, every Member of Congress received a letter 
from Commissioner Richardson and a packet of information 
describing EFTPS as well as a press release and answers to 
commonly asked questions. On February 10, 1997, the IRS 
National Director for Legislative Affairs sent another letter 
to the Chairman and Ranking Members of key congressional 
oversight committees, which included a fact sheet and described 
the upcoming mailing to business taxpayers.
    While all of these efforts were very useful to provide 
information to taxpayers and organizations representing them, 
direct mailings are the most effective way to provide taxpayers 
with information. The IRS accordingly sent:
     A letter in the summer of 1996 to advise taxpayers 
of the requirement to make federal tax deposits electronically 
by January 1, 1997;
     A second letter in late October/early November 
1996 to inform the same taxpayers that Congress had enacted 
legislation to postpone the January deadline to July 1, 1997, 
and to encourage them to enroll or use the system early. 
Materials included were an additional enrollment form and our 
Publication 966, entitled, ``EFTPS: Answers to the Most 
Commonly Asked Questions.''
     A third letter, mailed the week of February 17, 
1997, was sent to taxpayers required to begin using EFTPS by 
July 1, 1997, who had not then enrolled. This letter informed 
taxpayers of their requirements to enroll and advised them to 
send in their enrollment forms by May 1, 1997, to allow time 
for processing and confirmation of enrollment. Educational 
materials and instructions were also included in this mailing.
     A fourth letter will be mailed to taxpayers in 
April to encourage taxpayers who have enrolled in EFTPS, but 
who have not yet begun using it, to try the system before the 
July 1 deadline. The letter describes the special penalty 
relief period that the Commissioner recently announced to 
encourage early use of EFTPS, as I discuss in greater detail 
below.
     In mid May, we intend to send a final letter to 
taxpayers who have not yet enrolled to encourage them to act 
immediately to meet the July 1 deadline.

                      Penalty Relief for Taxpayers

    Commissioner Richardson announced on April 7, 1997, the 
extra steps the IRS is taking to help business taxpayers make 
the switch to EFTPS go more smoothly. The IRS will not impose 
any penalties on taxpayers who enroll in EFTPS and attempt to 
make payments through the system before July 1, 1997.
    This approach to penalties will give more taxpayers the 
confidence they need to begin using EFTPS. If businesses 
encounter any problems, they will have time to make 
adjustments, rather than face penalties.
    As Commissioner Richardson said, ``There is no reason to 
impose a penalty before July 1 on businesses that are simply 
trying to get comfortable with EFTPS but make a mistake in 
doing so.''

                               Conclusion

    In summary, I want to assure you that the IRS has taken its 
charge seriously to help develop this system. We have developed 
an easy-to-use, secure system with flexible payment options. We 
continue to receive excellent recommendations from taxpayers 
and professional associations on how to improve EFTPS, and we 
are looking at ways of implementing some of those 
recommendations. The EFTPS system is up and running. It 
promotes accuracy and efficiency in processing. It is already 
proving its worth to both taxpayers and the government, as 
Congress had intended it to do when it enacted section 6302(h).
    I will be happy to answer any questions.
      

                                

    Chairman Johnson. Thank you.
    Mr. Morris.

    STATEMENT OF RUSSELL D. MORRIS, COMMISSIONER, FINANCIAL 
      MANAGEMENT SERVICE, U.S. DEPARTMENT OF THE TREASURY

    Mr. Morris. Thank you, Madam Chair and Members of the 
Subcommittee. Thank you for inviting me to participate in this 
important hearing. I have prepared a formal statement and with 
your permission, I would like to submit that for the record and 
just take a couple of minutes and emphasize certain highlights.
    Chairman Johnson. Thank you, Mr. Morris, that will be done.
    Mr. Morris. The Financial Management Service is the Bureau 
of Treasury that manages the government's financial 
infrastructure. We issue most of the government's payments, 
manage the processes through which government receipts become 
available for government purposes and account for all 
government cash flows.
    Our strategic plan challenges us to create a world class 
financial infrastructure for the government, largely, through 
the development of user-friendly methods of replacing paper 
transactions with electronic flows of value and related 
information.
    I would like to call to your attention the diagram which is 
attached to my formal statement. This diagram is actually a 
simplification of the processes through which Federal tax 
deposit coupons and Advices of Credit travel. These processes 
and, indeed, the paper that flows through them, have outlived 
their usefulness.
    For the most part, this diagram represents a 45-year-old 
method of collecting payroll taxes. It is costly and more 
susceptible to error than electronics because it relies on 
multiple handlings of over 100 million pieces of paper. FMS and 
the IRS have been working in the electronic arena for more than 
a decade seeking to define an appropriate replacement for this 
old but vital process.
    During that time, 42 States have developed electronic 
methods for tax collection and 39 States now require EFTPS for 
some tax payments. Over the past several years, we have tested 
and refined and tested and refined and sought input from 
financial institutions and taxpayers. The Electronic Federal 
Tax Payment System, EFTPS, process is a result of that 
learning, testing and inclusive process.
    Although we were confident that we could have met the 
January 1997 implementation date included in the original law, 
FMS and the IRS have used the extra time that Congress has 
given us for the current phase of the EFTPS implementation to 
good advantage. As you have heard, the systems are ready for 
the volume. Taxpayers are well informed both as to their 
responsibilities and as to how to fulfill them, including their 
options, and financial institutions are well informed as to 
their role and their options.
    Madam Chair, it is our opinion that altering the course at 
this juncture would not be a good idea for two reasons. It 
would be costly and would cause a great deal of uncertainty 
among both financial institutions and taxpayers.
    Again, I thank you for this opportunity to appear before 
the Subcommittee and I am prepared to respond to any questions 
that you might have.
    [The prepared statement follows:]

Statement of Russell D. Morris, Commissioner, Financial Management 
Service, U.S. Department of the Treasury

    Madam Chair Johnson and members of the subcommittee, thank 
you for the opportunity to appear here today to discuss the 
Electronic Federal Tax Payment System.

                                Overview

    The Financial Management Service (FMS) serves as the 
Federal Government's Financial Manager. As such, FMS provides 
payments, accounting information, debt collection and 
collection services for all Federal Agencies and nearly every 
individual who receives money from the government or pays a 
bill owed to the government. We operate from six locations in 
the United States, but we support government operations 
worldwide. Our central location within the government benefits 
the taxpayers as it creates efficiencies based on enormous 
volumes and allows Treasury to administer prudent financial 
management policies.
    FMS disburses payments to a wide array of federal 
recipients including those who receive Social Security, 
Veterans benefits, Civil Service Retirement and Internal 
Revenue Service (IRS) tax refunds. FMS disbursed more than 840 
million payments during FY 1996 on time. Our payment operations 
touched the lives of well over 100 million citizens last year.
    FMS manages the central accounting and reporting systems 
that track the government's monetary assets and liabilities. 
FMS tracks and reports on enacted Congressional appropriations, 
some 7,500 separate accounts. FMS publishes the government's 
major financial and budgetary reports that are used by the 
public and private sectors to make policy and economic 
decisions.
    The Debt Collection Improvement Act of 1996, Public Law 
104-134, significantly increased FMS' responsibility to 
facilitate the collection of delinquent federal non-tax debt. 
We believe that the fair, prompt, and efficient collection of 
delinquent federal debt is sound financial policy, so we view 
full implementation of the bill as critical to performing our 
basic mission. We are working with numerous federal agencies to 
help implement the provisions of this bill through the Treasury 
Offset Program, the Tax Refund Offset Program and the referral 
of delinquent debt to FMS for collection.
    FMS manages the processing of all receipts, including 
corporate and individual income taxes, custom duties, federal 
fines and other levies. We manage the world's largest 
collection network of more than 11,000 financial institutions. 
As part of FMS' strategy to move toward an Electronic Treasury, 
we support moving more and more of the government's collections 
from paper checks to electronic transactions. We are working, 
in partnership with the IRS, to continue making the nation's 
tax collection system more efficient for taxpayers as well as 
the government. To this end, we are shifting from paper-based 
to electronic systems to collect taxes.

                       Federal Tax Deposit System

    The Federal Tax Deposit (FTD) System is a paper-based 
system operated jointly by the Financial Management Service, 
the Federal Reserve System, the Internal Revenue Service and 
over 11,000 financial institutions across the nation. In FY 
1996, the FTD System collected over $814 billion. Financial 
institutions, the Federal Reserve and the IRS processed over 
100 million paper coupons and over six million paper advices of 
credit last year. The basic FTD System has been operating for 
over 45 years. Several improvements have been made over the 
years, including the creation of the Treasury Tax and Loan 
Investment Program in the late 1970's; however, the use of the 
paper coupons by the taxpayers has remained essentially the 
same. The entire FTD paper process takes approximately 5-7 days 
before the taxpayer's account is credited.
    Financial institutions accept and process FTD coupons in 
order to be ``full service banks'' to their business customers. 
Financial institutions receive the FTD coupons over the counter 
at branch offices. The branch bank consolidates the FTD 
coupons, creates a deposit ticket (Advice of Credit) and 
forwards the Advice of Credit to the Federal Reserve, with 
another copy (along with the FTD coupons) to the IRS. (See 
attached chart.) Financial institutions often provide receipts 
to the taxpayers as proof of payment. The Federal Reserve 
processes the Advices of Credit, crediting Treasury the day 
after deposit by the taxpayer.


    During this process, the coupons touch many hands, leaving 
them prone to loss and other processing errors. It is a very 
manual, labor-intensive process making it expensive for 
financial institutions to process the coupons. Also, because of 
the paper processing in the FTD system, the government doesn't 
receive the use of the funds until the day after the taxes are 
paid, resulting in a loss of interest to the government.
    FTD processing is unique and banks cannot utilize the 
systems and processes for FTD coupons that they use for 
``mainstream'' banking activities such as processing checks and 
deposits. Consequently, it is expensive. Current Treasury 
regulations prohibit financial institutions from charging 
taxpayers for FTD processing. In the early 1970's, we 
determined that it cost approximately $.50 for a financial 
institution to process an FTD coupon. We estimate that it costs 
approximately $2.50 to process an FTD coupon today. Treasury 
began paying financial institutions $.50 per coupon in 1978. 
During the period, 1989 through 1990, fee payments were phased 
out for the medium and large financial institutions (except 
minority-owned). This decision was based on two reasons: 1) 
limited budget resources to pay the fees; and 2) medium and 
large financial institutions acquired considerable earnings 
from the one-day float between the taxpayer deposit date and 
the date which the Federal Reserve debits the financial 
institution's account. Currently, we pay only small and 
minority-owned financial institutions $.50 per coupon. This 
direct payment amounts to about $3 per business day for each of 
the 7,833 eligible financial institutions.
    As the Financial Management Service began to focus on 
electronic collections in the 1980's, we began working with IRS 
to introduce electronic transactions for tax collections. In 
the mid-1980's, FMS and IRS implemented a program to collect 
delinquent taxes electronically. With the success of this 
program, we began to focus our efforts on improving other tax 
collection processes, including the paper-based Federal Tax 
Deposit System.

    Historical Efforts to Replace Paper Federal Tax Deposit Coupons

    Since the early 1980's, the Department of the Treasury has 
been working to introduce electronic applications to the 
collection of federal taxes. We sought input from the financial 
industry, taxpayers and professional associations and conducted 
tests of various electronic funds transfer mechanisms. Treasury 
first tested electronic payment of Federal taxes in a project 
called, Automated Deposit of Electronic Payments for Taxes 
(ADEPT). Treasury operated ADEPT from April of 1990 to June of 
1991 to test the feasibility of using electronic payment 
mechanisms to collect Federal taxes and eliminate Federal Tax 
Deposit coupons. Treasury selected an existing electronic 
payment system used to make Direct Deposit disbursements. The 
Automated Clearing House (ACH) system is an established 
electronic payment network developed by the financial industry 
in the 1970's as an alternative to paper checks. The ACH System 
is operated primarily by the Federal Reserve with private 
processors entering the market over the last decade. The 
National Automated Clearing House Association (NACHA) is the 
organization that establishes the rules, standards, and 
procedures for financial institutions to exchange ACH payments 
on a national basis. Depositors can authorize a second party to 
originate a transaction through the ACH that will take funds 
from their account and deposit them to the second party's 
account (ACH debit). The ACH system also allows depositors to 
instruct their financial institution to send funds from their 
account to a payee's account located in another financial 
institution (ACH credit). Taxpayers used ACH Credits to make 
payments in the ADEPT system.
    The State of Indiana had earlier implemented Electronic 
Funds Transfer (EFT) tax payments in November of 1987. Indiana 
led the way in EFT tax collections. Today, 46 states provide 
taxpayers with an EFT mechanism to pay state taxes. Tax rules 
in 39 states include provisions requiring certain taxpayers to 
use EFT for paying taxes. Like the federal EFTPS, tax 
collection systems in 42 states allow both ACH Credit and ACH 
Debit for the payment of taxes.
    In 1992, FMS and IRS began a second project following in 
the footsteps of ADEPT. The goal of TAX-LINK was to advance the 
understanding of the requirements for building a national 
electronic federal tax deposit system. TAX-LINK employed three 
financial agents to test different concepts for use in a 
future, nationwide electronic federal tax collection system. 
The TAX-LINK project included marketing research with over 500 
financial institutions and 1,800 business taxpayers to learn 
financial institution and taxpayer capabilities and 
preferences. Lessons learned from TAX-LINK were the building 
blocks for the current EFTPS. Among other things, Treasury 
learned: that taxpayers have differing needs and need multiple 
payment options; that the simple approach of allowing taxpayers 
to enter payment data directly into the government system is 
most efficient; and, that taxpayers and the financial 
institutions are most comfortable using existing payment 
systems, such as the Automated Clearing House System.
    The TAX-LINK Evaluation Final Report, prepared by Decisions 
Systems Technology Inc., states: ``Both the participating 
business taxpayers and banks surveyed in the three TAX-LINK 
test are generally positive about the experience. Banks 
appreciate the reduction in paperwork. Business taxpayers 
mention the convenience of the electronic systems.'' In 1993, 
Public Law 103-182, Title V, Section 523(a), was passed, 
requiring the use of electronic methods to make tax payments. 
This law called for an increase in the amount of taxes 
collected each year using electronic methods. In order to 
achieve these levels, the IRS issued regulations identifying 
the taxpayers that must pay using electronic means. The IRS 
first required the largest taxpayers to pay electronically in 
1995. In addition to the 1500 required taxpayers of 1995, 
another 80,000 taxpayers voluntarily enrolled in TAX-LINK to 
take advantage of the efficiencies of the electronic system. 
The system collected a total of $395 billion from 1.2 million 
transactions in fiscal year 1996. After deducting the system 
costs, net savings to the government totaled $46.7 million.

                    EFTPS Design and Implementation

    Treasury drew on knowledge gained from TAX-LINK market 
research when designing EFTPS. The preferences of taxpayers, 
financial institutions, FMS, and the IRS were all considered. 
For example: taxpayers were offered several payment options; 
taxpayers were also provided the option of warehousing payments 
for future settlement dates; note option TT&L banks were 
provided an interface with the Treasury Investment Program to 
allow tax payments to remain invested with the financial 
institution's note balance; and large payroll processors were 
provided Electronic Data Interchange access for making payment 
reports and quick turnaround for the enrollment of clients.
    The EFTPS improves service to a variety of government and 
taxpayer interests. For tax administration, EFTPS will 
eliminate the need for IRS to process over 100 million FTD 
coupons in 1999 and will speed the posting of taxpayer 
payments. Moving from a manual paper process to an electronic 
process will also improve the accuracy of posting payments. 
EFTPS will expedite the reporting of data on collections so 
that the Department will have advanced knowledge of expected 
tax receipts and allow improved accuracy in managing the 
government's cash position. Taxpayers also benefit from this 
easy-to-use system. Taxpayers no longer need to travel to their 
financial institution to deliver FTD coupons. They can access 
EFTPS in various ways, including the telephone or personal 
computer. Taxpayers can use PC software to interface with their 
existing accounting systems. Reduced manual intervention also 
reduces the opportunity for human error.
    FMS, IRS, the Federal Reserve and the two EFTPS financial 
agents have participated in hundreds of seminars and forums 
nationwide to promote the EFTPS and educate taxpayers and 
financial institutions to the benefits for them and the 
government. The forums for our presentations included national 
ACH association meetings, regional ACH association forums, and 
financial industry and accounting organization educational 
forums across the country. We conducted Train-the-Trainer 
sessions for ACH associations in June 1995 and for the 
Independent Bankers Association of America in April 1996. As 
early as May 1995, FMS distributed a comprehensive education 
manual (55 pages) on the EFTPS to every financial institution 
in the country. In October 1996, we distributed an EFTPS Fact 
Sheet to every bank, savings association, and credit union head 
office and to every financial institution branch in the country 
to better educate workers in the branches; we distributed an 
updated Fact Sheet to all branches in February 1997. We 
established a Financial Institution Helpline at each financial 
agent dedicated to answering questions from financial 
institutions. FMS established an EFTPS Home Page on Treasury's 
Web Site. We produced two videos about EFTPS; one video focuses 
on educating customers and the other is designed to educate 
financial institution sales representatives. We are conducting 
over 30 EFTPS presentations for the American Bankers 
Association (ABA) state association workshops from April to 
June 1997.
    During the first half of FY1997, Treasury collected 2.5 
million tax payments electronically, totaling over $256 billion 
(these totals include EFTPS, as well as TAX-LINK, which will be 
converted to EFTPS by August 1997). As of April 10, 1997, 
enrollments of taxpayers required to pay taxes through EFTPS by 
July 1 had reached 976,995, or 84% of the total required to 
enroll. Only 181,870 required taxpayers remained to enroll. The 
consulting firm hired to assist IRS in reaching taxpayers with 
the message about EFTPS, has indicated that between 5-10% 
(58,000-116,000) of these required taxpayers will refuse to 
enroll until they receive penalty notices. Therefore, between 
65,000 and 125,000 taxpayers actually may be expected to enroll 
before July. With enrollments being posted at the rate of 
15,000 each week, EFTPS will be close to full enrollment for 
required taxpayers by July. During the TAX-LINK project, 
taxpayers learned of the benefits of paying electronically and 
the numbers of volunteer enrollments swelled. Only 1500 of the 
80,000 TAX-LINK enrollments were from those required to use the 
system last year. The rest were volunteers. This is also 
happening in EFTPS. Of the 1.3 million TINs now enrolled in 
EFTPS, only 73% are required to use the system, 27% are 
volunteers.
    Treasury's two EFTPS financial agents have staffed their 
respective Customer Service telephone lines to meet the 
expected need. January saw a very large surge in enrollments 
and customer service calls, due partly to taxpayers being 
unaware of the postponement until July of their requirement to 
pay electronically. Customer service calls for the month 
totaled 250,000. Even so, the EFTPS financial agents quickly 
adjusted to the call volume and callers to the customer service 
lines in January experienced an average wait of only 2 minutes 
and 46 seconds. The EFTPS financial agents expanded capacity in 
February and March, and the average wait time decreased 
accordingly. During February and March, the average speed of 
answering was less than one minute, once the caller answers two 
voice response questions to direct the call to the appropriate 
customer service representative.

                       Taxpayer Burden and Costs

    One of the driving forces in developing EFTPS was easing 
taxpayer burden. Taxpayer burden was a major issue in the 
decision making process for every aspect of the EFTPS design. 
For that reason, it was our intent to build a system around the 
use of ACH debits. ACH debits are the most economical and 
efficient electronic payment system available. We provided a 
toll-free number for taxpayers to report their tax liabilities, 
free software to PC users, an acknowledgment number to 
demonstrate proof of payment, a warehousing capability to allow 
taxpayers to report their tax payments early (but actually pay 
them on tax due date), and a toll-free number to provide 
customer service 24 hours per day.
    In listening to taxpayer desires, we learned that they 
wanted other options to the ACH debit method. We included the 
ability to accept ACH credits from the taxpayer's financial 
institution. Additionally, we worked with the Federal Reserve 
to develop a special wire transfer procedure just for tax 
payments. Each of these options is offered at no charge by the 
Federal government.
    Trends indicate that more than 85 percent of EFTPS 
enrollees will choose the ACH debit method by July 1997. Using 
their personal identification number and their TIN, only the 
taxpayer can access EFTPS to make their payment. Within the 
paper FTD process, taxpayers present the payments to one of 
11,000 designated depositaries. According to the National 
Automated Clearing House Association, virtually all financial 
institutions in the country (approximately 20,000) can receive 
ACH debit transactions. Although the government does not charge 
a fee for the use of EFTPS, the taxpayer's financial 
institution may charge a nominal fee to accept an ACH debit, 
usually lower than a check charge.
    Currently, only 5% of tax payments are made by the ACH 
credit method. Taxpayers choosing to pay using ACH credit, will 
need to establish a relationship with one of the 4000-5000 
financial institutions that originate ACH credits. This 
includes some financial institutions that originate ACH credits 
through a larger correspondent bank. Taxpayers will normally 
select one of the 10,000 commercial banks that process most 
corporate transactions and are most likely to be capable of 
originating ACH credits. Many small to medium-sized financial 
institutions do not originate credits because their customers 
have not expressed this need. The low number of originators 
reflects the financial institutions' concerns involving higher 
risks associated with originating ACH credits. When the 
financial institution originates a credit, it must guarantee 
good funds to the receiving financial institution. Accordingly, 
financial institutions may limit access to the ACH credit 
service to their most creditworthy customers, require 
prepayment, and charge higher fees to mitigate their risk. 
Charges for ACH credit services vary widely among financial 
institutions, among customers, and among the methods used to 
originate the transaction to the bank. These prices are set 
according to market forces and are not dictated by the 
government.
    According to the Federal Reserve, approximately 8500 
financial institutions are Fedwire participants (Fedwire is a 
same-day electronic funds transfer system operated by the 
Federal Reserve. Approximately 43% of the 20,000 financial 
institutions in the country use Fedwire). Financial 
institutions must guarantee good funds with the same-day 
settlement of a Fedwire. Due to this risk, banks may limit 
their access to Fedwire service and may charge high fees to 
mitigate their risk. Prices for Fedwire vary widely among 
financial institutions and among customers. These prices are 
set according to market forces and are not dictated by the 
government.

                Trends in the Use of Electronic Banking

    We are witnessing today a technology revolution in banking. 
Financial Institutions work harder than ever to streamline 
costs and improve efficiency to remain competitive in the 
marketplace. EFT payment of taxes through the EFTPS is clearly 
in keeping with these objectives.
    EFTPS represents the culmination of an ongoing search to 
introduce electronic technology to the collection of Federal 
taxes. It was patterned after the way most states collect their 
taxes. We are confident that EFTPS, as it is currently 
designed, offers taxpayers a secure and easy system to pay 
their taxes. Thank you for the opportunity to discuss this 
exciting new venture. I would be happy to answer any questions 
you have on EFTPS.
      

                                

    Chairman Johnson. Thank you, Mr. Morris.
    Mr. Albicker, did you have a separate statement from Mr. 
Donelson?
    Mr. Albicker. No.
    Chairman Johnson. That was my understanding, but I did want 
to give you the opportunity if you had prepared to do so.
    I thank the panel for your comments. Mr. Morris, you say 42 
States have electronic filing systems already?
    Mr. Morris. Yes, Madam Chairman. Forty-two States utilize 
electronic funds transfer for some business tax collection.
    Chairman Johnson. And 39 of those States require electronic 
payment for some portion of their taxes?
    Mr. Morris. That is true.
    Chairman Johnson. And what is the relationship between the 
new national system and these State systems?
    Mr. Morris. I would have to explain that my knowledge is a 
little superficial and we could provide more detail on paper. 
But, by and large, it is my understanding that every one of 
these States does rely on the automated clearinghouse system 
for tax collection. That there has evolved a standard format 
for tax collection within the automated clearinghouse.
    Chairman Johnson. In other words, the automated 
clearinghouse is the system that was developed that supports 
the State systems and is the system that the national system 
will use?
    Mr. Morris. The automated clearinghouse system has evolved 
for the exchange of value among businesses and it is the basic 
EFTPS System in the United States. The States, as they have 
developed their processes, have utilized that infrastructure, 
as have we, with the IRS.
    Chairman Johnson. Mr. Buettner and Mr. Dreyer, would you 
like to comment on that?
    Mr. Dreyer. Madam Chair, the ACH, automated clearinghouse 
system, has been in place since the early seventies and is a 
common mechanism of exchanging payment within the financial 
industry. It is commonly used for direct deposit, deposit of 
Social Security.
    Chairman Johnson. So, it is fairly well developed?
    Mr. Dreyer. Exactly.
    Chairman Johnson. Have you had any problems with the 
implementation of this new system with the larger payers?
    Mr. Dreyer. The larger payers are utilizing the ACH in the 
TaxLink pilot system as far as widespread application, 
widespread use. The larger users commonly use the ACH system 
for a number of other applications including exchanging 
commercial payments, their own in-house direct deposit, payment 
of State taxes also.
    Chairman Johnson. I was very interested that you pointed 
out that people are using this system to pay their taxes on 
weekends or at nights in a way that is far more flexible for 
them.
    Mr. Dreyer. That is correct.
    Chairman Johnson. Are there other advantages that you see 
for taxpayers who are using the new electronic system?
    Mr. Dreyer. The primary advantage that we see is that it is 
low cost, it is efficient. There is an audit trail available. 
We also believe that it is more anonymous than the current 
paper-based system in that there is not a lot of paper 
associated with this, therefore, the taxpayer's checking 
account number or tax ID number are not associated in moving 
through the banking system, the Federal Reserve System or the 
IRS.
    Mr. Buettner. I think some of the other things we have seen 
is that about 84 percent of all the transactions have been ACH 
debits which are initiated through a telephone, touch-tone 
phone. This has provided a lot of ease of use for taxpayers. 
The average amount of time for a taxpayer to complete a payment 
through the system is less than 3 minutes.
    We were hoping to do a demonstration today of how the 
system worked if a corporation had to pay their 1120 corporate 
tax the other day, April 15. There were only five data elements 
that were necessary to be input into the touch-tone phone in 
order to complete the 1120 transaction.
    So, not only are there many hours in the day, offhours, 
nonbusiness hours to do the transaction, but the ease of use 
and the different methods that are available make it a lot 
easier for taxpayers to make their payment.
    Chairman Johnson. Mr. Donelson, in implementing this 
system, did you anticipate that any of the advantages that the 
gentlemen from the banks have spoken of would be available?
    Mr. Donelson. Yes, Madam Chairman.
    One of the concerns we have with small business people as a 
matter of fact is that oftentimes they have to shut down their 
business and leave the business and go to a bank to buy a 
Federal tax deposit. That has been historically a concern that 
has been raised to us by small business people. And in this 
system they can either do it as we have heard, after hours, 
after the business closes, during a lull in the business. If 
there is somebody else to watch the front of the operation, 
somebody can go in the back and make a telephone call, and if 
the telephone call is less than a 5-minute telephone call, that 
seems to be an extremely convenient approach.
    There was some mention in the discussion of the previous 
panel and the Committee over extraordinary costs that were 
incurred by businesses and we should have had exceptions. Well, 
one of the exceptions built into this was people using the 
telephone. And I do not think there were that many businesses 
that would have trouble finding access to the telephone, either 
on premises or very close by. So, the fact that we have made 
this a telephone-based system, if you choose that option, as 
well as a computer system, saves you an awful lot of money. You 
do not have to go out and buy a PC or a system for your 
business that you were not in need of before.
    Chairman Johnson. Was there anything about this system that 
changed tax laws, increased taxes for the people paying their 
taxes or in any way altered their obligations?
    Mr. Donelson. I think that has been seamless. I do not 
think we have made any changes.
    Chairman Johnson. Right. In other words, all we were asking 
them to do was to pay the same taxes that they needed to pay 
anyway in a different manner?
    Mr. Donelson. Yes.
    Chairman Johnson. The benefit was that the government got 
the money sooner, so we earned the interest for the 24 hour-
period that we used to let the banks earn the interest on.
    Mr. Donelson. And we did, I think, a very good job in 
eliminating a lot of paper.
    Chairman Johnson. Now, Mr. Dolan was before our Committee 
recently and he talked about the number of notices that the IRS 
has rewritten to make them more intelligible to customers and a 
number of other projects that the IRS has undertaken to be more 
consumer-friendly, to be more intelligible, to have a healthier 
dialog with taxpayers out there. This Committee worked very 
well with the IRS for 1 year in developing the last Taxpayers 
Bill of Rights and has made great efforts to listen to the IRS 
and to work with them and to get the kind of input we need to 
write better tax law and to develop a system that is more 
taxpayer-friendly.
    I guess it is because this effort has been going on for 
almost 2 years now and there is some evidence of success that I 
was really so discouraged and outraged by your letter. It does 
seem to me that if you are going to tell a lot of small 
businesses that they are going to have to apply for something 
that takes 10 weeks to complete and you are giving them 6 
months' notice; they look at 6 months' notice and they have got 
to go through a process that takes 2\1/2\ months to complete, 
and they are dealing with the government, they double that in 
their mind. What if it does not work?
    And you are telling them that if it does not work, if they 
are not enrolled on time, they will not be able to pay their 
taxes; that we will prevent you from making your payment 
electronically but we will penalize you 10 percent. Do you not 
think that is pretty harsh? Do you not think that is a way of 
sort of saber rattling? If you were a small business, a single-
operator person, would not that send chills down your spine?
    Oh, my gosh, it is going to take 2\1/2\ months. And I have 
6 months and if I do not succeed and the bureaucracy does not 
hear me, I will be prevented from paying my taxes and penalized 
10 percent. Do you not think that is harsh?
    Mr. Donelson. Ms. Johnson, I took the opportunity during my 
oral testimony to step away and apologize for that notice 
already. But let me just add, my sense of schizophrenia. I am 
also, as Chief Taxpayer Service, the guy who eliminated 12 
notices and has modified the collection notices and has 
eliminated almost 20 million notices from being sent out to 
taxpayers unnecessarily.
    So----
    Chairman Johnson. Well, I am glad you are able to recall 
those statistics because I thought they were impressive. And 
all I can say is you have got to be schizophrenic.
    Mr. Donelson. I think I had a bad day that day when I let 
that one go.
    Chairman Johnson. Well, I would hope that in the future, 
first of all, instead of starting a letter by saying this was 
required, as a result of passage of the North American Free 
Trade Agreement--that has brought millions of jobs into this 
country and increased exports and so on and so forth, we could 
go into the economic benefits of the NAFTA Agreement--but 
instead of starting with that, that you might have talked about 
the advantages to the taxpayer that this system will net.
    NAFTA did not require that the threshold go down to 
$50,000. We just heard testimony before from the Members, and 
we will check this with the IRS, that by keeping the threshold 
at a far higher level you were already going to meet the 
revenue requirements of NAFTA and you are going to meet it 
simply by people paying their taxes in a way that the taxpayers 
of America benefit the most from the collection of those taxes. 
That seems to me fair and reasonable.
    So if you are going to talk about NAFTA, you should have 
talked about NAFTA not requiring you to go down to $50,000 
because it certainly did not. And you certainly should have put 
this in the context of electronic filing, of telephone 
technology. ``We think this is going to help you, we think this 
is going to let you file your taxes on weekends and nights. We 
hope to make it user-friendly.''
    If we do not begin to market ourselves on first contact so 
that people can see that not only are we serving, but we are 
trying to serve well. When you have 46 States that already have 
a system based on roughly a similar accounting system, the ACH 
system, that gives taxpayers assurance, and you can make that 
analogy to State systems and you can refer to some of the 
benefits and you can say, ``Yes, the last time we were going to 
implement this we waived the penalties the first 6 months and 
we intend to waive the penalties the first few months because 
we know that when we take in 1.2 million taxpayers, there could 
be glitches, but we think in the long run this is going to be 
good for you and good for us.'' Why do we not talk to each 
other that way?
    So, I appreciate your apologizing for this letter but, 
frankly, the kind of attitudinal change I am getting at goes 
way beyond the sort of technical details of this letter. It is 
true, it does not lay out the alternatives. It does not make 
the analogy of the debit alternative to the way you might 
choose to pay your mortgage, to make it more familiar and build 
confidence.
    But beyond that, it does not market this as a positive 
product that Americans might actually like and that might help 
small businesses function far more efficiently and effectively, 
at the same time serve taxpayers better.
    So, I hope that as one who has accomplished a good deal of 
simplification and is dealing with a lot of notices in a way 
that we hope will help taxpayers understand more clearly what 
the government is trying to say to them and reduce the amount 
of confusion and calls and so on associated with some of those 
communications, I hope that not just you, but the whole IRS, 
will begin thinking about the person you are talking to and the 
information you need to translate. Because I consider this 
letter, which really started this problem, for this quality of 
communication to go out seems to me really a travesty. I am 
glad you have apologized for it. I will not dwell on it any 
more.
    But I did want to bring out that not only does it not lay 
out the information in detail, but we have got to start to 
market the positive benefits of changes so that we are not just 
coming in and saying, ``You are going to be mandated to do 
this. If you do not get it done, even if we are the problem, 
you are going to get a 10-percent penalty and, furthermore, we 
are going to prevent you from paying your taxes.'' So, I am 
going to yield to my colleagues now, but I certainly did want 
to get on the record that I consider this an outward visible 
sign of the failure of the efforts we have been making for the 
last 2 years. And, while we have made progress in other areas, 
we have to accelerate the pace at which we make progress 
together or the American taxpayers have every reason to fault 
us.
    Mr. Donelson. I agree.
    Chairman Johnson. So, I will yield now to my colleague, Mr. 
Coyne.
    Mr. Coyne. Thank you, Madam Chairwoman.
    Mr. Donelson, in your testimony you pointed out that there 
were 365,000 taxpayers who opted to do this program 
voluntarily. Why do you think they chose to do that? What 
advantage is there to them to do it?
    Mr. Donelson. Well, I think we have heard a number of the 
advantages, Mr. Coyne. We have probably--and I would have to be 
guessing with some of these ideas--but we probably have a lot 
of businesses who are electronic based or run their businesses 
in this manner and this just fits perfectly with them.
    They are generally the smaller businesses because they are 
not mandated so they have a payroll of under $50,000 a year. 
They are probably startups. And because of that, they are 
probably entrepreneurial or Internet-based businesses for which 
this is an attractive feature.
    I would yield to some of the two members from the banks and 
they may have some ideas as well.
    Mr. Buettner. I think if you take a look at the general 
cash management business in the United States that banks 
provide to businesses, the middle market and small business, 
this is an area that points to the most rapid growth and change 
in the types and uses of technology that corporations are using 
to conduct their banking business.
    The Internet, itself, is a great example of how the small 
business market is looking for this type of service, similar to 
EFTPS, to conduct their business at their location rather than 
having to do the physical movement of paper or going to a bank 
to conduct business.
    So, this is really just another example of how small 
businesses really are looking for these types of cash 
management services.
    Mr. Coyne. Our two colleagues, Mr. Hastings and Ms. Smith, 
earlier gave pertinent testimony about this subject and you all 
were in the room at the time. Is there anything you would like 
to say relative to that testimony that might be able to clarify 
anything or help out with our deliberations?
    Mr. Dreyer. Yes, Mr. Coyne. One of the comments made was 
IRS access to the taxpayer's account. As we have stated in 
previous testimony the IRS does not have access to the 
taxpayer's account. The only way the funds can move, the tax 
deposit can move from the taxpayer's is by initiation by the 
taxpayer, himself, through the use of their TIN and the 
personal identification number, reporting into the EFTPS 
System. That is the only way that the funds can move from the 
taxpayer's account. So, the taxpayer controls the timing and 
the total amount and the tax types that are moved out of their 
account.
    The funds do not move any sooner. In fact, the taxpayer can 
warehouse or report up to 30 days ahead of time for payment of 
their taxes. And we have noticed a high use of that feature of 
the system. Again, it is another convenience to the taxpayer.
    Mr. Donelson. Mr. Coyne, I would like to add, there was an 
observation that was made, I think, by Mr. Hastings that people 
like to have a paper trail. Well, they receive a confirmation 
and they have this in their bank statement that they get from 
the bank each month. There is a paper trail that indicates, 
that would be sufficient for our auditors, to show that there 
was a transaction made appropriately, if we have some doubt as 
to whether that occurred.
    So, there is a paper trail and I am sure that was just an 
oversight on his part. But that issue is rather compelling. And 
when I was sitting back there listening to him, when he said 
there was no paper trail it was like it was in thin air and was 
out in the stratosphere, but there is a paper trail.
    Mr. Coyne. Is that only in the monthly statement?
    Mr. Dreyer. No, the paper trail that Mr. Donelson is 
referring to is represented on a bank statement which is 
typically released monthly. In addition to that, during the 
report process or upon completion of the report session, the 
taxpayer receives an acknowledgment number. If they are using 
the PC-based system that acknowledgment number is displayed on 
their screen and they can do a print screen of that and that, 
in combination with their bank statement showing deposit of 
good funds on tax-due date, has been deemed sufficient to 
provide an audit trail for that taxpayer.
    Mr. Coyne. And you feel that this is all sufficient to 
replace the coupons and the documents?
    Mr. Donelson. Absolutely.
    Mr. Dreyer. Yes, sir.
    Mr. Coyne. Thank you.
    Chairman Johnson. May I just follow up on that for 1 
minute. I understand your point about the bank statement. So, 
monthly you have confirmation that the transfer of this money 
occurred. The acknowledgment number you receive if you make 
your payments by computer, could you go through that again? 
Just give me a little more understanding of that, please
    Mr. Buettner. The acknowledgment number is provided when 
the taxpayer initiates the payment, itself. So, as an example, 
if they should use a touch-tone telephone and put in the 
appropriate data and the system determines that the edit checks 
are appropriate, when that payment is complete they get an 
EFTPS reference number.
    That number can be used----
    Chairman Johnson. On the telephone, they are told that 
number?
    Mr. Buettner. Right in the session. If they use a personal 
computer, again, the system will preedit the data to make sure 
it is correct. It will initiate a transmission to the EFTPS 
System of both financial agents and they receive back an 
acknowledgment number for each individual payment which is, as 
Mr. Dreyer pointed out, can be printed out or can be stored on 
the computer, itself.
    Both of those are used as audit trail points.
    Chairman Johnson. Thank you.
    Mr. Portman.
    Mr. Portman. Thank you, Madam Chair.
    I have so many questions for this well informed panel. But 
I guess I will start by associating myself with your comments, 
Mr. Donelson. You have seen through Mrs. Johnson's reaction to 
the program how a lot of Members feel and that is because we 
are hearing about it from our constituents. I guess my 
suggestion to the Service would be instead of calling this one 
of Internal Revenue Service's great success stories which is 
what you mentioned at the outset of your comments, you might 
qualify that and raise your concerns a little more openly. 
Because I think this is an example of a larger problem of the 
Service not successfully marketing what, in this case, could 
have been a very beneficial program in the views of small 
business owners had they had it properly described to them.
    But Mrs. Johnson has done a nice job of talking about the 
letter. I would just give you one quote that we have. You 
mentioned the quotes that you have from small business people 
saying it is working well for them. Here is one from an 
enrolled agent from Oklahoma in a survey of enrolled agents 
about the real world experiences with this. And her quote was, 
``I am doing damage control because of the first letter.''
    And that is what we are hearing from the intermediaries as 
well, as I said earlier, from the small business constituents 
regarding the way we have gone about explaining this and really 
marketing this program. So, I think this is a symptom of a 
larger problem that we need to focus on. The 58.3-percent 
requirement in NAFTA did not require the $50,000 threshold. I 
do not know what that magic number is. I do not know if you can 
give us one today but I would just say that that is something 
that all of us are very concerned about.
    Let me ask a couple of questions, if I could, regarding the 
way this system is being designed. Because, to the extent that 
we are going to move forward with something, I think that we 
must be sure it works as well as possible, particularly for 
smaller businesses.
    I appreciate your comment, Mr. Dreyer, in response to Mr. 
Coyne's good question on the access to accounts. I think that 
is a very important point to make, particularly to small 
business taxpayers. Another question I would have for you or 
Mr. Buettner, would be with regard to systems failures. We have 
heard a lot about this and I guess the specific question I 
would have for the banks is, in the 6 months that EFTPS has 
been in operation, have either of your banks experienced any 
systems failures which have prevented taxpayers from getting 
through or making their payments?
    Mr. Dreyer. Mr. Portman, let me address that. On one 
occasion in the last 3 weeks, the NationsBank system has had to 
switch to their backup system. There were a number of hours in 
which we stabilized the system and the data between the 
systems. However, by midafternoon, 3 p.m. eastern time on March 
24, we had stabilized the system and all taxpayers were able to 
successfully report into the system.
    However----
    Mr. Portman. Were these your customer service lines?
    Mr. Dreyer. These were the deposit report lines. However, 
during that timeframe we were continuing to accept the deposit 
reports from the taxpayers and by close of business we had met 
all of our transmission deadlines to IRS and FMS. We had not 
lost any taxpayer data and we had maintained security in the 
system.
    Mr. Portman. That is a very important issue on the customer 
service side, too. Have you had some breakdowns in your 
customer service lines?
    Mr. Buettner. We have not experienced any problem with our 
customer service.
    Mr. Portman. Do you have emergency backups in place? You 
mentioned you have a backup system. Do you feel as though the 
system is properly backed up with an emergency system to handle 
situations like that
    Mr. Buettner. Both banks have gone through extensive 
efforts to make sure that we have contingency plans. We have 
both primary and backup data centers in each case. We have 
tested our disaster recovery means to make sure that we can 
recover in a short period of time. I would probably say that 
the contingency plans for EFTPS are beyond what most banks 
would make for an ACH type of process. There has been a lot of 
work placed into making sure that we have more than adequate 
contingency capabilities.
    Mr. Portman. One other quick question and I will direct 
this more to the Service. That is in regard to bulk filers. As 
I said earlier, we rely on our employers to really collect 
these taxes and on bulk filers, as you know, in particular with 
regard to the system.
    And I encourage the Service to work more closely with the 
private sector because to the extent we can do that we are 
going to facilitate all of this. The bulk filers have a number 
of concerns, as you know.
    One is the ability to reverse erroneous or duplicate files 
that they send in. Do you have something in place to assist 
with that, Mr. Albicker or Mr. Donelson?
    Mr. Buettner. Well, first of all, if a file was to be sent 
to either one of the financial agents from a payroll processor 
we have software edits to make sure that we can detect whether 
a file has been erroneously duplicated during the same 
processing day.
    If we receive such a file we are not going to process it 
on, we are going to contact the payroll processor and determine 
whether there is a problem with it.
    Mr. Portman. You will contact the processor under the 
current system?
    Mr. Buettner. Yes.
    Mr. Portman. Prior to submitting----
    Mr. Buettner. In other words, they send us a file and we 
determine that there is a duplicate file received and we are 
not going to automatically process that second file. We are 
going to stop that file from being processed and we will want 
to determine whether this is, in fact, a file that needs to be 
processed or should it be rejected.
    Mr. Donelson. That is a major improvement over the current 
paper system that oftentimes----
    Mr. Portman. That should be one of the advantages of 
electronic filing.
    Mr. Donelson [continuing]. Oftentimes results in us having 
to work that issue back while we hold the money or the 
duplicate payment.
    Mr. Portman. We are going to hear from some of the bulk 
filers later and having seen their written statement, they 
still have some concerns in that area and we hope to work with 
you on it.
    Thank you, Madam Chairwoman.
    Chairman Johnson. Ms. Dunn.
    Ms. Dunn. Thank you, Madam Chairman.
    Mr. Donelson, I appreciated your presentation of the goals 
and objectives of the program. I think it was an excellent 
presentation. And I believe that we agree that what you are 
trying to do is the right thing to do. And yet, I believe Mrs. 
Johnson made an important point that had to do with attitude 
and in the presentation of the taxpayer advocates to our 
Subcommittee a number of weeks ago, attitude came out of those 
20 points that he presented again and again. And that is really 
a big, big concern of mine. With a group of small business 
people all over the Nation who are very sensitized to the IRS 
and to the problems they have in complying with the 
requirements that both Congress and the agency has set on the 
small business person, it is no wonder that they reacted in the 
way that they did which was a firestorm of complaining to us 
last June when the letter first came out.
    Mr. Morris, I wanted to ask you a question. In 
Representative Hastings' testimony he said that the Secretary 
of the Treasury had been given broad ability to produce waivers 
or allow exemptions for folks who were having a hard time 
meeting the requirements of the legislation.
    I am wondering why he did not take advantage of that or did 
he and we simply do not have that information?
    Mr. Morris. Congresswoman, the final regulations, as well 
as the final revenue ruling by IRS have not been issued. We put 
out a notice of proposed rulemaking some months ago and 
gathered input from many sources. That input is being 
considered and the final rules have not been written. The 
issues around those final rules will be in front of the 
Secretary and we will have to see how that goes. But we are in 
review of the issues right now.
    Ms. Dunn. And the initial goal of cutting down the amount 
of paperwork on taxpayers that was one of the two major goals 
of this program. When it caused trouble to the taxpayer the 
Secretary of Treasury was allowed to exempt certain taxpayers 
and what Representative Hastings told us is that, to his 
knowledge, no exemption had been granted. And that is really my 
question, why Secretary Rubin did not take advantage of his 
ability to ease off on some of the taxpayers who wanted to do 
what was right but were having problems in organizing their 
presentation in a way that goes along with what we have asked 
them to do?
    Mr. Morris. I have to admit some ignorance here, as well, 
because until Congressman Hastings made that comment I was not 
aware of any waiver authority. And, so, I just have to go back 
and look at that as we all do.
    Ms. Dunn. OK. That would be helpful if I could just have 
some sort of a response on that one.
    The other thing is I am still dealing with all the players 
in this whole situation. We have talked about ACH a lot and we 
talked about the fact that that was first operated in the late 
seventies, I think somebody said. I am just wondering is that a 
patented program and, if it is--and Mr. Morris you may have the 
answer to this--who holds that patent and who is paid the 
royalties on that patent?
    Mr. Morris. I think it is public domain software. The 
automated clearinghouse system actually dates to the early 
seventies and was developed by the banking industry in 
cooperation with the Federal Reserve System. The Federal 
Reserve operates most, but not all, of the clearinghouses. They 
are operated by a government entity, although there are a 
couple of private-sector organizations who operate regional 
clearinghouses as well.
    I do not think this question of patents has ever come up or 
copyrights. There is a national trade association or national 
association, automated clearinghouse association that 
essentially maintains the rules of engagement but it is an 
industry association with a broad input. And they maintain the 
operating rules and the standards for the system but it is not 
a patent. You do not pay a fee or a franchise fee to use it.
    Mr. Buettner. It is essentially a service that is run by 
the Federal Reserve for all the member banks. So, any bank who 
is a member can utilize the service. There are a few other 
private ACH systems, but they have some very specific uses. The 
system is very commonly used for mortgages, insurance 
collection. I think the statistic I saw the other day is that 
over 300 million transactions went through the system last 
year. The system has been growing double digit for the last 10 
years. I think it grew about 17 percent last year. So, it is a 
very commonly utilized system used primarily for the retail 
type transactions but a growing percentage of the use is for 
commerce, for business.
    Ms. Dunn. Thank you very much.
    Mr. Morris. For example, if you have direct deposit of your 
payroll, that direct deposit goes through the automated 
clearinghouse system. So, you are a user.
    Ms. Dunn. Good. Thank you.
    Chairman Johnson. Congresswoman Thurman.
    Ms. Thurman. Thank you, Madam Chairman.
    Madam Chairman, I would like to request maybe to put into 
the record, personally I would like to see not just what 
happened in, I guess, the June letter or the July letter, 
whatever it was, but also any other of the information that was 
distributed--the training tapes, whatever. I think that might 
be beneficial for this Subcommittee to have in the record, so 
that we know what has been out there.
    Chairman Johnson. Thank you, Congresswoman, that is a good 
suggestion and also the 30-page booklet of instructions, and 
other materials and any other correspondence that you put out 
to help people.
    Mr. Donelson. We have already discussed the possibility of 
suggesting it would go into the record, so, we would be glad to 
comply.
    Chairman Johnson. Thank you.
    Ms. Thurman. I think that would be very helpful for all of 
us. So, I would appreciate that.
    [The materials are being retained in the Committee files.]
    I have been trying to read ahead on some of the testimony 
that is going to be offered by the other panels. Sometimes in 
these hearings, we get some information and then never have the 
opportunity to ask people the questions that are going to come 
up in the next panels. So, I am going to try to do a little bit 
of that.
    I would like to ask the banks a question. In the NFIB 
testimony, we are going to hear that one of the major concerns 
is the cost to small businesses. I think we need to have an 
answer to that because as they have pointed out today, this 
system basically is free to them.
    How do you answer them regarding any costs they might 
accrue in their businesses for this transaction now?
    Mr. Dreyer. Ms. Thurman, the cost of the system to the 
taxpayer, there is no cost for the enrollment process. The 
enrollment process consists of returning a 2-page front-and-
back form to the EFTPS, to the financial agents for processing. 
If they elect to utilize the ACH debit method, they can utilize 
their telephone. Again, I would assume that that would be 
normal. There is no additional cost or incremental cost for 
them to use their telephone to make their tax payment.
    Ms. Thurman. So, there is no cost with the debit method?
    Mr. Dreyer. That is correct.
    And the telephone numbers that they use to call for 
customer or for reporting are 800 numbers provided by the 
financial agents.
    The cost of an ACH debit posting to their account that 
would effect a payment probably costs no more and, quite often, 
costs less than the cost of a check clearing against their 
account.
    Now, if, for business reasons, business practices, business 
reasons, they elect to use the ACH credit method, and quite 
often, you know, if they are using the ACH credit for other 
applications, it is probably a very easy incremental process. 
However, if they were to utilize this strictly for EFTPS they 
would incur some costs. Now, one of the problems is that their 
banks may not offer that service, however, that is a business 
decision that their banks make as to whether or not they will 
or will not offer those types of services to their customers. 
But if the taxpayer elects the tax payment for the ACH debit 
method, there is virtually no incremental cost and a very 
simple process to participate in the system.
    Ms. Thurman. So, the number that was used in previous 
testimony--anywhere between $120 to $130 to $600--is not 
necessarily the one that would be accrued. That would not be 
the case with the debit method?
    Mr. Dreyer. That is correct. And as I had stated 
previously, 95 percent of the participants currently using the 
system are using the debit method and less than 5 percent are 
using the ACH credit method.
    Ms. Thurman. Let me go to another issue that is an 
interesting one and, quite frankly, could create some ill will 
out there. Again, my question is to the banks.
    The issue concerns our community bankers who, quite 
frankly, are very helpful to our businesses by advising them 
and doing a number of other things. The concern is that if they 
do not offer this service, the big banks or, in your case, who 
you represent, will gain all the depositors and take the money 
away from these community banks.
    How do you answer that? I hate to put you on the spot but 
you happen to be here and I think it is important because 
sometimes that can be part of a problem.
    Mr. Buettner. I think community banks have a number of 
opportunities to choose to decide to participate in the ACH 
process. They can do that by directly joining. They can work 
through a correspondent to do that. So, they do not have to 
always incur the direct cost of participation.
    I do not believe that any bank will be gaining any undue 
market share by processing an individual's tax payment. There 
is not enough volume here to warrant a large bank thinking this 
is a market share opportunity. The other opportunity that 
community banks have is through service providers, third 
parties, that provide products that they can utilize so they 
can originate ACH credits as well.
    So, there are other alternatives if they choose to get into 
that market. And it is very much a business decision by each of 
the banks to do that.
    Ms. Thurman. Let me ask another question. In your branches 
throughout the country, how much correspondence have you had 
between say, the chambers of commerce or the NFIBs in trying to 
get more information on how to do this? I am just curious to 
know if they are using educational tools that might be 
available to them? I mean what is going on out there?
    I have heard that 960,000 have actually signed up, but have 
not started to use it. Are they starting to ask more questions?
    Mr. Buettner. We have conducted a number of seminars, 
industry seminars both with banks, accounting firms, 
associations, small business associations----
    Ms. Thurman. At their request or----
    Mr. Buettner. A combination of both. One association had us 
do almost 25 different seminars across the country. Very well 
attended. So, we were able to get the information out that way. 
In addition, information has been provided to every bank 
through the Federal Reserve as far as the programs, so, every 
bank has received a notification as to what the intent of the 
program was and how to comply and implement their software 
accordingly.
    So, we have gone, I think, as best as we can to identify 
those groups that need information and when asked have provided 
speakers to come onsite and explain the system to them.
    Ms. Thurman. From those people that are kind of the 
naysayers right now, and from the experience that you have had 
from customers, what would be your response, to try to initiate 
them to get into the program?
    If you had a message that you could give those that have 
enrolled but are not participating yet, what would you tell 
them?
    Mr. Dreyer. Ms. Thurman, in conversations with tax 
practitioners, tax professionals, small business groups, 
taxpayers, when that question comes up once we discuss and 
alleviate their initial concerns concerning the cost, 
concerning the misconception that they have to have additional 
equipment, concerning the IRS access to their accounts, once we 
address those main concerns, most of them are, quite frankly, 
say, well, there is no issue here, we will go ahead and try it, 
once they receive that basic reassurance.
    Some of them, it is an issue of change, it is just 
something different. But, again, once we explain the basic 
system, the operation, the fact that this is an existing 
payment processing system that we simply adapted to the 
requirements of the IRS we alleviate most of the concerns and 
misconceptions that they were under and they go ahead and 
participate and say, Oh, it is not a big deal.
    Ms. Thurman. Mr. Donelson, in your testimony you talk about 
the fact that you probably receive or somebody receives about 
100 letters a week that you answer to folks that participate. 
When you look at the information you send out to these 
taxpayers that you are trying to enroll in the system, how 
often do you change the information to reflect the commonly 
asked questions? Certainly there have got to be some that are 
repetitious, some that keep coming up which your booklets or 
videos are not explaining. Do you go through a process of 
trying to address those most common themes?
    Mr. Donelson. Ms. Thurman, we capture and accumulate the 
most frequently asked questions and come back in the next 
mailout with brochures and lists of those most frequently asked 
questions. As was just mentioned there are two or three toppers 
but there are a number of other questions that we know are 
bothering people and we use that data that we capture to 
formulate the next wave of mail. So, yes, we try to improve as 
we go along and learn from each succeeding mailout.
    Ms. Thurman. And those would also come from those telephone 
inquiries, as well?
    Mr. Donelson. Absolutely. We get a lot of information from 
the agents.
    Mr. Buettner. Ms. Thurman, in the next set of mailouts that 
will go to anyone that has not started to utilize the system, 
we have included a brochure entitled, ``Start Right, Start 
Now.'' It includes all the most commonly asked questions and 
concerns and helpful tips as to how to use the system to make 
sure that your first-time encounter with the system is an easy 
one.
    So, we have heard a lot from the feedback from taxpayers, 
particularly through our customer service centers and have 
captured it. We have reformulated that back to the taxpayer and 
are hopefully providing them the piece of information that will 
alleviate some of their concerns and make their first-time 
experience an easy one.
    Mr. Donelson. It was mentioned earlier that we were 
thinking this morning of showing an actual hands-on tutorial 
that we have on our telephone system. The taxpayer can get in 
without any money on the line or any of his business at stake 
and actually practice with a tutorial system that is built into 
the operation. And that is, in our view, a feature that can add 
comfort to the user so that they do not have any concern that 
their money will disappear into space. They can exercise and 
play with the system and get comfortable before they actually 
put money in the process.
    Ms. Thurman. OK. Thank you.
    Mr. Portman [presiding]. Mr. Hulshof.
    Mr. Hulshof. Thank you, Mr. Chair.
    Mr. Dreyer, and Mr. Buettner, I want to echo what Ms. 
Thurman mentioned. We have some community, family owned banks 
who have survived in our district, in my district in Missouri 
and I think there is, Mr. Dreyer, as you suggested, 
misperception. But there is a concern whether it is 
appropriately placed or not that in order to comply with the 
law that taxpayers will have to open an account with 
NationsBank or First Chicago. So, this is not just a concern in 
Florida and granted, perhaps it is misplaced. What can we do to 
help alleviate those concerns?
    You mentioned some of the other options available, but what 
suggestions would you give to alleviate some of these misplaced 
ideas?
    Mr. Dreyer. In addition to the techniques or the procedures 
that we are following through on our AUR, automated response or 
touch-tone systems, the financial agents provide additional 
information as far as frequently asked questions that the 
taxpayers have expressed to us.
    We also communicate through the banking industry. The FMS 
coordinates with the banking industry, the Federal Reserve 
communicates through the banking industry in terms of ensuring 
that everybody that we come in contact with and that raises 
those questions understands that that is not a requirement of 
the system. There is absolutely no change in the banking 
relationship by a taxpayer as a result of participating in 
EFTPS.
    Mr. Buettner. I think in some respects the community banks 
can play a lot more valuable role than some of us larger banks. 
They know their customers very well, and if they have good 
knowledge about how EFTPS works, they should realize that the 
ability to provide their taxpayers direction on how to use the 
ACH debit method essentially insures that they are continuing 
to bank with them. Their account will be maintained with that 
bank. It is just that the service happens to be provided by the 
two financial agents but it ultimately comes back to their bank 
account where that customer is doing their banking.
    So, we are not looking to pull the accounts. We do not open 
the accounts.
    Mr. Hulshof. I recognize that. And I agree there is 
probably not a large market share there for targeting 
promotion. Mr. Morris, earlier this morning Congressman 
Hastings, in his testimony, talked about some numbers, 
reacknowledged the goal that implementing EFTPS was to 
accelerate revenue collections by $3.3 billion over 5 years and 
he indicated in his testimony that we are up to $2.89 billion 
through just 3 years and had a letter that he was submitting in 
conjunction with his testimony as part of the record. Let me 
first ask you, do you have any quarrel with those numbers? Are 
you familiar with those numbers?
    Mr. Morris. I have no quarrel with the number that he 
presented. In fact, it is true that in the letter we had 
provided data actually from my boss' office, from the Office of 
Fiscal Assistant Secretary that represents the measure of the 
movement of value from what would have been fiscal year 1997 
into 1996 as a result of last year's activity.
    Mr. Hulshof. Mr. Morris, given the accuracy then of those 
numbers, does the Department of Treasury have a position on 
legislation that would provide voluntary compliance with EFTPS?
    Mr. Morris. Mr. Congressman, I think we need to be real 
clear here that even though the stated intent of the NAFTA 
legislation was to move value forward in fiscal years, that the 
way the law was written, it was written in terms of a 
percentage of tax revenue to be collected by EFTPS.
    So, what we are doing is implementing the law as it was 
written and our target is that percentage of tax revenue and 
the byproduct is the money that is moved from fiscal year to 
fiscal year.
    I do not know if I am making any sense to you but our view 
is, as I said, the view of the Financial Management Service or 
the fiscal service and, quite frankly, I am not empowered to 
speak for the Secretary, is that given where we are in history, 
that we have notified, we have nearly 1 million organizations 
signed up. There have been no significant problems that any of 
us are aware of. We have over 200,000 users of the system right 
now. Our view is that it creates more turmoil than it solves if 
you terminate this project at this time.
    Certainly, Treasury has an interest in the acceleration of 
the funds flow. It saves taxpayers money in a different pocket. 
It reduces interest costs. And, so, we would like to move on, 
move out and get this law implemented.
    Mr. Hulshof. I do not think there is the suggestion that we 
terminate it. I think, as Mr. Donelson said, that once people 
try it, they like it. But I guess what my thrust is and what I 
heard Congressman Hastings say was that we have moved very far 
toward our goal of raising the revenue that we need and should 
we now back up and say, Well, maybe voluntary compliance? But I 
see my time is running short.
    Mr. Donelson, first of all, congratulations for surviving 
another tax day with the rough seas of April 15. Do you have a 
number of how many penalty notices have been issued to the 
1,500 largest employers that have already been mandated to 
comply with the EFTPS, an approximate number?
    Mr. Donelson. I do not have the number with me and I think 
it is a very small number.
    Mr. Hulshof. OK.
    Mr. Donelson. But it is extremely reasonable on listening 
to their concerns and abating any penalties that have occurred.
    Mr. Hulshof. Could we and perhaps with followup find out 
how many notices and about what sort of revenue we are talking 
if collection were obtained?
    Mr. Donelson. Absolutely.
    [The following was subsequently received:]

    Total number of penalties assessed: 8,433 for 
$2,463,473,940.14.
    Total number of penalties abated: 4,425 for 
$2,184,312,283.11.
      

                                

    Mr. Hulshof. Thanks.
    Thanks, Mr. Chairman.
    Mr. Donelson. And Congressman, thanks for the kind words 
about the filing season. We think we had a real good filing 
season and we have 100,000 people working very hard to make 
that happen every year.
    Thank you.
    Mr. Portman. Thank you, Mr. Hulshof.
    Before we adjourn, I have just one followup to Mr. 
Hulshof's good question on the numbers. Mr. Morris said the 
numbers were accurate and that they had, in fact, been provided 
by Treasury and then you indicated that the target under the 
NAFTA legislation was the percentage which was the 58.3 percent 
that we discussed earlier and not the impact on future fiscal 
years from a revenue basis, even though that may have been the 
intent. But just one clarification is necessary I think and 
correct me if I am wrong.
    If 58.3 percent is, indeed, your target, then the $50,000 
threshold which was selected, which was the tax-filing 
threshold, would have been inaccurate. In other words, you 
could have chosen a number that was higher than that to give 
some relief to the smallest businesses, is that correct?
    Mr. Morris. I need to defer to IRS. The decision about or 
the calculation of which taxpayers needed to be included to 
meet those targets were based on Internal Revenue Service's 
review of their tax revenue stream.
    Mr. Portman. I am not sure that is true, but let me, Mr. 
Morris, I want the record to stand that there was, in fact, a 
percentage target and that was the only target used and, 
therefore, we came up with the policy of a $50,000 threshold.
    Mr. Morris. Right.
    Mr. Donelson. Maybe I can help you out, Congressman.
    In the Federal Register dated Monday, July 11, 1994, there 
was a discussion of the calculation and how we arrived at that. 
And I am sure this is available to you but we could make this 
available, as well, to you. There are a couple of factors. One 
is that it is not just an annual target. It is a target based 
on a 3- or 4-year growth in moving people into EFTPS. So at the 
end of that we will have an accumulation of x percentage of the 
EFT, the total deposits.
    [The following was subsequently received:]
    [GRAPHIC] [TIFF OMITTED] T0852.012
    
    [GRAPHIC] [TIFF OMITTED] T0852.013
    
    [GRAPHIC] [TIFF OMITTED] T0852.014
    
    [GRAPHIC] [TIFF OMITTED] T0852.015
    
    [GRAPHIC] [TIFF OMITTED] T0852.016
    
    [GRAPHIC] [TIFF OMITTED] T0852.017
    
    [GRAPHIC] [TIFF OMITTED] T0852.018
    
    [GRAPHIC] [TIFF OMITTED] T0852.019
    
    [GRAPHIC] [TIFF OMITTED] T0852.020
    
    
    
      

                                

    Mr. Portman. But the proposal was January 1, 1997, 100-
percent compliance with a penalty attached on $50,000 or up.
    Mr. Donelson. I understand that.
    Mr. Portman. That is hardly a phase-in.
    Mr. Donelson. But the actuaries that we used to come up 
with this projection helped us in terms of you will have so 
much slippage. Everybody will not automatically be in. And 
people will come in and go out of business. So, you have to 
pick a number that is realistic in order to make the level that 
Congress mandated us to achieve. So, if you just target what 
you think the number should be if everything works perfectly, 
you would always undershoot the mark. So, you have to, 
obviously, give yourself some room for events not working out 
exactly correctly.
    Second, the target is a target as of 1999, not just where 
we start in 1997. Plus, with the late start in 1997, Congress 
moved the date from January 1 to July 1, and we lose a little 
bit more. And so we had to adjust even from the date 
established in 1994.
    There is one last part I would just like to add. And we 
also tried to get a whole grouping of taxpayers, taxpayers who 
file on a semiweekly basis for the main taxes which are the 
withholding taxes. So, the semiweekly group, if you split them 
in half by cutting the number off at 82,000, you would create a 
tremendous administrative burden, not only on us but on the 
taxpayers trying to figure out whether they were in or out of 
this. And if they had an increase in their payroll in one month 
they might have to be in it, and if they were below that level 
the next month they could opt out of it.
    So, there is more than one factor in that calculation than 
simply $50,000 gets the money that you need or not. It is 
calculated over time, it is calculated in terms of a group or 
class of taxpayers, the semiweekly depositors, as well as total 
dollar amount.
    Mr. Portman. I appreciate the semiweekly distinction and I 
think that is an important distinction on the administration of 
this. But my point stands which is let us not let the record 
state that the 58.3 percent was the target. Instead there was a 
number chosen which included a lot of factors. The actual 
number, I think, is in excess of 82,000 although we do not have 
that number and you may not have that number.
    Mr. Donelson. I made that number up, Congressman. That 
82,000 is an illustration.
    Mr. Portman. My point is there may have been other ways to 
have done this and I think it is instructive for the future. It 
is also instructive though, and the reason I raise it for how 
we deal with this problem now, because there may be some 
flexibility here. It is my understanding that the Joint Tax 
Committee has been asked by this Subcommittee to give us a 
better revenue estimate so we can understand how the budget 
rules apply to what we come up with in terms of legislation to 
alleviate the concerns that have been expressed today. We do 
not have a number yet and until the Joint Tax Committee can 
give us something it will be difficult for us to draft 
legislation.
    Thank you all very much for excellent testimony. We will 
now adjourn until 1 o'clock. I see other panelists are here 
already. We have a Members' meeting until 1, but we will 
reconvene with the next panel at 1 o'clock.
    This hearing is adjourned until 1 o'clock.
    [Whereupon, at 12:03 p.m, the Subcommittee recessed, to 
reconvene at 1 p.m., the same day.]
    Chairman Johnson. Will the members of the second full panel 
please come forward? Bennie Thayer, president and chief 
executive officer of the National Association for the Self-
Employed; Roger Harris, president, Padgett Business Services, 
Athens, Georgia; Randy Mason, general manager of Mason 
Mechanical Laboratories, Inc., on behalf of the National 
Federation of Independent Business; Gene Cole, Agrimanagement, 
Yakima, Washington, on behalf of the Small Business Survival 
Committee; and Judy Akin, enrolled agent, on behalf of the 
National Association of Enrolled Agents.
    Welcome, and I am sorry that we had to adjourn for a period 
of time. I welcome you back.
    Bennie Thayer.

 STATEMENT OF BENNIE L. THAYER, PRESIDENT AND CHIEF EXECUTIVE 
      OFFICER, NATIONAL ASSOCIATION FOR THE SELF-EMPLOYED

    Mr. Thayer. Madam Chairman and Members of the Subcommittee, 
may I say, good afternoon now. My name is Bennie L. Thayer and 
I am president of the National Association for the Self-
Employed. I am here today representing approximately 325,000 of 
the smallest of small business. Madam Chair, at the outset, may 
I thank you also for your efforts on behalf of small business 
with the home office deduction last year.
    I am pleased to testify here today on the impact of the 
Electronic Federal Tax Payment System, and especially the 
effect of that system on the smallest of small business. We 
commend Committee Chairman Bill Archer and you, Mrs. Johnson, 
as well as the other Ways and Means Committee Members for 
delaying the EFTPS Program last year.
    The NASE vigorously lobbied for this legislation. Without 
this delay many businesses with 10 or fewer employees would be 
forced to pay all of its payroll tax deposits electronically. 
The Committee rightly recognized, in 1996, that the IRS was ill 
equipped administratively to manage such a dramatic extension 
of the EFTPS Program from a few hundred businesses to more than 
1 million.
    A year later, small businesses and the IRS are still 
unprepared for this mandate. Why? First, because businesses 
still are not prepared for the change. The EFTPS replaces a 
previous electronic payment system program called TaxLink, as 
we very well know. While 63,000 employers used TaxLink through 
May 1996, they were mainly firms with payrolls larger than $1 
million dollars. Therefore, the NASE recommends the program 
remain voluntary and backs legislation by Senator Nickles and 
Representative ``Doc'' Hastings, whom we heard from here this 
morning, to make the EFTPS Program voluntary for small 
businesses.
    While nearly 1 million businesses have enrolled in the 
EFTPS Program, only a small fraction of those businesses are 
actually using it. We believe that the business community 
continues to be confused even today with all aspects, details 
and requirements of the EFTPS Program.
    Second, the structure of the program could damage the 
relationship between banks and small businesses. Why do I say 
that? Businesses have two options in filing these taxes 
electronically. As we very well know, the ACH debit method is 
one of those options and the ACH credit method is the other 
option.
    Many of our members are telling us that they would prefer 
to use their community banks rather than the two national banks 
that are presently being used which are NationsBank which we 
have heard from this morning and the First National Bank of 
Chicago, primarily put in place because of the debit method. 
Meanwhile, local community banks fear that they will lose 
depository accounts to NationsBank or First National Bank of 
Chicago, when small businesses switch their payroll tax 
payments to these banks.
    In effect, the debit method has been set up as a free user 
service. Smaller banks may need to charge customers for use of 
the credit method in order to cover operating costs. That will 
bias the system toward the debit method and the big banks. 
Thus, many small banks have not yet developed a marketing 
strategy to address the EFTPS. The NASE urges Congress to 
monitor this closely. The local community bank has historically 
served as the lifeblood for many small businesses in terms of 
financing business growth and expansion. This relationship 
should not be damaged simply for the administrative convenience 
of the Internal Revenue Service.
    Third, I would point out here today, if the program is as 
good as advertised, then a mandate is not necessary. The IRS 
has advertised the EFTPS Program as a fast, easy and convenient 
way to initiate Federal tax deposits electronically with a 
telephone call or through a personal computer.
    These are good benefits, both certainly do not warrant a 
mandate. Tax payment methods should be left in the hands of the 
business community and not mandated in Washington.
    Fourth, I would point out here today that many businesses 
simply want paper records of their tax payments. A voluntary 
system would permit a small business to decide for itself 
whether it wants to continue utilizing the traditional pay per 
coupon method for making payroll tax deposits with the 
government.
    Finally, a mandatory program will inevitably involve tax 
penalties for noncompliance. We do not need more of these. We 
believe that the use of the EFTPS Program over the coming 
months is likely to be fraught with inadvertent acts and 
mistakes. The NASE strongly recommends that the House Ways and 
Means Committee take steps to alleviate the threat of tax 
penalties under the EFTPS Program, by making the program 
voluntary beyond July 1, 1997, the cutoff date.
    In conclusion, Madam Chair, I would simply say this: In 
today's paper, ``Investment Business Daily,'' the headline 
reads, ``The Situation is Normal at the IRS: Computers 
Management, Books Are All Fouled Up.'' I would submit here 
today that while our members strongly want to see us go into 
the modern age in terms of utilizing electronic mechanisms to 
file our systems, certainly as we approach the millennium, 
these types of headlines certainly do not encourage our members 
to believe that the IRS will be any different after this than 
they have been before.
    I thank you very much for appearing today.
    [The prepared statement follows:]

Statement of Bennie L. Thayer, President and Chief Executive Officer, 
National Association for the Self-Employed

    My name is Bennie L. Thayer, President of the National 
Association for the Self-Employed. I am pleased to testify 
before the House Ways and Means Subcommittee on Oversight today 
to address the impact of the Electronic Federal Tax Payment 
System (EFTPS) on small business.
    The NASE commends Committee Chairman Bill Archer, 
Subcommittee Chairman Nancy Johnson and the other Ways and 
Means Committee members in spearheading legislation last year 
to delay further extension of EFTPS to any more businesses 
until July 1, 1997. The NASE vigorously lobbied for this 
legislation.
    Without passage of this EFTPS delay measure, a business 
with yearly payroll tax deposits of $50,000 or more would 
generally now be obligated to transmit all of its payroll tax 
deposits electronically. The Committee rightly recognized in 
1996 that the IRS was ill-equipped administratively to manage 
such a dramatic extension of the program to more than one 
million additional businesses.

                      How the EFTPS Program Works

    Section 6302(h) of the Internal Revenue Code authorizes the 
IRS to institute an electronic funds transfer program for the 
payment of employment taxes by employers. This was a voluntary 
program before 1995. Beginning on January 1, 1995, the program 
was made mandatory for certain employers based on the firm's 
total payroll tax deposits for the year. The phase-in schedule 
was as follows:

------------------------------------------------------------------------
                                     Determination
          Tax Deposits                  Period          Effective Date
------------------------------------------------------------------------
$78 million.....................  1/1/93 to 12/31/93  1/1/95
$47 million.....................  1/1/93 to 12/31/93  1/1/96
$47 million.....................  1/1/94 to 12/31/94  1/1/96
$50,000.........................   1/1/95 to 12/31/   1/1/97
                                   95.
$50,000.........................  1/1/96 to 12/31/96  1/1/98
$20,000.........................  1/1/97 to 12/31/97  1/1/99
------------------------------------------------------------------------

    EFTPS replaces a previous electronic payment system program 
called TaxLink. About 63,000 employers used TaxLink through May 
1996, paying about $227.1 billion in payroll tax deposits 
electronically. However, it is commonly recognized that the 
companies currently using the EFTPS program are firms with 
payrolls that are larger than $1 million.\1\
---------------------------------------------------------------------------
    \1\ Tax Analysts Internet Page, http://www.tax.org/notes/tadiscus/
291e.htm, Employment Tax Update, Vol. 3, No. 8, May 21, 1996.
---------------------------------------------------------------------------
    The following hypothetical illustrates the type of small 
business impacted by a mandatory EFTPS program. Under this 
hypothetical, three assumptions are made. First, the small 
business is depositing $50,000 in payroll tax deposits with the 
government on a yearly basis. Second, the average tax bracket 
for all employees working for the business is 20 percent. Last, 
the average wage paid by the business to each employee is 
$25,000. Based on this hypothetical, a business with 10 workers 
and a total yearly payroll of $250,000 would be required to 
utilize EFTPS. Obviously, businesses that employ even fewer 
workers would be brought under EFTPS if they pay their 
workers--on average--significantly more than $25,000.
    One of the principal reasons that NASE supported a delay in 
further implementation of the program was that small businesses 
were generally not aware of the program in the Spring of 1996. 
And more than 1.2 million businesses were affected in 1996, 
those with yearly tax deposits of $50,000 or more.
    According to a survey released in June 1996 by Automatic 
Data Processing (ADP), 70 percent of U.S. businesses were not 
aware that EFTPS was scheduled to become a mandatory program. 
This level of unawareness among the small business community 
was extremely high last year despite IRS efforts through the 
media and public seminars to educate the business community. 
ADP's survey clearly illustrates why the NASE supported a delay 
in EFTPS implementation.

                    The IRS' EFTPS Outreach in 1997

    According to the IRS, over 840,000 EFTPS enrollment 
applications were received by the IRS as of February 12, 1997. 
While it is conceivable that the number of EFTPS enrollment 
applications may be approaching 950,000 or more by the date of 
today's hearing, the NASE remains concerned about the ability 
of the IRS to successfully implement the program over the 
coming months.
    The IRS has sent several mailings reminding businesses that 
they must enroll in the EFTPS program by May 1, 1997. According 
to the IRS, this May 1, 1997 deadline is necessary to ensure 
sufficient time for processing the enrollment applications, so 
that a business will be properly enrolled and ready to start 
transmitting payroll taxes electronically by July 1, 1997.
    Unfortunately, it is the NASE's understanding that only a 
small percentage of all businesses enrolled in the EFTPS 
program are actually currently using the program to make 
electronic transmissions. We believe that the business 
community continues to be confused even today with all aspects, 
details, and requirements of the EFTPS program. An 
unfortunately, today's level of confusion appears to be very 
comparable to the high degree of confusion which existed last 
year among business owners. The various concerns existing today 
about the EFTPS program are as follows:
    1. ACH Debit Method. It appears that the IRS prefers small 
businesses to utilize the ACH debit method for purposes of 
making electronic transmissions of payroll taxes. Under this 
method, the small business is told that it will not be charged 
for making the electronic transmission of taxes as long as the 
firm facilitates the transmission through one of Treasury's two 
Financial Agents for the EFTPS program, NationsBank or First 
National Bank of Chicago. But our members are telling us that 
they want to continue using their local community banks for 
paying payroll taxes.
    2. ACH Credit Method. The ACH credit method is designed to 
enable the small business person to electronically transmit the 
payroll taxes by working with a local community bank. 
Unfortunately, when many small business persons have contacted 
their local bank about the EFTPS program in recent weeks or 
months, they have been informed by the local bank that the bank 
has not yet developed a process or pricing strategy for 
handling electronic tax transfers for business customers. Thus, 
to the extent smaller firms are considering the ACH credit 
method, many of these firms still don't know what it will cost 
and how it would work in detail.
    3. The Loss of Bank Customers to NationsBank or First 
National Bank of Chicago. There is a fear among local community 
banks that they will lose depository accounts to NationsBank or 
First National Bank of Chicago because of the way the EFTPS 
program is structured. These banks believe that the program 
inherently favors the ACH debit method. While the ACH debit 
method has been setup as a ``free'' service to users, smaller 
banks are concerned that they may need to charge customers for 
use of the ACH credit method in order to cover operating costs. 
These small banks are concerned that small businesses using the 
``free'' debit method will decide to move their depository 
accounts to either NationsBank or First National Bank of 
Chicago. We have not seen studies on this problem but we would 
urge Congress to examine the issue in more detail. Historically 
the local community bank has served as the lifeblood for many 
small businesses in terms of financing business growth and 
expansion. This historical financing link for small business 
should not be deliberately--or inadvertently--severed.

                   Making the EFTPS System Voluntary

    The IRS has ``advertised'' the EFTPS program as ``a fast, 
easy and convenient way to initiate federal tax deposits 
electronically with a telephone call or through a personal 
computer.'' The Service also claims that ``EFTPS means no more 
paper Federal Tax Deposit coupons, checks or trips to the 
bank.'' Both of these claims on the part of the government are 
very positive and worthy as objectives.
    But based on our observations about the EFTPS program, the 
NASE strongly supports making EFTPS a voluntary program for 
small business. We believe that tax payment decisions should be 
left in the hands of the business community, as opposed to 
being decisions made in Washington. A voluntary system would 
permit a small business to decide for itself whether it wants 
to continue utilizing the traditional paper coupon method for 
making payroll tax deposits with the government. Many business 
owners are telling us that they want the sense of security that 
they get with having their tax records on paper. Also, a 
voluntary system would provide the federal government with the 
opportunity to test the EFTPS program without resorting to tax 
penalties to mandate compliance by the small business 
community. For these reasons, the NASE commends Congressman Doc 
Hastings for introducing H.R. 4251, legislation to make EFTPS a 
voluntary program.

                             Tax Penalties

    As noted above, it appears that the vast majority of 
businesses described as ``enrolled'' in EFTPS are not actually 
using the system. Therefore, the NASE fears that the IRS will 
use the traditional compliance weapon--tax penalties--to make 
the EFTPS program work beginning on July 1, 1997. But, tax 
penalties will not make a poorly designed system work. Small 
businesses are already weary of EFTPS. Forcing them into it, 
particularly if EFTPS fails to meet expectations, will only 
intensify public skepticism and opposition.
    The NASE also believes that use of the EFTPS program over 
the coming months is likely to be fraught with inadvertent acts 
and mistakes. Therefore, the NASE strongly recommends that the 
House Ways and Means Committee take steps to alleviate the 
threat of tax penalties under the EFTPS program.
      

                                

    Chairman Johnson. Thank you, Mr. Thayer.
    Mr. Mason.

  STATEMENT OF RANDY MASON, GENERAL MANAGER, MASON MECHANICAL 
LABORATORIES, INC., SALEM, VIRGINIA; ON BEHALF OF THE NATIONAL 
               FEDERATION OF INDEPENDENT BUSINESS

    Mr. Mason. Thank you, Madam Chairwoman.
    I would like to thank, Madam Chairwoman and the 
Subcommittee for allowing me the opportunity to represent 
myself and my small business, as well as the National 
Federation of Independent Business membership which is about 
600,000 small businesses.
    It is a rare opportunity for a small business man to get an 
opportunity to come and speak before the House and I have been 
very concerned about this issue ever since I first heard about 
it. I also was very troubled by the letter that I received 
informing us of it, by the wording of the letter and the fact 
that it was a mandate and it was basically saying you have to 
do this, in addition to the fact that it is mandated.
    As a small business, we see mandates every day from the 
State, Federal and local levels and we are constantly having to 
change things in order to meet these mandates. And, as small 
business men, we have a lot to do other than changing things to 
suit the government's needs and the government's requirements 
and, in some cases, the government's experiments in new ways to 
do things.
    In addition to the fact that we are just against being 
mandated, we are looking to have a voluntary method. I have no 
problem with the EFTPS as a voluntary method but as a mandate 
it is a big problem to us.
    Second, the cost to small business, I believe, is 
considerably more than was anticipated by Congress when this 
was passed by the IRS. In talking to my bank, there are two 
options that we could choose under the ACH credit method which 
is what I would prefer to go with because I do not want to deal 
with sending in our bank account numbers and everything and 
dealing directly with the IRS and that method.
    So, I, looking at the other two options, the cost would be 
anywhere from $120 a year in fees up to $600 per year in fees. 
And even at the lowest option for our business that amounts to 
$144 million a year, for the 1.2 million businesses that will 
be forced, if they pay just the smallest amount involved here.
    Another thing that really bothers me is the lack of written 
documentation, the receipts. As it stands right now, when we 
deposit our payroll taxes we take our check and our payroll 
coupon to the bank at the same time we take our normal 
deposits, so there is no additional time involved in going 
there. At the time we do that, we receive a receipt immediately 
as we have sent the check in. We also get the canceled check 
back as a receipt and the receipt we get from the bank gives us 
the date and time of deposit so we have proof immediately. We 
can file and not have to worry about it any more.
    With the methods that we will be dealing with, with the ACH 
credit, when we do the telephone transaction we will, they say, 
give us a number, a code that we can put down as an 
authorization code. In some cases, as a businessman, I will 
admit that we make mistakes sometimes. What if I write that 
code down wrong somehow? What if I get a number wrong and then 
I try to go back and correct it if there is a problem?
    Without us having written documentation, and having that 
number on a written piece of paper, I have no way of proving 
that I had the right number or getting the right number.
    Also, in talking to my bank I found that when we do the 
cheaper method that is $120 a year in fees, we are not dealing 
directly with our bank, I am dealing with a third-party 
processor that is in Cape Coral, Florida. I am in Virginia, 
Salem, Virginia. So, that is quite a bit of distance between me 
and them. They, then, will take the entries off the telephone 
and process it, send it back across the phone lines later that 
day to my local bank to make the transactions. I do not like 
the idea of being so far separated from the people that I am 
used to doing banking with. We've banked with the same bank for 
about 19 years.
    Also, something that bothers me is the fact that this seems 
to go against an existing law in the fact that U.S. currency is 
legally able to be used to pay taxes. In a letter that my 
Congressman got from the IRS, it said that once you are 
mandated to do this, you can no longer use U.S. currency to pay 
this tax because there is no way to take it and deposit it at 
the bank. And that seems to go against the existing law. And a 
lot of people overlook that and say it is no big deal since we 
are all going electronic but that bothers me a lot.
    Also, there was not enough review done before this was made 
into law or made a regulation. The IRS said in their statements 
that this was not a significant regulatory action and, yet, 
there are two definitions of that. One is anything over $100 
million a year has an effect on the economy, which is just the 
cheapest fees to the banks by small business, makes it more 
than that.
    And also, any novel legal issue or novel legal problem is 
another thing and the fact that you cannot use cash to pay your 
taxes or U.S. currency to pay your taxes seems to be that novel 
legal issue there.
    In conclusion, I would like to ask that Congress would 
change this to make it totally voluntary at all levels, because 
in this country we are used to having the choice and the 
freedom to do things. I think it is ironic that this is part of 
a North American Free Trade Agreement and we are changing 
regulations and lowering fees in tariffs and all but yet, we 
are putting regulations and putting fees on small businesses in 
America which are the backbone of our country.
    Thank you very much.
    [The prepared statement follows:]

Statement of Randy Mason, General Manager, Mason Mechanical 
Laboratories, Inc., Salem, Virginia; on Behalf of the National 
Federation of Independent Business

    Dear Committee Members,
    Thank you for the opportunity to voice the concerns of 
myself and many other small business owners across America. My 
name is Randy Mason. I am part owner and general manager of 
Mason Mechanical Laboratories Inc.; a small, family owned 
business in Salem, Virginia. I first heard of Electronic 
Federal Tax Payment System (EFTPS) on June 10, 1996. My 
bookkeeper showed me a copy of IRS publication 1693 (rev. 5-96) 
with an article entitled ``ELECTRONIC FEDERAL TAX PAYMENTS--
IT'S THE LAW.'' My bookkeeper informed me that we would fall 
under this mandate beginning January 1, 1997.
    As a small business owner, I have seen many regulations 
from both federal and state levels which affect our business. 
In the past I have done what most small business owners do, 
complain and comply. This time I decided to take a stand 
against what I feel is an unnecessary, unwise and burdensome 
mandate on small businesses in America. We are here today 
because many other small business owners feel this way and have 
spoken out against EFTPS. Following are the major concerns I 
have with EFTPS.
    1. Small business owners are being constantly subjected to 
new regulations from federal, state, and local governments. 
Often these new regulations are accompanied by letters composed 
by bureaucrats, who may have never owned or run a business, 
informing us that these new regulations will make our jobs 
easier, make our businesses run smoother, and cost us less. In 
reality most regulations imposed on small businesses make our 
jobs harder, interfere with our ordinary course of business, 
and definitely cost us more. The IRS issued a legislative fact 
sheet #96-14 (July 29, 1996) stating that ``TAXLINK customer 
surveys show that small businesses are strongly in favor of 
TAXLINK.'' If this were true, no mandate would be needed. The 
fact is, we are not in favor of EFTPS, nor any mandate imposing 
EFTPS on us.
    Small businesses have been forced to act as tax collection 
agencies for the federal government since the Current Tax 
Payment Act of 1943. For 53 years we have done this with no 
compensation for the time required to calculate the 
withholding, FICA, etc. It is time for the federal government 
to concentrate on making itself more efficient, and stop 
forcing experiments on small business.
    2. The cost to small businesses will be considerably more 
than the members of congress realized when they passed this 
bill (H.R. 3450). According to CRS report for congress 96-703 E 
(August 8, 1996); ``The Joint Commission on Taxation estimated 
that the provision (Electronics Fund Transfer) would increase 
revenues by $3.3 billion over the 5 years, 1994-1998.'' As I 
understand it, these revenues would be the interest gained as a 
result of the funds being transferred earlier out of the 
business accounts and banks, and into the treasury accounts. If 
the federal government is gaining $3.3 billion, then it would 
be reasonable to assume that private business is losing $3.3 
billion.
    In addition to these losses, banks will be charging a 
transaction fee to make the electronic transfers. My bank has 
informed me of two options. The least expensive option would 
cost our business approximately $120.00 per year in fees. The 
more expensive option would cost our business approximately 
$600.00 per year in fees. If each of the 1.2 million small 
businesses being affected this year pay only the lesser fee, 
this would amount to an annual cost of $144 million.
    3. With the EFTPS there is no immediate written proof of 
payment issued to the business. Under the current coupon 
system, we take our federal tax deposits to the bank at the 
same time we take our regular account deposits. When we make 
those deposits, we receive an immediate receipt with the date 
and time of deposit, which we keep as proof of timely payment. 
If the IRS has any question about our timely payments, they 
will require proof.
    4. I am concerned with future changes that may occur if the 
EFTPS is fully implemented. Even though there is no direct 
access to business accounts in the ACH credit option under the 
current regulations; once the system is in place, what is to 
keep a future congress from deciding that they could raise an 
additional $3.3 billion in revenues by directly accessing 
business accounts and allowing the IRS to initiate the 
transfers. This may seem outrageous now, but in another 10 
years or in a time of fiscal crisis, there will be a strong 
temptation to move in that direction. We have an historical 
model of taxation and collection of taxation in this country 
dating from the sixteenth amendment in 1913 which would 
certainly point in that direction.
    5. There is a law (31 USC Sec. 5103) which states ``United 
States coins and currency (including federal reserve notes and 
circulating notes of federal reserve banks and national banks) 
are legal tender for all debts, public charges, taxes, and 
dues.'' According to a letter sent to my congressman, Mr. 
Goodlatte, from the IRS (Feb. 21, 1997); the IRS states ``once 
a taxpayer is required to pay electronically, cash will no 
longer be an acceptable form of payment for tax deposit 
payments.'' This raises a novel legal issue, and also raises a 
lot of questions.
    A. Can the federal government choose for whom currency will 
be legal tender and for whom it will not?
    B. Can the federal government make currency legal tender 
for all transactions except taxes?
    C. Will the federal government in order to bring these two 
laws into agreement:
    i. Repeal mandatory EFTPS?
    ii. Remove legal tender status of U.S. currency?
    6. The Department of the Treasury states: [federal 
register: September 30,1996 (volume 61, number 190, page 
51180)] ``the regulations are not a significant regulatory 
action as defined in Executive Order 12866. Accordingly a 
regulatory assessment is not required. It is hereby certified 
that this revision will not have a significant economic impact 
on a substantial number of small entities. Therefore a 
regulatory flexibility analysis is not required''
    However, Executive Order 12866 states: `` `significant 
regulatory action' means any regulatory action that is likely 
to result in a rule that may:
    (1) Have an annual effect on the economy of $100 million or 
more or adversely affect in a material way the economy, a 
sector of the economy, productivity, competition, jobs, the 
environment, public health or safety, or state, local, or 
tribal governments or communities;
    (2) Create a serious inconsistency or otherwise interfere 
with an action taken or planned by another agency;
    (3) Materially alter the budgetary impact of entitlements, 
grants, user fees, or loan programs or the rights and 
obligations of recipients thereof; or
    (4) Raise novel legal or policy issues arising out of legal 
mandates, the presidents priorities, or the principles set 
forth in this Executive Order.''
    This regulation (mandatory EFTPS) definitely falls under 
the definition of a ``significant regulatory action'' according 
to definitions (1) and (4). Yet the IRS chose to ignore the 
impact that this regulation would have. These regulations and 
many others should be much more carefully reviewed, not only by 
the agencies that write them, but also by the people who will 
be affected by them.
    In conclusion: H.R. 3450 was introduced in the house 
November 4, 1993 and passed on November 17, 1993. Two weeks 
seems much too short a time for a massive bill with so many 
questionable provisions among which is mandatory EFTPS. 
Congress needs to correct this mistake by making EFTPS 
voluntary at every level of business. H.R. 722 is a step in 
that direction. In ten weeks over a million small business 
owners will be forced to comply with EFTPS if congress doesn't 
act quickly. If two weeks was long enough to get H.R. 3450 
through, then ten weeks should be more than enough time to pass 
H.R. 722.
      

                                

    Chairman Johnson. Thank you very much, Mr. Mason.
    Mr. Harris.

   STATEMENT OF ROGER N. HARRIS, PRESIDENT, PADGETT BUSINESS 
                   SERVICES, ATHENS, GEORGIA

    Mr. Harris. Thank you very much, Madam Chairman and the 
Subcommittee, it is a pleasure to be here today. I think to 
better understand my comments, I would like to give you a 
little background on Padgett Business Services, what we do, and 
our relationship with small business.
    For the past 30 years, we have been providing accounting 
and tax services to small business. Our definition of a small 
business is one with fewer than 20 employees. So, I think we 
are talking about the people who are going to be affected by 
any change to EFTPS.
    We are very much involved in administering with those 
clients the current paper system of paying taxes. Another part 
of our service is two monthly visits from one of our 
representatives to each of our small business clients.
    Therefore, in addition to preparing reports and statements 
for small business, we also have the opportunity to talk to 
them, discuss with them issues and deal with their concerns. It 
is from that experience that I make my comments with regard to 
EFTPS.
    I think what we have in EFTPS is a very good system that 
was miscommunicated and is misunderstood. When we have taken 
the time to inform our small business clients of the truth 
about the system, we have found EFTPS to be something that they 
are no longer concerned about and many of them have, in fact, 
chosen to enroll early.
    Now, I would like to share with you how we went about 
explaining EFTPS to our small business clients because I think 
it brought out some of the questions that small business has 
about EFTPS. As soon as EFTPS was made public we began, through 
a monthly newsletter that we furnished our clients, giving them 
information about start dates and when they were going to be 
faced with this requirement. We were fortunate this past 
November to have Lilly McCracken from the IRS speak to our 
office owners, deal with their concerns about EFTPS to enable 
them to then go out and deal with our small business clients' 
concerns.
    We then took it upon ourselves to listen to their questions 
and give them the answers that they needed. We found they had 
some very basic questions.
    Number one, will I have to change banks? The answer, of 
course, is, no, but as long as they believe that they may be 
forced to change banks they will not be in favor of this 
system.
    There was a tremendous amount of concern about whether or 
not the IRS would have access to their bank account. Again, the 
answer is, no, but that concern must be addressed and it must 
be addressed in plain english and it must be communicated in a 
way that alleviates any doubts that they are furnishing 
information to the Internal Revenue Service that those 
businesses do not want them to have.
    And finally, is there any new equipment needed? In other 
words, is it going to cost me any money? Here, again, we were 
able to tell them that as long as they have a telephone they 
can comply with the EFTPS. That is all it is going to take.
    Unfortunately, the information that was sent out by the 
IRS, and you have already discussed much of that, answered some 
of those questions but not in a language that I think small 
business is accustomed to reading and understanding.
    ACH debit and ACH credit means nothing to small business 
owners. My bank or another bank means something. And we have to 
communicate to them that is really the choice between ACH debit 
and ACH credit. Do you wish to deal with your local bank if 
they subscribe or do you wish to deal with one of the Treasury 
agents?
    And then, of course, the fees that are going to be charged. 
I think there is a concern. Most people prefer to deal with 
their local banks. There is no question about that. But if it 
is going to cost more I think that they are going to feel 
pressured to move to the two Treasury agents. But, again, when 
you ask them, Is it easier to take a coupon to the bank with a 
check than to pick up the phone and call a toll-free number, 
given the proper assurances that their checking account is 
secure, that they are not going to have to open accounts, they 
will say, Yes, that is better.
    And I think all the people in small business understand 
that we get very busy at times and to remember to go to the 
bank on the 15th of the month or the 30th of the month can 
sometimes be difficult. To be able to pick up a telephone on 
any day of the month and warehouse a payment for a future 
payment date is an extremely important feature.
    Finally, I would like to say that Padgett Business Services 
is a small business, itself. We employ 27 people. We enrolled 
in EFTPS January 1 of this year. We have not had one problem 
with the system. And we are very much encouraged by it and 
would continue to use it no matter what the Subcommittee 
decides.
    I think you do have to make some changes to go forward with 
small business' blessings. You have to insist that the 
communications improve. I think at a minimum, you should assure 
small business that for no less than two quarters after they 
are required to start using EFTPS that they cannot be assessed 
any penalties for the time that they are attempting to learn 
this new system. As long as they have made an honest attempt 
and at the end of that 6-month period, have in fact, enrolled 
and are paying their taxes under EFTPS that they will never 
receive a bill for any penalties that they may have accrued 
prior to that time.
    I think you have to give them time to get used to EFTPS, 
and you have to inform them better and when those things are 
done, I think that they will find it a better system than the 
paper system that we now have.
    I thank the Subcommittee again for this opportunity to 
testify and look forward to any questions that you may have.
    [The prepared statement follows:]

Statement of Roger N. Harris, President, Padgett Business Services, 
Athens, Georgia

    Good afternoon Chairman Johnson and members of the 
committee. My name is Roger Harris, President of Padgett 
Business Services and I am pleased to have the opportunity to 
speak to you today. To help the committee better understand my 
comments, I should give you some background information about 
myself and Padgett Business Services.
    Padgett Business Services has been in business for over 
thirty years providing accounting and tax services to small 
business owners. Currently, we have 292 franchised offices in 
the United States. We estimate that we represent over 20,000 
small business owners. Our definition of a small business is 
one that employs less than 20 people. Businesses with less than 
20 employees represent 85% of all businesses in the United 
States. Our service includes monthly preparation of financial 
statements, income tax preparation, state and local tax 
reports, and, finally, we prepare all federal payroll tax forms 
and reports for our clients. Our service also includes two 
visits each month by our accountant to each small business 
owner. These visits allow us to talk to business owners about 
their business and to know how they feel about issues that will 
effect them.
    As I mentioned, I am President of Padgett Business 
Services. I became President in 1992 and, prior to that, I was 
a Padgett franchisee. From 1972 to 1992, I was one of those 
people who provided accounting and tax services to the small 
business owners we serve. Since becoming President I have 
assumed many other roles, but have continued to provide 
services to a limited number of small businesses. This keeps me 
in touch with small business and the rules and regulations they 
must comply with. I am an Enrolled Agent, Accredited Tax 
Advisor, Accredited Tax Preparer, and a member of the Federal 
Tax Committee of the National Society of Accountants.
    I think the service we provide, the regular contacts we 
have with small business owners, and our years of experience 
gives us the ability to assist the committee as you look at the 
Electronic Federal Tax Payment System.
    On July 1, 1997 more than one million business will be 
required to start paying their taxes through EFTPS. As the July 
1 start date draws near we are hearing that this system may not 
be good for small business. There are suggestions to either 
make the program voluntary or to raise the threshold that 
requires participation in the program. We believe that most of 
the people who oppose this new payment system have not had it 
properly explained to them. We have all heard the myths that 
exist about EFTPS. We must not allow misinformation about the 
system to kill a system that will save the federal government a 
tremendous amount of money and make it easer on small 
businesses to pay their taxes.
    Today I would like to share with you how our company is 
dealing with EFTPS and our clients' reaction to the system.
    When we became aware of EFTPS, we began to inform our 
clients about the system in the tax newsletter we give them 
each month. In November of 1996, we had Lillie McCracken of the 
IRS make a presentation to our franchisees at our annual tax 
conference. Ms. McCracken did a wonderful job of explaining the 
program, and she answered all of the questions we had and the 
questions our clients would have about EFTPS. With this 
information, we were able to go out and explain to our clients 
as we met with them each month what EFTPS would mean to them 
and when they would be required to start paying their taxes 
electronically. We found that when our clients had all of the 
information they needed, they liked the program and, in fact, 
many elected to enroll before they were required to do so. 
Those clients who are now using EFTPS like the program and see 
it as an improvement over the current paper system. We have 
also changed our software to produce a report that gives every 
one of our clients all of the information they will need to 
transmit the required payment. What all of this tells me is 
that when EFTPS is properly explained, small business will 
comply and see it as a change for the better. I believe that 
the problems with EFTPS are not with the program itself, but 
with the communication of the program.
    Today, many small businesses still do not know that such a 
program exists or that they must comply in the near future. 
This is because many small business owners do not read or 
understand all of the mail they receive from the IRS. This 
problem is not unique to EFTPS. I think we can all Roger Harris 
Padgett Business Services agree that the Internal Revenue 
Service needs to continue to improve their communications with 
taxpayers, and I know they are working on this issue. The IRS 
should work with taxpayers, practitioners, and other outside 
stakeholders to quickly come up with a way to inform businesses 
that will be covered in 1998 and beyond about the new system 
and how to enroll in the system.
    In this communication, I would ask that they look for terms 
that are more understandable than ACH Debit and ACH Credit. ACH 
Debit and ACH Credit are terms that have no meaning to small 
business owners. The real question that the business owners 
need answered is, do they use their bank or the financial 
institutions contracted by the Department of Treasury? 
Remember, you are trying to communicate a new service. What 
about this service helps the small business owner? Be sure to 
answer the question, ``What's in it for me?'' Small businesses 
do not like to be told by the Internal Revenue Service that 
they are required to make changes in their way of keeping 
records and paying their taxes without being shown why this 
change is good for them and the country.
    Also, the booklet that was mailed to small business owners 
had too much information in it. How can a simple system require 
a thirty page book to explain? The booklet tried to answer all 
the questions, instead of the important questions. Additional 
information, such as software information, should have been 
made available to those who needed it rather than everyone.
    I am sure it is no surprise to this committee that most 
small business owners do not consider the IRS their friend. 
Because of the way small business views the IRS, the IRS must 
use all of their public relations skills to properly 
communicate this new program. Effective communication of this 
program means answering some basic questions about EFTPS in a 
way everyone will understand.
    Let's look at the basic questions small business has about 
EFTPS:
    ``Will the IRS have access to a small business owners 
checking account after they enroll in EFTPS?''
    We all know that the answer is no, but that is always the 
first question we are asked by our clients when we discuss 
EFTPS with them. As long as this issue is in the minds of small 
business owners, they will oppose this system. All future 
correspondence with taxpayers must address this issue quickly 
and in a way that will leave no doubt in taxpayers' minds that 
the IRS cannot take money from their checking account without 
their awareness and without proper authority to do so. The 
assurances of this committee would be helpful in this area.
    ``Will I have to change banks?''
    Again, we all know the answer to this question is no. It 
must be made clear that, as long as their local banks 
participate in this program, the program will not require a 
change in banks. Also, taxpayers should be made aware that 
Nationsbank or First National Bank of Chicago can be used, for 
this program, without an account at those banks. The Service 
must also address the issue of bank fees charged to 
participating businesses. This program cannot cost more to 
comply with if you want the support of the business community. 
It must not require unwanted changes such as opening new bank 
accounts. Again, we know this is not the case, but small 
business is not convinced.
    ``What new equipment will I need?''
    Here again, we know the answer is none, beyond a touch tone 
telephone. This must be made very clear to the people who must 
use EFTPS. They do not want to pay more to pay their taxes 
electronically.
    I know these questions have been addressed in the IRS 
mailings. I can tell you, however, that the questions still 
remain. They must be addressed again and they must be addressed 
in a way that leaves no doubt in business owners minds as to 
what the answers are. I can not stress enough that this must be 
done directly and in a way that is easy to understand.
    I would also like to comment on EFTPS from a practitioners 
standpoint. For years we have computed the tax liability for 
our clients, properly filled out tax deposit coupon, taken that 
coupon to our client, and then had them write a check and take 
it to their bank before the due date. This was a very time 
consuming process and one that could cause mistakes. Now, with 
EFTPS, our software will not only compute the liability but, as 
I mentioned before, produce the form needed for our client. The 
form can then either be taken to our client on our next 
scheduled visit or faxed immediately. The client only needs to 
pick up the telephone and follow the instructions and their tax 
will be paid. They will even be able to call at their 
convenience and instruct the bank to make the payment at a 
future date before the deadline. We too often hear stories of 
business owners rushing to the bank late in the afternoon to 
meet a deadline. This feature alone answers the question 
``What's in it for me?'' Finally, the business owner will 
receive confirmation of payment for their records.
    This system is not only much more efficient, but greatly 
reduces the chance of mistakes. Also, under EFTPS, 
practitioners can transmit payments on behalf of their clients. 
For liability reasons, we have decided not to transmit for our 
clients, but I know some practitioners will like that feature. 
I am aware, however, that some practitioners still oppose 
EFTPS. I can only speculate about the reasons. Some will oppose 
the program because it represents change, others because it is 
an IRS program, and still others because it is simpler and they 
feel it could cause their clients to question the need for an 
accountant. Padgett Business Services does not agree with any 
of these reasons to oppose EFTPS.
    This committee is faced with making a decision on what to 
do with EFTPS quickly because millions of small businesses will 
be faced with the new system in a matter of weeks. Shortly 
after that, millions more will also need to enroll. I believe 
that too much has been invested in EFTPS to allow it to become 
a voluntary program. My experience tells me that any program 
offered on a voluntary basis by the Internal Revenue Service 
will not be successful. That would be an unfortunate result, 
because I feel this is a good program and, once put in place, 
will be well received by most small business owners. In 
addition, if this program is not successful, the Federal 
government will have wasted a great deal of time and money.
    What then is a reasonable solution to the problem of a good 
program that, due to lack of information, has strong opposition 
in the small business community?
    First, examine all information mailed to small businesses 
about EFTPS and make sure it answers all of their questions. 
Make sure all mailings explain why it is good for small 
business owners, not just that it is required. Do not mail 
information on EFTPS with any other IRS forms or notices. 
Inserts in routine mailings tend not to get noticed. Each of 
these mailings must address the three concerns we have 
discussed.
    Second, stick to the stated start dates. Business owners 
who make an honest attempt to enroll and comply with EFTPS, 
however, should be excused from any penalties for the first two 
quarters of enrollment. This should give all taxpayers time to 
learn how the system works without fear of penalty.
    Another suggestion would be for the IRS to make a concerted 
effort to update practitioners, as well as local banks, on how 
the program works. Every time a small business owner talks to 
an accountant or a banker who does not appear to understand the 
program, it gives the small business owner a reason to be 
concerned. We have heard from many clients that when they call 
their bank to ask about EFTPS, they cannot find anyone to help 
them or answer their questions. Staff members in your offices 
and other Congress members' offices are probably receiving many 
calls from small business owners as well. I would hope they 
have been furnished enough information to answer small business 
owners basic questions about EFTPS.
    Padgett Business Services began using EFTPS in January of 
1997. We have had no problems at all with the program, and it 
is now just as much a part of our routine as the old paper 
system once was. I am certain other businesses will feel the 
same way once they have used EFTPS.
    As taxpayers, we are all quick to criticize the IRS when 
they do something we do not like or understand. In the case of 
EFTPS, the IRS has come up with a program that will work if 
allowed to do so. We should work to answer small business 
owners questions rather than effectively killing the program, 
which voluntary participation will do.
    Electronic-based information is the future. To ignore this 
or to consider it too difficult, is not the way to achieve an 
efficient government, which everyone will agree is a primary 
concern for taxpayers. While this system may not be perfect, it 
is a step in the right direction. I hope this committee will 
agree that EFTPS must go forward. While we may make changes in 
the future, a delay in the start date or a rise in the 
threshold could signal the end of EFTPS.
    I hope my comments have been helpful to the committee 
today. I thank you for your interest and hope you will feel 
free to contact me at any time if I may be of any further 
assistance to you.
      

                                

    Chairman Johnson. Thank you, Mr. Harris, for sharing your 
experience, both as a user and as a manager and educator of 
others.
    Gene Cole from Yakima, Washington. I have been corrected.

STATEMENT OF T. GENE COLE, BOOKKEEPER, AGRIMANAGEMENT, YAKIMA, 
                           WASHINGTON

    Mr. Cole. Thank you, Mrs. Chairman.
    I appreciate the opportunity to testify before you today. 
Currently I am employed as a bookkeeper for Agrimanagement 
which is an agricultural consulting firm in central Washington. 
Our current payroll tax load is about $65,000.
    I am here today to express the concerns and problems that I 
have had with the Electronic Federal Tax Payment System. When I 
first received the notice that Agrimanagement had to comply 
with the EFTPS I wondered what that had to do with NAFTA and 
why the new procedure was necessary?
    The repeated use of words like mandated, you must, and you 
will be required, concerned me deeply. But because we were 
required to do this I started with the enrollment process.
    I believe the fear of IRS involvement could be why there is 
some silence in terms of the response and the feelings toward 
this mandated procedure.
    It has been a real headache trying to comply with this 
EFTPS mandated system. We began the implementation procedure in 
August 1996. About 1 month later EFTPS sent us a letter saying 
that the routing number that the bank, with which we deal in 
Yakima, had given me was incorrect.
    I went over to the bank and showed them the letter and 
asked for the valid number. A different number was given and 
sent into EFTPS. In November we received another letter saying 
that this routing number was also incorrect.
    I asked our bank what was going on? You would think that a 
mandated tax deposit procedure would be well planned and 
understood by the banks before putting this procedure into 
effect.
    The bank people insisted that the number they had given me 
was correct. So, I then called the EFTPS phone number and asked 
them what number I should be using. They said they could not 
give me that information, that only our bank could.
    After several calls I was told to contact the Federal 
Reserve bank that our bank dealt with. One of the tellers at 
our bank said it was in Seattle but that she could not give me 
the phone number. So, I got the information from the operator 
in Seattle.
    I spoke with a representative of the Federal Reserve bank 
in Seattle who was very disturbed that I was requesting that 
information from her and that I even know where to call.
    She kept me online and called EFTPS and spoke with someone 
in Illinois who called a representative of our bank in Pasco to 
find out why they did not have the right routing number.
    The representative from Pasco then assured me that they 
would notify the Yakima branch of the correct routing number. I 
called our bank later that week and they still did not have the 
right number. The same bank representative I spoke with from 
Pasco, the week before, said I did not need this number if I 
was using the credit method anyway.
    However, she recommended using the debit method due to the 
liability placed upon the bank to get the tax payment deposited 
with the IRS Agency. If we chose the debit option, she 
recommended that we open a separate bank account for our 
payroll tax deposits and have the EFTPS pull the money from 
that account, this would keep them out of our normal business 
checking account.
    Another point she made was that they believed that the 
credit method would only be temporary, eventually the debit 
method would be the only option available.
    For all the effort to assure us that no one would be able 
to have access to our bank accounts, I thought it was 
interesting that the bank recommended opening a different 
account than our normal business account. It is also 
interesting that the bank does not want the hassle of being 
held liable if people choose the credit method and that they 
believe the IRS will eliminate the choice of a credit method 
anyway.
    As it stands now, Agrimanagement has yet to be enrolled 
with the EFTPS. I am currently in the process of changing our 
bank and hope that I do not have to go through this procedure 
again. This detailed account of our expense, time, resource and 
mental well-being has surely been felt by thousands of 
businesses elsewhere. I guess we just dislike any further 
attempt by the government to put its hands into our pockets. I 
furnish this long detail to help you fortify your efforts for 
making the system voluntary for small businesses.
    Thank you again for this opportunity to testify before the 
Subcommittee.
    Chairman Johnson. Thank you, Mr. Cole.
    Ms. Akin.

 STATEMENT OF JUDY AKIN, ENROLLED AGENT; ON BEHALF OF NATIONAL 
                 ASSOCIATION OF ENROLLED AGENTS

    Ms. Akin. Thank you, Madam Chair, Members of the 
Subcommittee, distinguished guests, I am an enrolled agent 
engaged in private practice in Oklahoma City. I have been in 
private practice specializing in individual and small business 
clients for 23 years. I am very pleased to have this 
opportunity to present testimony about EFTPS on behalf of more 
than 9,000 members of the National Association of Enrolled 
Agents.
    I, personally, have 14 clients using the EFTPS and my own 
business, as well. In December, NAEA conducted a survey of its 
online members which represents about 25 percent of our 
membership, requesting their experiences with the EFTPS. Again, 
in March, I requested an additional survey on the EFTPS with 
questions asking: How was it going in your area? Any particular 
problems or concerns? Are there any questions that you would 
like for me to share with my committee?
    We received 167 responses from throughout the country. This 
is twice as many as those who responded to the first survey. 
Many of our respondents who did have clients mandated to come 
under EFTPS in July have referred their clients to payroll 
services. For other members, IRS outreach programs have 
provided the education necessary. We are working with the IRS 
through State affiliates and local chapters to get the word out 
to the small business community.
    Many of the December respondents indicated that there was 
confusion about the system which may be attributed to 
practitioners and clients just beginning to really focus on the 
EFTPS requirements. At that time, enrollment forms were not 
readily available. Also, the tone of the first letter was 
considered hostile and offputting.
    However, other EFTPS documents, notably the question and 
answer booklet, were praised for clarity and general 
helpfulness. There were still requests for a plain English 
version for the taxpayers and NAEA members observed most 
taxpayers do a mental shutdown as soon as they hear a debit or 
credit method.
    Many of our members indicated that clients fear the IRS 
reaching into their bank accounts and taking money, a fear 
which still must be overcome.
    Earlier there were reports of major problems with phone 
lines used by the banks handling the EFTPS contracts. That 
problem seems to have been resolved by the time of the March 
survey.
    Other problems concern liability of local banks to handle 
EFTPS. Typical was the comment, ``When I went to the bank the 
tellers at the window did not know anything about the program. 
IRS should encourage the bank to fill their tellers in on what 
is going on.''
    One EA wrote, ``The biggest problem is the bank's inability 
to tell us how they will do it and what costs there are, if 
any.'' Unfortunately, problems with the local banks were still 
evident in the March survey and they, perhaps, have contributed 
to the unwillingness of some taxpayers to enroll in EFTPS.
    ``EFTPS works OK, banks are not very cooperative. We have 
had our first catastrophe with EFTPS. Signed up all the clients 
as ACH debit depositors so they would get confirmation numbers 
when completed. It turned out that one of the banks in the area 
had communication errors with EFTPS and none of the clients' 
deposits were made.
    ``We do not know what position the Service will take about 
the deposits being made now with the coupon except that we do 
have acknowledgment numbers and penalties should be abated 
under reasonable cause.''
    From the surveys, we have learned that some States have 
already adopted a similar system to EFTPS and it is working 
very well.
    There were also many concerns about the impact that EFTPS 
could have on the small business community. A central 
California EA wrote, ``Will life continue to get more complex 
for our small business clients? The dollar amounts are way too 
low.''
    On the other hand, many practitioners are willing to 
utilize the system and have positive comments. A later March 
survey confirmed this.
    However, there are suggestions for improvement. A number of 
our members offered many ways to improve the system, making the 
enrollment application easier, and so forth. From the comments 
from our members it is clear that there is a need for greater 
educational outreach to alleviate uncertainty and fear, 
particularly the fear that the IRS is going to invade the 
taxpayer's bank account.
    In many areas of the country local banks may simply not be 
ready to deal with the situation. Penalties are one area that 
seems to be of concern to a broad consensus of NAEA members. 
IRS needs to be sensitive to the taxpayers. As the comments of 
our members indicate, there may be a way in which well-
intentioned taxpayers who might have a problem with the system 
should not be penalized.
    NAEA strongly believes that a taxpayer who retains a 
professional advisor, a competent payroll staff, or uses a 
reputable payroll service company has demonstrated an intent to 
comply with the law. This should be reasonable cause, in 
itself, for abatement of the penalties. We would envision that 
this would constitute a good taxpayer threshold.
    Thank you.
    [The prepared statement follows:]

Statement of Judy Akin, Enrolled Agent; on Behalf of National 
Association of Enrolled Agents

    Madame Chair Johnson, Members of the Subcommittee, 
distinguished guests, my name is Judy Akin and I am an Enrolled 
Agent engaged in private practice in Oklahoma City, Oklahoma. I 
have been in private practice specializing in individual and 
small business clients for 23 years. I serve on the NAEA Board 
of Directors and chair the Affiliates-IRS Subcommittee for the 
Government Relations Committee. I am also a member of IRPAC, 
the Information Reporting Program Advisory Committee, at IRS.
    I am very pleased to have this opportunity to present 
testimony about the Electronic Federal Tax Payment System or 
EFTPS on behalf of the more than 9,000 Members of the National 
Association of Enrolled Agents. Personally, I have 14 clients 
using EFTPS and have signed up my own business as well.
    Under House rules, I am required to advise you that the 
National Association of Enrolled Agents receives no federal 
grants or contracts.
    Enrolled Agents are licensed by Treasury to represent 
taxpayers before the Internal Revenue Service. Enrolled Agents 
were created by legislation signed into law by President 
Chester Arthur in 1884 to remedy problems arising from claims 
brought to the Treasury after the Civil War. We represent 
taxpayers at all administrative levels of the IRS. Since we 
collectively work with more than 4 million taxpayers and small 
businesses each year, Enrolled Agents can fairly be said to be 
at the front-lines of tax administration.

            Results of December 1996 and March 1997 Surveys

    NAEA has conducted two surveys of its online Members--about 
one quarter of our membership--to gauge their experience with 
EFTPS. The first survey was conducted in early December 1996 
and a second was done about a month ago. The responses came 
overwhelmingly from rank and file Members. They truly reflect 
the views of those tax practitioners out in the hinterlands, 
well beyond the Beltway.
    In the first survey, we received 85 responses to the 
following questions: Have you reviewed the IRS information on 
EFTPS? Have you signed up a client for EFTPS? How did it go? 
Any problems you want the IRS to know about? Anything that 
would make the system more user-friendly? Any other comments? 
Any questions you would like NAEA to ask IRS?
    We found in that survey that many of our Members have 
clients who are too small to fall under the July 1 mandate. 
Rather, their clients will come in next January.
    I requested a second survey, along with other issues, in 
early March 1997. The sole EFTPS question was: ``On EFTPS, how 
is it going in your area? Any particular problems or concerns 
you would like Judy Akin to share with her committee?'' We 
received 167 responses. We thought it interesting that nearly 
twice as many replied during the height of filing season as in 
December. It may indicate greater focus by tax practitioners on 
EFTPS requirements.

                   Practitioner Experience with EFTPS

    Many of our respondents who did have clients mandated to 
come under EFTPS in July have referred their clients to payroll 
services. As one Member put it, ``I have directed all clients 
to contact a third party payroll tax service because these 
companies seemed to know what to do and how to do it. I try to 
get out of the payroll business whenever possible. I attended a 
seminar sponsored by Paychex and was impressed with their 
knowledge and procedures around EFTPS.''
    For other Members, IRS outreach--seminars in San Diego and 
at the Ogden Service Center, for instance--provided information 
they needed. From our Members' reports, we know there still 
needs to be educational outreach. We are working with the IRS 
through our State Affiliates and Local Chapters to get the word 
out to the small business community where we are hearing of 
problems. For example, the Ohio State Society of Enrolled 
Agents is working with the local IRS office on outreach 
programs.
    Many of the December respondents indicated that there was 
confusion about the system, which may be attributed to 
practitioners and clients just beginning to really focus on the 
EFTPS requirements. At the time, enrollment forms were not 
readily available. Some complained that enrollment applications 
that were mailed in September were not acknowledged by early 
December. Those complaints did not appear in the March survey.
    Also, the tone of some early letters--one from July 1996 in 
particular--was considered hostile and off-putting. As one 
Member noted, ``It referred to more forms than most of my 
clients have ever heard of, much less made deposits for. It 
furthered the impression that the IRS is intruding into the 
lives of the owners of small business. It made the entire 
matter seem more complex than it needed to.'' Later letters--in 
October and November--were considered more friendly but the 
same practitioner noted, ``I am still doing damage control 
because of the first letter.''
    However, other EFTPS documents, notably the Question and 
Answer booklet, were praised for clarity and general 
helpfulness. Still, there were requests for ``Plain English'' 
versions for taxpayers. As one EA observed, ``Most taxpayers do 
a mental shutdown as soon as a debit or credit is mentioned.''

                             Other concerns

    Many comments of our Members indicated that clients fear 
the IRS reaching into their bank accounts and taking money, a 
fear which still must be overcome. One Enrolled Agent noted 
that ``Some of our clients who have had trouble with IRS in the 
past have serious problems with allowing a direct connection 
between their bank account and the IRS. This is especially true 
of people who have had liens wrongfully put on their accounts. 
We are still contemplating the possibility of opening an escrow 
account from which to transmit the funds.''
    Earlier, there were reports of major problems with the 
phone lines used by the banks handling the EFTPS contract. That 
problem seems to have been resolved by the time of the March 
survey.
    Other problems concern the ability of local banks to handle 
EFTPS. Typical was the comment, ``When I went to the bank, the 
tellers at the windows did not know anything about the program. 
IRS should encourage the bank to fill their tellers in on what 
is going on.'' In addition, there were lots of rumors about 
bank charges which many call unfair to small businesses. One EA 
wrote, ``The biggest problem is the banks' inability to tell 
how they will do it, the cost or even when they will do it. The 
sense my clients have is that it will cost them $15 to $25 for 
each deposit by the ACH credit method. Some banks can't (or 
won't) do the credit method. There seems to be a lot of 
confusion on the banks' part.''
    And from another Member, ``I asked my local commercial bank 
four months ago if they would facilitate this new requirement 
on their electronic banking programs. They still haven't 
identified a way I could work with them without using their 
payroll service. IRS should have worked with the Federal 
Reserve System banks to require that they participate and 
facilitate this program.''
    Unfortunately, problems with local banks were still evident 
in our March survey and they perhaps have contributed to the 
unwillingness of some taxpayers to enroll in EFTPS:
    ``Many problems with debit. Haven't found a bank that 
allows ACH credit method. Problems with validity of 
confirmation numbers.''
    ``I've encountered three banks in Houston that don't have a 
clue about EFTPS.''
    ``EFTPS works OK. Banks are not very cooperative. Some want 
to charge exorbitant fees by going through them. We are having 
most of our clients just call the IRS and have them transfer 
the funds.''
    ``We've had our first catastrophe with the EFTPS system. 
Signed up all of our clients as ACH debit depositors so they 
would get the confirmation number when completed. Turns out one 
of the banks in our area has a communication error with the 
EFTPS system and NONE of this client's deposits have been 
drawn! The bank indicates they will probably be online around 
May. Let's hope. Don't know what position the Service will take 
about the deposits being made now by coupon to replace the ones 
that didn't get drawn (late by more than a month), except that 
we have the acknowledgement numbers.''
    ``Because of the confusion and inability of the banks to 
answer questions regarding this program, my clients have been 
reluctant to enroll. Since most of those mandated to use the 
program just received their final notice last week, we'll be 
contacting their banks to confirm their ability to meet our 
clients' needs and subsequently filing the enrollment form. We 
can only hope that all the bugs will be worked out of the 
system prior to my clients having to make deposits in this 
manner.''
    ``We hope the banks will begin to support the credit side 
of the system, since personally I have no faith in our debit 
bank. They can't seem to keep their records straight and mess 
up accounts on a regular basis. I also don't quite understand 
why it takes 6 plus weeks for processing when other 
``commercial'' entities can do the same kind of processing in 
just a couple of weeks.''

                        Comparable state systems

    From the surveys, we learned that some states have already 
adopted systems similar to EFTPS for payment of state taxes. In 
those states, our Members seemed very comfortable with EFTPS.
    From a Colorado EA: ``We have enrolled about 15 clients and 
that has gone well. We have received confirmation and PIN 
numbers...We have been transferring Colorado withholding 
payments for a couple of years now and it actually works very 
well.''
    And from a Florida Member who reported no problems, ``We 
utilize a Florida State Local Option Tax electronic program and 
it works efficiently.''
    From a New Jersey EA, ``New Jersey is beginning a similar 
[electronic] system statewide.''
    From a Maryland practitioner, ``I have signed up 3 clients 
using the ACH debit method and it is dependable. I like it for 
small businesses. . .''

                     The small business perspective

    There were, however, concerns about the impact EFTPS could 
have on the small business community:
    From a central California EA, ``Will life continue to get 
even more complex for our small business clients?''
    And from another EA, ``The dollar amounts are way too low. 
They are forcing small businessmen who are not sophisticated to 
apply a system that requires knowledge they don't want to 
acquire. I have a hard enough time getting people to not throw 
up their hands and go off the books now.''
    ``This is going to be a tremendous penalty 
generator...dropping the threshold down to $20,000 per year 
causes all but very small employers to have to use this new 
system. Again, it is not that the little guy doesn't want to 
comply, it is that they may not have the savvy it takes to 
overcome their fear of electronics.''

                               Penalties

    Many of our Members in both surveys expressed concern about 
the transition to the new system and the penalties which could 
be applied.
    From a Florida EA, ``Two clients go on the program this 
year. Both are ready to run. Had no problems getting them set 
up although there were some delays. Telephone help was 
available and courteous. We like the idea and have promoted it 
in our publications. I think the big problem is still helping 
employers to understand the commitment, and giving them time to 
get into the system. I would anticipate many, due to 
unfamiliarity and disliking change, not being ready even when 
the procedures become mandatory. I would like to see IRS go 
easy on them re. penalties.''
    ``We are advising clients to open a separate account to use 
for these transfers. Clients have concerns and fears of IRS 
having access to their regular checking accounts. A separate 
savings account should handle this without too much expense. 
Also, [we are] advising clients to go straight to IRS for 
transfer. With acknowledgment of transfer, potential penalty 
liability should be lessened. Concerned that banks might not 
get things right and client will be left with penalty 
problems.''

                            Success Stories

    On the other hand, many practitioners who are utilizing the 
system have very positive comments. The later March survey 
confirmed earlier successes. Following are some typical 
reports. We would be pleased to share copies of all replies 
with the Subcommittee Members and staff.
    ``We had a 20-minute seminar from our payroll service 
representative [Paychex] who covered it fully. It is pretty 
much a no-brainer and no one should have a problem.''
    ``I believe that this type of modernization will have a 
greater impact on taxpayers' daily routines than electronic 
filing.''
    ``No problems so far. Everything went smooth. It is by far 
easier than the coupons...this is very user friendly for me. 
They did a super job on this on and I appreciate that they are 
furnishing the software.''
    ``This is better than the TaxLink System! The best feature 
is the ability to warehouse the payment until the due date!''
    ``No problems thus far in Laguna Nigel. Let's keep our 
fingers crossed.''
    ``Working fine. I have two fairly large clients who are 
using it and plan to start others July 1.''
    ``Most of my clients don't plan to start until July. Like 
most business people, they are a little reluctant to start 
something new. I don't think they realize how convenient not 
having to go to the bank to pay taxes will be!''
    ``I have called the EFTPS 800 number several times and have 
always been treated courteously and gotten the answers I need. 
It was a big help to be able to tell my clients they need not 
supply the breakdown of the SS-Med-WH but only hit the pound 
sign when asked for an amount.''
    ``I use EFTPS for one client that I prepare payroll checks. 
It works great! I was amazed the first time I used it how easy 
it was. The IRS has really done a great job with this one.''
    ``EFTPS is working great here in South Carolina.''
    ``So far I have had much success with this program for 
payroll tax deposits in the San Francisco Bay area.''
    ``I have been using EFTPS since being available. Think it's 
great. The few problems I have had have been quickly resolved 
by their support. The support people seem to be well trained 
and most cooperative.''
    ``Clients using EFTPS are having no problems and have 
advised me that they are getting good help from IRS.''
    ``I haven't heard any complaints, but it sure helps those 
taxpayers that have a three day deposit rule and are busy.''
    ``Clients still a bit reluctant but like it once they get 
used to it.''
    ``We find EFTPS system working very well. The use of the 
software has made it very easy. The people at the helpline have 
been very helpful. Now if only California would join the 
bandwagon and use an easier method.''

                         Suggested Improvements

    A number of our Members offered ways in which the system 
could be improved. They include
    1) Making the enrollment application typewriter friendly by 
providing better spacing;
    2) Permitting taxpayer or practitioner to go online to see 
what payments have been posted to the client's accounts for 
specific periods;
    3) Providing a recordkeeping system in the instruction 
booklet for EFTPS to show date called, type of tax, date of 
payroll, amount, confirmation number, etc;
    4) Lowering the batch number from 100 small businesses to 
as few as 10 in order to bring more tax practitioners and their 
clients into the program by allowing for faster processing;
    5) Providing exceptions to the threshold dollar amount in 
the case of winding down businesses;
    6) Permitting reclassification of companies with highly 
variable incomes because of contraction of business;
    7) Standardization of software interface for use on EFTPS;
    8) Permitting 24 hour a day transmittal;
    9) Providing taxpayers and practitioners with a methods and 
procedures handbook to explain what to do in an emergency; and
    10) Installing practitioner hotlines with PIN numbers so 
that client accounts can be monitored.

                   NAEA Overview and Recommendations

    From the comments of our Members, it is clear that there is 
need for greater educational outreach to alleviate uncertainty 
and fear, particularly the fear that IRS is going to invade 
taxpayer bank accounts. This is one issue which will require 
greater sensitivity by IRS.
    In many areas of the country, local banks may simply not be 
ready to deal with the new system. It is also evident from the 
comments of EAs that many businesses, even if enrolled, do not 
plan to start using the EFTPS system until July 1. Penalty-free 
use of the EFTPS prior to July 1 may help, if that information 
is widely publicized.
    Perhaps most significantly, a number of states have already 
put in place or are in the process of implementing electronic 
deposit of funds for state tax payments. The States of 
California, Maryland, New Jersey and Florida, to name a just a 
few, have already put in place comparable systems and 
practitioners report they are working well.
    Penalties are one area where there seems to be broad 
consensus among NAEA Members that IRS needs to be sensitive to 
taxpayers. As the comments of our Members indicate, there are 
many ways in which well-intentioned taxpayers may have a 
problem with the system and should not be penalized.
    NAEA strongly believes that a taxpayer who retains a 
professional adviser, hires a competent payroll/tax staff, or 
uses a reputable payroll service company has demonstrated 
intent to comply with the law. This should be reasonable cause 
in and of itself for abatement of penalties that occur. We 
would envision that this would constitute a ``good taxpayer'' 
threshold that allows periodic errors without penalty for 
overall long-term performance.
    Thank you for allowing me this opportunity to testify 
today. I will answer any questions you may have.
      

                                

    Chairman Johnson. Thank you very much.
    In view of your experience--there are a couple of you on 
the panel that could comment on this--do you think that the 
date at which very small businesses, that is, below $50,000, 
between $20,000 and $50,000, that the date of their entry into 
the system should be delayed?
    Ms. Akin. No, I do not believe it should be delayed. I do 
believe that delaying the program again would greatly hinder 
the integrity of the IRS. If on-again, off-again, people would 
take the attitude, ``When are we supposed to believe the 
Internal Revenue Service?''
    Chairman Johnson. I see. So, you think providing penalty 
relief for those who were in the system and trying is a 
preferable approach?
    Ms. Akin. Yes, I do.
    Chairman Johnson. And is there more education that is 
needed?
    Ms. Akin. Yes. There is definitely more education needed at 
the small banks. NationsBank and Chicago Bank are doing a very 
good job. The outreach needs to go to the smaller banks, 
especially in the rural parts of the country and smaller towns 
where the banking industry is not up to date on what EFTPS is.
    Chairman Johnson. Mr. Harris.
    Mr. Harris. I would favor that we go ahead with the current 
dates as long as penalty relief is available. I am afraid if we 
continue to extend the start date, we are just going to be back 
at the same place, whenever that extension is, 30 days out, 
discussing whether to go ahead with the program or extend the 
date again.
    I think what you have heard today is we have got to do a 
much better job educating everyone, including the banks. And a 
lot of the problems we are having is the misinformation that is 
not always the fault of the Internal Revenue Service. It is 
that someone at the bank cannot properly explain the system. 
And, so, I think that education is a must and it must go to all 
levels of people who will be part of this program. But I think 
penalty relief is more important at this point than extension.
    Mr. Mason. Can I comment on that?
    Chairman Johnson. Yes, you certainly can, Mr. Mason.
    Mr. Mason. Thank you.
    I would like to say that as far as penalty relief, I do not 
think that is the answer to the problem. In January 1999 this 
is all going to happen again because nobody has brought up the 
point yet as to whether any of those people between the $50,000 
and $20,000 level have been contacted yet. But you are just 
dealing with the 1.2 million today and we are going to have 
another 1 to 2 million that will probably come on in January 
1999 and this is all going to happen again.
    I think what we need is to make this voluntary and then we 
will not--if the system is good, businesses are going to make 
decisions based on what they see. And the people who are on it 
will talk among themselves, among business organizations and 
let them know if it is a good program or not. You know, we are 
out here in business and we make decisions every day and we 
make decisions that keep us in business or force us to go out 
of business based on the wisdom of those decisions.
    I think this needs to be left to the businessowner to 
decide. If it is a good system it will become widespread. If it 
is not, then the only way the IRS is going to know that is if 
they make it voluntary, this will show them the weak points of 
the system. If it is mandated they cannot see whether this is 
something that people will voluntarily come to because it is 
good, they are forced to.
    Chairman Johnson. Any other comments on that?
    Mr. Cole. Yes, I would agree with what the gentleman, 
prior, just mentioned. I do not think we are against the 
concept of the EFTPS but it is just the initial presentation 
and original intent, the requirement of it being mandatory, 
that comes across as being very negative and which arouses the 
current fear people have of IRS involvement. Most of us know 
how long it takes to try and get ahold of someone from IRS on a 
phone. Many times you get just a prerecorded phone message. I 
would also agree with the area of this marketing concept that 
was mentioned earlier, of doing it in a better way so that it 
is a positive thing rather than a negative thing. And if it 
works, then great, people will join it. But I think it is best 
to keep EFTPS voluntary.
    Chairman Johnson. You do understand that in keeping it 
voluntary there is one change that would go on and that is the 
past practices of banks not charging to process the coupons. 
Because, in the past, the banks paid for the cost of processing 
the coupons through the interest on the float.
    They will not have the interest on the float. They do not 
have the interest on the float in the new system. So, even just 
keeping it voluntary will involve for small businesses a charge 
for those banks that prefer to do it the old way.
    Mr. Thayer. Mrs. Johnson, if I might, as I alluded to in my 
remarks, we believe that whatever that nominal charge might be, 
that small businesses would opt, if under a voluntary system, 
to pay that charge. And we believe that simply because most of 
our members fall in that very small category. We are fearful of 
1999 because when it falls from $50,000 to $20,000, if it has 
not operated efficiently at the $50,000 level we are very 
fearful and know that it is absolutely not going to operate 
efficiently when it falls down to the preponderance of our 
membership.
    So, keeping it voluntary and not mandated and, in addition 
to that, addressing the penalty issue if there is a nominal 
cost charged to the local banks because of the benefits that 
accrue to small business people in terms of having that 
relationship with their bank, we think that they would opt to 
do that.
    Chairman Johnson. Thank you.
    Mr. Mason.
    Mr. Mason. Yes. I would just like to say regarding the 
charge that the banks may charge, personally speaking, I would 
have no problem with that. Being in business, I know that when 
you have expenses you have to have revenues to cover them. And 
to have the freedom to make that option to either use or not 
use the EFTPS, I would not mind paying the fee if they had to 
charge it for the normal transactions. There is going to be a 
fee with the new system and I would assume there would be a 
similar fee with the other.
    Chairman Johnson. Mr. Harris and Ms. Akin, in your 
experience is there sort of a level of smallness at which you 
are making such small payments that it is not worth your while 
to get into the electronic system or it is too sophisticated? I 
mean is there a problem of smallness here that would make it 
either uneconomic for the small business or unreasonable?
    Mr. Harris. I think you can probably look at the current 
system where, right now, if your total quarterly deposits are 
$500 or less you do not have to make monthly deposits, you can 
make payment with your quarterly report. I think it would be 
unreasonable to ask people, that right now do not have to pay 
more than once a quarter, and can mail the payment with their 
tax form, to go to a system any different than that.
    But I think if you are going to be faced with a monthly 
payment obligation I just come down to this: Is it easier to 
pick up the telephone than to go to your bank with a piece of 
paper and a check and make sure you get there before 2 o'clock 
or whatever the cutoff time is for your bank?
    So, I think that it probably has more to do with the timing 
of payments which has a relationship to size.
    Chairman Johnson. Thank you very much.
    Mr. Coyne.
    Mr. Coyne. Thank you, Madam Chair.
    Mr. Harris, what have you found in your experience to be 
some of the reasons why businesses hesitate to enroll in this 
program?
    Mr. Harris. I think it maybe goes to the heart of the whole 
voluntary system. I think that it is not hard to understand 
that small business does not look at the Internal Revenue 
Service as their friend. And if you ask them to volunteer to do 
anything with the Internal Revenue Service, there is a certain 
amount of objection.
    But it goes back to the three basic questions: First, will 
they have access to my bank account? Will I have to change 
banks? And will I have to buy any equipment?
    When you alleviate those concerns and take it down to the 
level that I just referred to, either go to the bank with a 
coupon or pick up the phone and make a payment, most of their 
concerns go away, and then the fear is related to just fear of 
change in general.
    Mr. Coyne. Well, have you found the efforts of the NFIB and 
NASE to be helpful or hurtful relative to the public's 
understanding and participation in the program?
    Mr. Harris. I think there is just a general 
misunderstanding about the program, and I think we all 
contribute to that, again, the communication that originally 
came out from the Service, the media, the practitioners, 
everyone. I think that what we have to be able to do is go sit 
down, unfortunately at this point, on a one-on-one basis with 
each small business owner and say let me explain this program 
to you the way it will really work.
    It is very easy to explain the program in a negative way as 
well. If I want to make it appear to be a very intrusive and 
negative program, I can do that, too. But I think when all the 
facts are really laid out in front of small business in a way 
that they can understand, most of their concerns will go away. 
And, again, I think they will be like us. Once you use EFTPS 
for a while, you will wonder why this was not available 
earlier.
    Mr. Coyne. So that in a hearing like this today, when all 
sides are being heard, and particularly those who are charged 
with the administration of the program, when you hear from them 
and they are able to respond to some of the concerns of those 
who are charged with having to implement the program, then that 
ought to clear some of the misconceptions up. Would you think?
    Mr. Harris. I would hope so. I think a big concern that we 
have at this point: Is the Service equipped to handle the 
program when fully implemented? That is something that, until 
we test it, I guess we will never know. So one of the reasons I 
see for going ahead with EFTPS is let's test the system. If it 
is not ready, then we have to stop it. But we have to trust 
them at that point that they are ready.
    Mr. Coyne. Thank you.
    Chairman Johnson. Congresswoman Dunn.
    Ms. Dunn. Thank you, Madam Chairman.
    Mr. Harris, I want to pursue that. It is my understanding, 
then, that you believe it should not be an optional system?
    Mr. Harris. I think in essence, if you make it optional, 
you are going to end up killing it with most small businesses, 
and that is, unfortunately, just the perception of the Internal 
Revenue Service. It is not a judgment of the program.
    Ms. Dunn. But why would you say you would end up killing 
the program if it is a good program and small business has 
proved over and over again, as Mr. Mason said, that if it is a 
good program, they will take advantage of it?
    Mr. Harris. I am not sure they will give it a chance. I 
think when you--and this comes from many years of dealing with 
small businesses and their perception of the IRS, the IRS is 
judged solely on the fact that they collect money and audit, 
not other things that they do. It is for that reason that they 
may never give EFTPS a chance. Change is not always easy to 
accept, even when it is for the better. And I think that small 
business may just object to an IRS program.
    Ms. Dunn. Are you a small business man, Mr. Harris?
    Mr. Harris. Yes.
    Ms. Dunn. Is yours one of the 1.2 million mandated 
taxpayer----
    Mr. Harris. Yes, but we went ahead and enrolled early.
    Ms. Dunn. You did?
    Mr. Harris. Yes.
    Ms. Dunn. Would it ease you a little bit if you knew, as 
Representative Hastings testified this morning, that the 
Treasury Department has recently verified in a letter that in 
just 3 years they have accelerated revenue collections by $2.8 
billion--and as you will recall, their goal for the total 
program was $3.3 billion through the use of these transfers. It 
does not include the 1.2 million taxpayers that are scheduled 
to begin using the EFTPS for their obligations on July 1. Would 
that ease your approach toward this whole thing? Because I 
think what we are debating here is whether this should be 
optional to the taxpayer. Apparently, it does not ease the 
burden of paperwork for the small business, and yet they are 
far ahead of their goals when it comes to raising the amount of 
money they wanted to bring in early.
    Mr. Harris. Obviously, the benefit to the Federal 
Government is enormous in picking up the float on the early 
payments. And I think to the extent that those goals were being 
reached ahead of schedule, that is tremendous.
    I guess my only hesitation about a voluntary program or 
extending the deadline is: What are we going to do during that 
period of time? I have no problem with extending the deadline 
if the purpose of that is to do a better job of informing the 
small business community of what this program is all about, 
with the intent that we go forward with it at some date. I 
think just to say it is voluntary and leave everything as is is 
going to effectively make the program--though it may be 
effective in the revenue collection, it will not be as 
effective as it could be because thousands of businesses will 
never participate.
    Ms. Dunn. It seems to me that when you run into a program 
of this magnitude that in most management situations you do 
ease it in or phase it in over a period of time. I would 
suggest that you and Mr. Mason and Mr. Cole sit down and help 
the IRS write that marketing plan that they need to have so 
that the public relations will be out there and people will 
understand this program. And meanwhile we go ahead and make it 
an optional program. And I do believe that if it is sold 
properly, as many of you have said, some of the consternation 
with the program will be overcome. But it appears to me from 
the testimony we have heard today, not just from your panel but 
the add-up of the testimony from all the panels, makes it seem 
more and more obvious that this is a program that was poorly 
sold and has created its own obstacles and that it could be a 
very good program in the long run and accomplish at least the 
two major goals if it were phased in.
    Thank you, Madam Chairman.
    Chairman Johnson. Thank you.
    Congresswoman Thurman.
    Ms. Thurman. Thank you, Madam Chairman.
    You know, one of the things that strikes me in this 
conversation is we talk about this as being a mandate, but 
nothing has really changed here. I mean, you are still going to 
pay the tax. Correct? So really the only difference is in the 
form of how it might be paid. Would you all agree with that.
    I do not know--maybe the Chairman can tell me; this is my 
first year--how many times this has changed before. I mean, we 
talk about a coupon. Have there been other ways that this has 
been submitted before? Maybe you can tell me. Is there this 
kind of confusion any time we change it. I mean the bottom line 
is we are still going to remit the money.
    Beyond that, I need to ask Mr. Thayer a question. When we 
talk about education, we seem to put it on the IRS. I have 
looked at the exhibits from previous testimony regarding the 
amount of things that have been sent out, the videos, the 
questions that needed answers, and so forth. In your 
organization, have you invited either the IRS or any other 
groups of people--the banks--to come in and talk to your 
membership as to how this system should work?
    Mr. Thayer. Yes, we have, Ms. Thurman. We actually had Ms. 
Richardson come in and address us at our annual meeting. Even 
prior to that, when this first came out and we discerned from 
our membership that very few people really knew what it was all 
about and certainly were not prepared for it, we were among the 
first to sound an alarm here on the Hill saying we need to hold 
off and do something. And in that process----
    Ms. Thurman. When was that?
    Mr. Thayer. We disseminate more than 400,000 newsletters 
nationwide to our membership and others. In that process, we 
laid out an educational piece that covered more than one page 
on here is how it will work and here is what we must do to get 
ready for it. And we would be amenable to doing even more with 
the IRS in terms of educating the membership.
    Ms. Thurman. When did those classes take place, or when was 
that offered to your membership?
    Mr. Thayer. When was the newspaper offered to our 
membership?
    Ms. Thurman. No, when did Ms. Richardson come?
    Mr. Thayer. Ms. Richardson came to our group last year. I 
do not recall the exact date, but it was also in conjunction 
with the whole simplification process. At that same time, the 
IRS had come out with a simplified form of understanding the 
independent contractor bill, if you recall that.
    Ms. Thurman. Right.
    Mr. Thayer. And that is when she came to our membership, 
and included her remarks in that as well.
    Ms. Thurman. Was there a question and answer period that 
took place after her remarks?
    Mr. Thayer. Afterward, she did not have too much time, in 
all honesty, but she did speak with a couple of our people as 
she was departing.
    Ms. Thurman. Can you give this Subcommittee some examples 
of the kinds of questions that were asked regarding the IRS so 
that we might know? I mean, I am sure she took that information 
back, but just for our clarification to know where some of 
those problems are?
    Mr. Thayer. I was not privy to any specific conversations 
between her and the individual members. However, those 
questions that you have heard raised here, especially by Mr. 
Harris, are the questions that were so very much indicative of 
the questions that were raised at our meeting following her 
departure. And that is, you know, after dealing with the 
penalties, do I have to change banks? Which was one of the main 
things that was raised.
    Ms. Thurman. Sure.
    Mr. Thayer. In addition to that, the other questions you 
know--what equipment do I have to use and really common 
questions that accrue to the smallest of small business people 
and what is the burden going to be on me.
    Ms. Thurman. These have been part of the conversation 
today--the myths and the reality. You just raised the questions 
that seem to be part of the myths. Hopefully, most of them will 
be cleared up today.
    Mr. Mason, since you are part of the NFIB, I have a 
question for you. As a businessman--and, Mr. Cole, maybe you, 
too, from organizations that might be involved in your area--
did you ever get notice from any of these organizations or did 
you get any help? Did they tell you that there might be IRS 
coming into town to go through an explanation, that there might 
be a video at the bank to help you through this? I am not so 
sure that helps you, Mr. Cole, under the circumstances that you 
were in with the bank. But I am just curious to know what the 
organizations have done themselves in helping businesses such 
as yourself comply with this.
    Mr. Mason. I can say the NFIB has always been very helpful 
for any questions we had as far as questions about this issue. 
One thing I found since I became interested in this back on 
June 10 when I first got the notice was that it seems that very 
few people have a full realization of what is going on here, 
not just business organizations but the banks, the IRS. It is 
like everybody has a piece of it, but nobody can really give 
you all the information about what is going on, how the process 
works. And I think that is a lot of the fear that businesses 
have, and that is why they do not want to be forced to do 
something that they are not comfortable with. And I think that 
is an educational process.
    As I said before, I do not have a problem with a voluntary 
system, but when you mandate something like this, it is going 
to be a battle with the people who it is being forced upon. And 
we have a lot of other things to do in business than that.
    I know I have spent--on the subject of the cost of this, to 
me personally it has been very expensive because I cannot tell 
you the amount that I have lost already in the time that I have 
spent in just trying to stop something being forced on my 
business.
    Now, I did not have to do that. I could have just said, OK, 
we will do it and not had that expense. But I feel that it is 
something that is important that we have that choice rather 
than being enforced upon.
    Ms. Thurman. And I can understand that. However, if one of 
the things that I hear correctly is that, you know, this is a 
telephone call away instead of going to the bank, are those not 
some benefits. Yes, Mr. Cole, I know you have had an awful 
experience in what has happened to you with the PIN numbers. 
But once it was up and running everything was fine. It seems to 
me in the long run that there are some real benefits to this.
    If I were trying to do my banking and doing some other 
things where I could just pick up the telephone, put my number 
in, and have it done, I would be a real happy person. What do 
you think, Mr. Cole?
    Mr. Cole. We use the telephone for reporting for our State 
labor and industry, and we have had no problems with that. It 
works just fine.
    Ms. Thurman. How long has that been going on?
    Mr. Cole. I am not exactly sure, but it has been about 1 
year.
    Ms. Thurman. OK.
    Mr. Cole. And as far as the education material, I did have 
a number of notices--I cannot remember exact publications--that 
this was coming out. But there was nothing educational that I 
ever received.
    Ms. Thurman. This is a real difficult issue, from a 
congressional side of it because we have to streamline 
programs.
    Let me ask one other question, maybe this to Mr. Mason and 
to Mr. Cole. Are either one of your States one of the States 
that have been discussed as far as already going through 
electronic transfers?
    Mr. Cole. Not ours.
    Mr. Mason. Our State does not currently have mandated, but 
I think they are talking about it.
    Ms. Thurman. OK. So you may be faced with this at the State 
level?
    Mr. Mason. Yes, we may be faced with this at the State 
level, also.
    Ms. Thurman. I bring that up because in Ms. Akin's 
statement she talks about different States that are going 
through this system, and there has been some positive feedback. 
Being from Florida, I obviously noted that Florida was one of 
those that does this, and the agents have said it has been a 
very positive system.
    Ms. Akin. Yes, we have heard no real complaints about the 
States that are doing it, and most of them are saying there is 
a Federal-State option, and it is working very well for them.
    Ms. Thurman. Mr. Thayer, you started to say something. 
Somebody else was speaking, but I will be glad to come back to 
it.
    Mr. Thayer. I simply wanted to respond to your remark when 
we were talking about a simple change in the method of payment. 
And you are absolutely correct, and I would hope that you 
understand that the NASE and I do not think the NFIB is opposed 
to the system in terms of making it better, not only for the 
government but for the taxpayer.
    What we have a problem with here is the process of making 
that change, and that is simply what we are addressing here 
today. Our members do not understand right now what it is all 
about, and they do not understand and they cannot get their 
questions answered when they pick up the phones. We must 
address this, whether it be through a mass marketing campaign 
that everyone is involved in, including the associations and 
the government, or whether it be individually. We must educate 
the people before we complete the process, and that is what we 
are saying here today, is that we have problems with the 
process.
    Then if we do that and we educate rightly, if we educate 
well, if the system is good, small business people will elect 
to participate in it because it will be simpler for them and 
they would elect to participate in it. I believe that very 
firmly.
    But unless we allay those fears, they are going to do just 
like Mr. Harris. They are not going to participate in it, and 
rightly so, because they have to base it upon the track record 
that they have seen as far as IRS is concerned.
    Ms. Thurman. I guess where I might disagree a little bit 
is--and not on the education part of it, but I notice that in 
your testimony actually the survey was done in 1996. The 
testimony that we heard today is that now we have 960,000 
people that have actually enrolled, maybe not totally signed 
up, but the education is starting to happen. I guess I think it 
is incumbent on us as legislators, you as somebody representing 
self-employed, or NFIB, the IRS, for us to start making this 
more available to people at home so that they can get these 
questions answered.
    On the other side of this, we are looking at programs not 
only to small business, but also regarding welfare reform. 
During the welfare deliberations, you all came to us and said 
we have got to have the EFTPS so that we can have the 
electronic transferred benefits for welfare recipients. So, 
actually, in some degree, this is a good lesson because one 
group of people are saying this is what has to happen. It is 
going to be very confusing to them. I hope that people are 
listening to some of this testimony today so that when we start 
getting into that whole issue we can calm some of those folks 
down as well.
    But a lot of this is taking place because of the 
technology. We are moving ahead, and I somewhat agree that it 
is going to be difficult to stop it. Because I think if we stop 
it, then we are going to end up having people opt out of it, 
and then we are going to have two or three different kinds of 
systems out there. And I think that could even be more 
confusing and less efficient for our government and for the 
people that we represent.
    Thank you, Madam Chairman.
    Chairman Johnson. Thank you very much. I appreciate this 
panel's input, and certainly, Mr. Thayer, Mr. Mason, and Mr. 
Cole have certainly made very clear the lack of information 
that is out there. And when I look at the information that IRS 
provided to Members of Congress late in July and the job that 
Mr. Harris and Ms. Akin have provided for the businesses they 
deal with, there really is a terrific educational problem. And 
that really has to be dealt with or we cannot move forward in a 
way that is good for everybody.
    Thank you very much.
    Let me call the last panel, if I may: Regina Lee, the vice 
president of government affairs for Automatic Data Processing; 
Carolyn Kelley, director of government affairs for American 
Payroll Association; and John Foehl, chief financial officer 
and treasurer of the Housing Authority Insurance, on behalf of 
the Treasury Management Association, accompanied by Arlene 
Chapman.
    I am sorry to keep this last panel waiting so long. We 
appreciate your patience, and we will appreciate your input.
    Regina Lee, please, would you proceed? You know that your 
testimony will be submitted in its entirety, and you have 5 
minutes. The yellow light will warn you when you are within 1 
minute.

STATEMENT OF REGINA R. LEE, VICE PRESIDENT, GOVERNMENT AFFAIRS, 
                AUTOMATIC DATA PROCESSING, INC.

    Ms. Lee. Madam Chairwoman and Members of the Subcommittee, 
I am pleased to have the opportunity to testify on behalf of 
ADP at today's EFTPS hearing. ADP has provided payroll, human 
resources, tax deposit, and reporting services to a broad range 
of clients for over 40 years. We are proud to serve more than 
375,000 employers, many of whom are members of the small 
business community.
    Over a period of many years, ADP has demonstrated its 
commitment to assist the IRS and various other governmental 
entities with a broad array of automation-related initiatives 
such as the TaxLink pilot, the Electronic W-2 pilot, and 
STAWRS. We believe that EFTPS can provide a significant benefit 
for Federal tax administrators in moving toward a more 
efficient tax deposit system.
    ADP is a leading member of the service bureau industry, 
which provides payroll processing and employment tax services 
for over one-third of the private-sector work force. Along with 
other providers, ADP has worked closely with the IRS during the 
past 3\1/2\ years in an attempt to ensure a smooth transition 
to EFTPS.
    We have assisted the IRS with its public education efforts 
to promote employer awareness, understanding, and enrollment in 
the new system. We have made EFTPS implementation the number 
one priority in our tax service business and have spent a 
considerable amount of time and resources to modify our systems 
as well as educate and prepare our clients. Every one of our 
clients has been successfully enrolled in the system for 
deposits ADP will make on their behalf.
    However, we are concerned that serious issues remain to be 
addressed before the system can expand without serious negative 
consequences from 1,500 mandated employers to 1.2 million 
mandated on July 1. These include the need for timely 
notification to taxpayers of mistakes, the lack of emergency 
backup procedures, and the ability to make file reversals. I 
will now briefly review each of these issues.
    First, timely notification. Understand the current 
structure of the EFTPS System. The IRS will not notify 
taxpayers of a failure to correctly use EFTPS until several 
months after the mistake has been made. A taxpayer, unnotified 
of the problem who continues to pay all his taxes by the FTD 
coupon, will be assessed a 10-percent penalty on that deposit 
and each successive deposit until actually notified. This could 
amount to as many as 5 months of Federal tax deposits.
    Each deposit would be subject to a 10-percent penalty, even 
if all the tax deposits were made in a timely manner. This 
taxpayer would be subject to a penalty that is 4 times greater 
than its actual semiweekly tax liability. We have a chart that 
illustrates our concern and shows that a taxpayer who paid his 
liability on time ended up with a $50,000 penalty.
    The IRS has recently indicated that employer readiness and 
enrollment in the system have increased dramatically, and they 
are prepared to go forward. Nonetheless, there are still more 
than 200,000 mandated employers not prepared to switch to 
electronic payment less than 100 days from today.
    In addition, we project that in the early months of 
operation, there will be considerable taxpayer confusion as to 
how EFTPS operates and how to determine which taxes are covered 
by the rules. Nothing will do more to harm taxpayer acceptance 
of EFTPS than the triggering of tens of thousands of notices to 
employers next December. Given the harshness of the penalty, 10 
percent per deposit on all taxes paid, a solution for this 
notification issue must be in place before taxpayers are 
subjected to this penalty.
    Second, emergency procedures. The IRS has not provided a 
method for responding to system interruptions caused by 
unforeseen disasters or emergencies. Given the extremely tight 
timeframe for transferring funds and data under EFTPS, any one 
of a number of breakdowns, even 1 hour or less at a critical 
time, could result in a failure to complete timely deposits 
successfully.
    The emergency procedure exists for EFTPS primarily because, 
unlike the current system, EFTPS requires transmission of both 
taxes owed and all related payroll data at the same time. In 
contrast, under the current system, IRS procedures allow for 
separation of funds and data. This offers service providers the 
flexibility to respond to situations where data is not 
available or, because of last-minute employer payroll 
adjustments, the data is in need of refinement before 
submission.
    Currently, when there is a breakdown, service providers can 
estimate tax deposits due and transfer by wire all the 
necessary funds on the due date. Specific payroll data 
underlying a tax payment can be provided within the 4 days 
after the payment due date. Even in emergency situations, the 
4-day cleanup period has always been sufficient to overcome 
submission problems.
    No similar mechanism exists for EFTPS. Even in an 
emergency, the IRS has said it cannot accept the payment of 
funds without all the supporting data. The elimination of the 
4-day cleanup period means that in an emergency situation, the 
lack of data will preclude the making of a timely funds 
deposit. The result is that the IRS will issue thousands of 
late payment notices to taxpayers. Taxpayers would be required 
to seek abatement of the penalties on the basis of reasonable 
cause either through their service provider or on their own.
    To eliminate these serious consequences and associated 
burdens, an emergency procedure must be established prior to 
the next phase of implementation. The procedure should allow 
timely submission of funds while providing flexibility for 
transmission of supporting data. Such an emergency procedure 
clearly can be developed within the statutory requirements of 
EFTPS.
    We have a chart that demonstrates what the current practice 
is and compares it to the requirement under EFTPS. It also 
lists a proposed standby procedure.
    Third, file reversals. The IRS has not provided procedures 
regarding reversal of a bulk file in the event of a computer or 
human error. Bulk providers deposit on behalf of hundreds of 
thousands of taxpayers. Therefore, a systemic means to reverse 
a duplicate file once submitted is essential. One bulk provider 
file may contain funds and data for hundreds or thousands of 
taxpayers. Absent such a procedure to reverse files, thousands 
of erroneous notices could be sent to taxpayers.
    While we appreciate the comment that was made this morning 
by the financial agent regarding an edit that exists, we do not 
believe that that edit is adequate to handle the concerns that 
we have.
    Madam Chairwoman, service providers such as ADP are in the 
business of furnishing a broad range of payroll and employment 
services to our employer clients. Our clients look to us to 
simplify the tax payment process and to assure that they comply 
with their obligations in an accurate and timely manner. When 
things go wrong and they receive a government penalty notice, 
they look to us, as they should, to deal with the problem. We 
remain quite concerned that, despite several years of effort, 
important bulk filer issues have not been fully addressed. Each 
of these problems could result in the issuance of sizable 
penalty notices to tens of thousands of taxpayers in the next 
year. Nothing would do more to undermine the acceptance of the 
new system with either the Congress or the taxpayers than such 
an occurrence.
    We urge the Subcommittee to examine these issues closely. 
We hope you will encourage the IRS to acknowledge their 
significance and announce specific plans to resolve them within 
the next few weeks. We are prepared to provide any technical 
assistance needed.
    I would like to note that we were very encouraged by Mr. 
Donelson's testimony this morning, specifically regarding his 
willingness to look at separating funds and data in the event 
of an emergency. We look forward to meeting with him to further 
discuss that.
    Mr. Chairman, we strongly believe that significant work 
must be completed within a very short timeframe in order for 
the next phase of EFTPS implementation to succeed.
    Thank you, and I would be very happy to answer any 
questions you may have.
    [The prepared statement and attachments follow:]

Statement of Regina R. Lee, Vice President for Government Affairs, 
Automatic Data Processing, Inc.

                             Introduction.

    Madam Chairwoman and members of the Subcommittee, I am 
pleased to have the opportunity to testify on behalf of ADP at 
today's EFTPS hearing. ADP has provided payroll, human 
resources, tax deposit and reporting services to a broad range 
of clients for over 40 years. We are proud to serve more than 
350,000 employers. Over a period of many years, ADP has 
demonstrated its commitment to assist the Internal Revenue 
Service (``IRS'') and various other governmental entities with 
a broad array of automation-related initiatives such as the 
TaxLink Pilot, the Electronic W-2 pilot and STAWRS. We believe 
that EFTPS can provide a significant benefit for federal tax 
administrators in moving toward a more efficient tax deposit 
system.
    ADP is a leading member of the service bureau industry, 
which provides payroll processing and employment tax services 
for over one-third of the private sector work force. Along with 
other providers, ADP has worked closely with the IRS during the 
past three and one-half years in an attempt to ensure a smooth 
transition to EFTPS:
     ADP has worked with the payroll service community 
to identify and resolve issues of concern to bulk filers; we 
have made numerous technical submissions regarding these issues 
and have participated in more than 20 industry meetings with 
the IRS;
     We have assisted the IRS with its public education 
efforts to promote employer awareness, understanding, and 
enrollment in the new system. These efforts include CPA 
seminars, videos, educational information packets and a unique 
public/private partnership with the Small Business 
Administration to develop materials and conduct small business 
seminars throughout the United States; and
     We have made EFTPS implementation the number one 
priority in our tax service business and have spent a 
considerable amount of time and resources to modify our systems 
as well as educate and prepare our clients; every one of our 
clients has been successfully enrolled in the system for 
deposits that ADP will make on their behalf.

                     EFTPS Implementation Schedule.

    The IRS has been required to implement a very complex 
system under difficult time constraints. Since EFTPS was 
phased-in to accommodate the year-by-year revenue funding needs 
of NAFTA, sufficient flexibility was not provided to implement 
this complex new system. For example, new IRS and related 
banking systems had to be developed and fully tested. Millions 
of employers had to be made aware of the significant changes in 
the payment methods, learn about specific requirements, and 
become properly enrolled.
    In private industry, any systems change of such magnitude 
and complexity would be phased-in by manageable increments over 
reasonable time intervals. This would allow for ample testing 
and refinement to ensure smooth implementation and minimize the 
risk and serious consequences of system failures.

                     Serious Problems Still Exist.

    Last summer, it had become clear that EFTPS was not ready 
for the scheduled January 1, 1997 dramatic increase in mandated 
employers. At that time, we believe that the Congress acted 
prudently to enact a six-month delay.
    Progress has been made since then on system development and 
employer readiness. At the same time, despite the collaborative 
efforts of many, we are concerned that serious issues remain to 
be addressed before the system can expand without serious 
negative consequences from 1,500 mandated employers to 1.2 
million mandated on July 1. These include the need for timely 
notification to taxpayers of mistakes, the lack of emergency 
back-up procedures, and the ability to make file reversals. In 
recent weeks, we have had meetings with both your Committee 
staff and the IRS on these implementation issues. However, we 
have not yet received assurance that the IRS is willing, or 
technically able, to address these ``bulk filer'' issues of 
critical concern to payroll service providers, prior to July 1.
    I will now briefly review each of the major bulk filer 
issues:
    1. Timely Notification: Under the current structure of the 
EFTPS system, the IRS will not notify taxpayers of a failure to 
correctly use EFTPS until several months after the mistake has 
been made. A taxpayer, unnotified of the problem, who continues 
to pay all his taxes by the FTD coupon method, will be assessed 
a 10-percent penalty on that deposit and each successive 
deposit until actually notified. This could amount to as many 
as five months of federal tax deposits. Each deposit would be 
subject to a 10-percent penalty--even if all tax deposits were 
made in a timely manner. This taxpayer would be subject to a 
penalty that is four times greater than his actual semi-weekly 
tax liability.
    The IRS has recently indicated that employer readiness and 
enrollment in the system have increased dramatically, and they 
are prepared to go forward. Nonetheless, there are still more 
than 200,000 mandated employers not prepared to switch to 
electronic payment less than 100 days from today.
    In addition, we project that in the early months of 
operation, there will be considerable taxpayer confusion as to 
how EFTPS operates, how to properly access the system, and how 
to determine which taxes are covered by the rules. Nothing will 
do more to harm taxpayer acceptance of EFTPS than the 
triggering of tens of thousands of penalty notices to employers 
next December.
    We understand that the IRS is now aware of the penalty 
notification problem and is trying to develop a procedure for 
more timely notification to taxpayers. Given the harshness of 
the penalty--10 percent per deposit on all taxes paid--a 
solution for this notification issue must be in place before 
taxpayers are subjected to this penalty.
    2. Emergency Procedures: The IRS has not provided a method 
for responding to system interruptions caused by unforeseen 
disasters or emergencies. Recent examples include the nine-
state West Coast blackout and a 1995 system failure at the 
Minneapolis Federal Reserve Board. Given the extremely tight 
timeframe for transferring funds and data under EFTPS, any one 
of a number of breakdowns, even an hour or less at a critical 
time, could result in failure to complete timely deposits 
successfully. These interruptions could be between an employer 
and its service provider or between the service provider and 
the government's financial agent.
    The emergency procedure issue exists for EFTPS primarily 
because, unlike the current FTD system, EFTPS requires 
transmission of both taxes owed and all related payroll data at 
the same time. In contrast, under the current deposit system, 
IRS procedures allow for separation of funds and data. This 
offers service providers the flexibility to respond to 
situations where the data is not available or, because of last-
minute employer payroll adjustments, the data is in need of 
refinement before submission. Currently, when there is a 
breakdown, service providers can estimate tax deposits due and 
transfer by wire all necessary funds on the due date. Specific 
payroll data underlying the tax payment can be provided within 
four days after the payment due date. Even in emergency 
situations, the four-day ``clean up'' period has always been 
sufficient to overcome submission problems.
    No similar mechanism exists for EFTPS. Even in an 
emergency, the IRS has said it will not accept the payment of 
funds without the supporting data. The elimination of the four-
day data clean up period means that in an emergency situation, 
the lack of data will preclude the making of a timely funds 
deposit. The result is that IRS would issue thousands of late 
payment penalty notices to taxpayers. Taxpayers would be 
required to seek abatement of the penalties on the basis of 
reasonable cause, either through their service providers or on 
their own.
    To eliminate these serious consequences and associated 
burdens, an emergency procedure must be established prior to 
the next phase of implementation. At a minimum, the procedure 
must allow timely submission of funds while providing 
flexibility for transmission of supporting data. Such an 
emergency procedure clearly can be developed within the 
statutory requirements of EFTPS.
    3. File Reversals: The IRS has not provided guidance or 
procedures regarding reversal of a bulk file in the event of 
computer or human error. Bulk providers deposit on behalf of 
hundreds of thousands of taxpayers. Therefore, a systemic means 
to reverse a duplicate file once submitted is essential. One 
bulk provider file may contain funds and data for hundreds or 
thousands of taxpayers. Absent such a procedure to reverse 
files, thousands of erroneous notices could be sent to 
taxpayers. These taxpayers, who have paid their taxes in a 
timely way and who have made every effort to deposit correctly 
using the new EFTPS system, will be confused and frustrated 
with both their service provider and the government. This 
confusion, frustration, and perhaps ultimate distrust can be 
avoided if critical systems issues, including the ability to 
reverse a duplicate bulk file, can be resolved in advance of 
the next stage of implementation.
    Madam Chairwoman, service providers such as ADP are in the 
business of furnishing a broad range of payroll and employment 
services to our employer clients. Our clients look to us to 
simplify the tax payment process and to ensure that they comply 
with their obligations in an accurate and timely manner. When 
things go wrong and they receive a government penalty notice on 
a tax deposit or payment question, they look to us--as they 
should--to deal with the problem.
    We remain quite concerned that despite several years of 
effort by the IRS and service providers, important bulk filer 
issues have not been fully addressed. Each of these problems 
could result in the issuance of sizeable penalty notices to 
tens of thousands of taxpayers in the next year. Nothing would 
do more to undermine the acceptance of the new system with 
either taxpayers or the Congress than such an occurrence.
    We urge the Subcommittee to examine these issues closely. 
We hope that you will encourage the IRS to acknowledge their 
significance and announce specific plans to resolve them within 
the next few weeks. We are prepared to provide any technical 
assistance needed.
    Madam Chairwoman, we strongly believe that significant work 
must be completed within a very short timeframe in order for 
the next phase of EFTPS implementation to succeed.



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[GRAPHIC] [TIFF OMITTED] T0852.024

      

                                

    Mr. Portman [presiding]. Thank you, Ms. Lee.
    Our next panelist is Carolyn Kelley, director of government 
affairs of the American Payroll Association.
    Ms. Kelley.

 STATEMENT OF CAROLYN KELLEY, DIRECTOR OF GOVERNMENT AFFAIRS, 
                  AMERICAN PAYROLL ASSOCIATION

    Ms. Kelley. Good afternoon, Mr. Chairman and Members of the 
Subcommittee. I am Carolyn Kelley, director of government 
affairs for the American Payroll Association, and although I 
think I have managed to keep my remarks to 5 minutes, I would 
like to submit our longer written testimony and these oral 
remarks for the record.
    APA represents more than 14,000 U.S. businesses and the 
payroll managers in them who will be responsible for meeting 
the new requirements of the EFTPS System. A large majority of 
the currently mandated businesses are APA members, and the July 
1, 1997, phase-in of 1.2 million taxpayers will include over 90 
percent of our members. APA has sought to work with the Federal 
Government during the design and implementation phases of EFTPS 
since early in 1993.
    APA has also placed articles in newspapers and magazines, 
reaching millions of taxpayers and hosted or participated in 
hundreds of EFTPS seminars across the country to inform 
taxpayers about requirements. Our goal has been and continues 
to be a successful implementation of the system.
    APA is going to urge Congress to move forward with the 
EFTPS implementation but provide an amnesty period which would 
protect taxpayers from penalties until certain critical issues 
and the need for system enhancements and further taxpayer 
education are resolved. We also have specific recommendations 
on how to do this.
    Regarding the current status of EFTPS implementation, as 
Commissioner Morris stated this morning, no final EFTPS 
regulations or revenue procedures currently exist to guide 
taxpayers. Information on EFTPS requirements available to 
taxpayers is inadequate, and many taxpayers remain unaware or 
misinformed about the full extent of the requirements. To 
illustrate, APA talked to a reporter from New Mexico who 
recently contacted IRS and was told that only employment taxes 
are due through the EFTPS. She thought that this was wrong and 
went on the Internet. She came across information on EFTPS from 
an accounting firm, which was reputable in her State, which was 
incomplete and inaccurate. She finally called Senator Pete 
Domenici's office and was finally given correct information. It 
is no wonder that some 177,000 mandated taxpayers are not 
correctly enrolled.
    But this number is not the whole story, frightening as it 
is to imagine that many penalty assessments. There is, in fact, 
a critical distinction between the 1.2 million taxpayers who 
are mandated to use the EFTPS on July 1 and the number of 
taxpayer enrollments which will be needed to meet the mandate. 
The fact is many taxpayers will have to enroll more than once 
to comply with EFTPS.
    For example, there are those who will need to enroll more 
than one bank account. There are also those who have to enroll 
separately for any tax types that their payroll service 
providers does not handle for them.
    Come July 1, many more taxpayer enrollments will be 
outstanding than the numbers stated today suggest. In fact, 
many more than 1.2 million taxpayer enrollments will have to be 
processed. We predict tens, if not hundreds, of thousands more.
    We urge IRS and Congress to consider what happened after 
the 1995 and 1996 implementation dates. There was confusion on 
the part of the largest and most sophisticated companies in the 
United States, and IRS contacted unenrolled companies to help 
them to comply. How much more confusion may exist now with 
smaller, less sophisticated companies? This time, however, 
there will be too many to call.
    The next issue is penalties. As previously discussed, IRS 
has chosen to assess a 10-percent avoidance penalty on every 
mandated tax deposit that is not made through the EFTPS. These 
penalties are inappropriate and grossly punitive, and to our 
minds, indicate that IRS is willing to educate taxpayers 
through penalty assessment. In fact, according to testimony 
submitted today by FMS, IRS has been advised by contractors 
that penalties are necessary to stimulate compliance. Why is 
this penalty 5 times that of the first late payment penalty of 
2 percent? If a taxpayer mistakenly uses the FTD coupon instead 
of the EFTPS System, taxes are still paid accurately and on 
time.
    But it gets worse. IRS' penalty system, as Ms. Lee pointed 
out, is not able to notify taxpayers that they are not 
depositing correctly until potentially 4 or 5 months after July 
1. Thus, taxpayers who fail to understand that they have to 
enroll in EFTPS but who are still paying the correct amount of 
tax on time, using their paper coupons, will receive penalty 
notices of 10 percent for every single deposit made from July 1 
until the IRS notifies them potentially in December.
    In addition, the EFTPS' enrollment process is manual and 
currently takes 2 to 10 weeks. So if a taxpayer manages to 
discover his error after July 1 and tries to enroll, he will 
find that the EFTPS will reject his payments until the 
enrollment process is completed. Meanwhile, the 10-percent 
avoidance penalties will continue to mount even though the 
taxpayer is doing everything within his power to pay his taxes.
    Next is the unknown strain on EFTPS Systems and taxpayer 
service functions that will be caused by the jump from the 
current mandate of some 1,500 U.S. businesses to 1.2 million 
all at once. We have heard testimony today that seeks to 
convince us to have confidence in the EFTPS System. APA is not 
here to dispute the merits of the system; rather, we caution 
that in any system implementation of this size, problems will 
occur. That is a simple fact of life.
    In the case of EFTPS, this means taxpayers will be assessed 
penalties. One example that we know of is one of our members 
who tried to make a deposit of $1.7 million on Monday, March 
24, and that deposit was not accepted until 3 p.m., despite 
repeated efforts to make it. This Monday, I myself could not 
get through to one financial agent's taxpayer service line 
until close to noon. I received a recorded message telling me 
my call could not be completed as dialed.
    What would have happened in these situations if 10 times 
the number of mandated taxpayers had been competing against 
each other to pay their taxes on time? We don't know.
    APA cautions that although, as has been said today, some 
200,000 taxpayers are currently using the system, all but 1,500 
of them are using it voluntarily. So, in fact, we do not know 
how the system will handle the volume of mandated taxpayers 
about to use it under penalty, because if you have a problem in 
the voluntary system, all you need do is simply deposit by 
coupon.
    There are unresolved system issues which affect these 
taxpayers. The number one issue is the lack of emergency 
procedures. A recent survey indicates that 50 percent of 
financial--excuse me, that less than 50 percent of financial 
institutions will offer the EFTPS Fedwire emergency same-day 
settlement procedure. In addition, EFTPS enrollment document 
instructions regarding the Fedwire emergency procedures are not 
adequate. Taxpayers will not understand, first of all, that 
this procedure is available, if it is, and, second of all, how 
to use it.
    Taxpayers who do not have access to or know about the 
Fedwire emergency procedure after July 1 will be issued late 
deposit penalties. Further, FMS in its proposed regulations is 
contemplating restricting the use of the same-day option. And, 
finally, no emergency procedures exist in EFTPS for payroll 
service bureaus, as has been discussed.
    Because of time, I will leave the issues of inadequate 
procedures for file reversals and refunds in case of erroneous 
deposits for individual taxpayers to my colleagues at the 
Treasury Management Association. One last issue, however, is 
the lack of an electronic acknowledgment of ACH credit deposits 
that is equal to the ACH debit acknowledgment for purposes of 
tax controversy, and we encourage Congress to examine the 
system that ACH credit taxpayers have to go through of calling 
their financial institution on the tax-due date in the morning 
to make sure that their tax has settled.
    The Federal Government should not allow the EFTPS mandate 
to go forward July 1 of this year unless these issues are 
resolved. IRS urges Congress to insist on and continually 
monitor an IRS and FMS plan to resolve systems issues and 
prevent inappropriate penalty assessments during the critical 
first two quarters of the EFTPS implementation. This plan 
should ensure that: One, taxpayers are immediately notified 
that they are noncompliant, the notification is by tax type; 
two, that the taxpayer is allowed a penalty-free period while 
the EFTPS manual enrollment process takes place; three, all 
deposits made during the enrollment period are accepted by the 
EFTPS; four, an emergency same-day settlement procedure is 
available to all taxpayers who need it and that they have clear 
instructions regarding its use; five, the grossly punitive 10-
percent avoidance penalty should be rescinded and replaced with 
a penalty lower than that of the first late payment penalty of 
2 percent; six, file reversal procedures consistent with ACH 
operating rules and an expedited refund procedure should be 
adopted; seven, the system bias against ACH credit 
acknowledgments is eliminated; eight, proposed regulations 
providing guidance, including emergency procedures to 
taxpayers, payroll service bureaus, banks, and tax 
practitioners are released for public comment and then issued 
as soon as possible; and, nine, an amnesty period of no less 
than 180 days is instituted, to remain in effect until these 
issues are resolved.
    As several members have said, we hope IRS and FMS will 
start working immediately with their tax partners--the U.S. 
businesses, payroll service bureaus, and financial 
institutions--to resolve these issues and make the systems 
changes necessary for a successful implementation. The 
solutions are available, and the private sector is willing to 
work with the government to help provide them. It is our hope 
that Congress will monitor this process.
    In closing, APA supports the successful implementation of 
the EFTPS System and hopes it can work with the Federal 
Government to quickly resolve these issues.
    I thank you for the opportunity to present APA's concerns, 
and I am pleased to answer any questions you may have.
    [The prepared statement follows:]

Statement of Carolyn Kelley, Director of Government Affairs, American 
Payroll Association

    The American Payroll Association (APA) represents more than 
14,000 U.S. businesses on issues relating to payroll tax 
withholding, depositing, and reporting. According to the IRS's 
annual report, more than 70 percent of all federal revenue is 
collected, reported and deposited through the payroll functions 
of U.S. businesses. As such, APA's members are tax collectors 
for the nation. Our members are responsible for carrying out 
the requirements of the new Electronic Federal Tax Payment 
System (EFTPS), including withholding and depositing the 
majority of taxes (and deposit volume) that are subject to 
these requirements. A large majority of the U.S. businesses 
currently mandated to use the EFTPS are APA members. The next 
phase-in of 1.2 million taxpayers will include over 90% of our 
members.
    The American Payroll Association has actively sought to 
work with the federal government during the design, development 
and implementation phases of the EFTPS since early in 1993. We 
have worked closely with our banking, tax practitioner, and 
payroll service bureau colleagues during this time. APA's goal 
was to help with the successful implementation of the EFTPS by 
articulating the needs of the front-end users of the system--
the U.S. businesses that are this nation's tax collectors. This 
is still our goal. APA representatives have attended dozens of 
meetings in Washington and elsewhere with members of Congress 
and their staffs, IRS, Treasury, the Federal Reserve, and EFTPS 
financial agents. APA representatives have also met with the 
commissioners of both IRS and Treasury's Financial Management 
Service (FMS).
    Further, APA has been a major contributor to the nationwide 
education effort mounted to inform taxpayers, tax 
practitioners, and the banking community of EFTPS requirements. 
APA has placed educational articles in its publications and in 
newspapers and magazines across the country, reaching millions 
of readers. In addition, APA has hosted or participated in 
hundreds of EFTPS seminars across the country.
    In general, APA supports the efforts of the federal 
government to reduce high costs and error rates associated with 
paper processing. However, there are several critical issues 
which must be solved before a successful implementation of the 
EFTPS can be achieved. We support the eventual full (or nearly 
full) implementation of the EFTPS once these issues are 
resolved.

I. Summary of the Current Unresolved Problems Involving Enrollments and 
                               Penalties

    EFTPS is a complete change in the way taxpayers deposit 
their taxes. It takes taxpayers from the traditional paper 
coupon system to a brand-new electronic system. This change 
affects not only taxpayers, but their service providers, their 
advisors, and their banks. Despite education efforts by both 
the public and private sectors, a significant number of 
taxpayers remain unaware of either EFTPS requirements as a 
whole or the full extent of the requirements. These taxpayers 
will thus be in a penalty situation come July 1, 1997.
    IRS has chosen to assess a 10% avoidance penalty on every 
mandated tax deposit that is not made through the EFTPS. 
However, the IRS penalty system is not able to notify taxpayers 
that they are not depositing correctly (i.e. electronically 
through EFTPS) until four or five months after July 1, 1997.
    Thus, taxpayers who failed to understand that they must 
enroll in EFTPS but who are still paying the correct amount of 
tax on the tax due date with their paper coupons will receive 
penalty notices of 10% for every deposit made from July 1, 1997 
until the IRS finally notifies them (potentially) December 
1997.
    Further, if an unenrolled taxpayer discovers his error 
after July 1, 1997 and tries to correct it by immediately 
enrolling in EFTPS, he will find that the current EFTPS 
enrollment process is manual and takes from two to ten weeks to 
be completed. This means that the EFTPS will reject his 
deposits until the enrollment process is completed. The 10% 
avoidance penalties will continue to mount, even when the 
taxpayer is doing everything in his power to comply.

                   II. Inappropriate penalty exposure

A. Unenrolled taxpayers will be penalized.

    According to the IRS, over 220,000 taxpayers mandated to 
begin depositing electronically on July 1, 1997 were not 
enrolled by April 11th. APA believes the large majority of 
these unenrolled taxpayers are unaware of the new requirements.

B. Partially enrolled taxpayers will be penalized.

    There is a critical distinction between the 1.2 million 
taxpayers who are mandated to use EFTPS on July 1, 1997 and the 
number of enrollments which will be needed to meet the mandate. 
According to IRS, 970,000 (of the 1.2 million) mandated 
taxpayers are currently enrolled in EFTPS. However, there are 
many taxpayers who will have to enroll more than once to comply 
with EFTPS requirements:
    For example, approximately 300,000 to 400,000 taxpayers 
have been enrolled in EFTPS by their payroll service bureau. 
However, many of these taxpayers use the payroll service bureau 
only for their employment taxes. These taxpayers will have to 
enroll separately for corporate income and any other tax types 
that the payroll service bureau doesn't handle.
    This is poorly understood by these taxpayers despite the 
best efforts of the APA, payroll service bureau industry and 
IRS to educate them. Recognizing this problem, IRS sent some 
228,000 notices in March to mandated taxpayers whose only 
enrollment action was by their payroll service bureau. Although 
this will help, we are certain that a significant number of 
these taxpayers will remain confused regarding the requirements 
or erroneously assume that everything is taken care of by their 
service provider.
    Moreover, taxpayers can also enroll separate bank accounts 
for different tax types under the ACH debit option. This 
requires additional enrollments. For example, if payroll taxes 
and corporate income taxes are paid through different accounts, 
taxpayers using the ACH debit option would have to enroll 
twice.
    Thus, though the number of taxpayers mandated to use the 
EFTPS as of July 1, 1997 may be 1.2 million, the actual number 
of enrollments needed to be processed before all taxpayers are 
ready to use the system without being penalized could be 
significantly more than 1.2 million.
    Therefore, although 970,000 taxpayers are enrolled, it is 
probable that come July 1, 1997 hundreds of thousands of 
enrollments in addition to the 230,000 already identified by 
IRS will be outstanding. A 10% avoidance penalty will be 
assessed for each non-electronic deposit.

C. Because the EFTPS enrollment process is manual and currently 
takes two to ten weeks, taxpayers who are trying to use the 
EFTPS will still be penalized.

    The EFTPS cannot accept unenrolled deposits. After July 1, 
1997, any taxpayer who is unenrolled or partially enrolled and 
who then tries to enroll in EFTPS will have to wait for the 
two-to-ten week enrollment process to be completed before a 
deposit can be accepted. The penalties will continue to mount 
during this time.

D. Going from less than 2,000 to 1.2 million mandated taxpayers 
all at once will likely result in taxpayer penalties.

    APA is very concerned about the implications for taxpayers 
of jumping from the current mandate of some 1,550 U.S. 
businesses to 1.2 million all at once after July 1, 1997. 
Although IRS's most recent news release (IR 97-20) states that 
``over 100,000'' taxpayers are currently using the EFTPS, it is 
very important to note that this participation is voluntary and 
allows for a FTD coupon backup for emergencies. After July 1, 
1997, taxpayers who try to use the FTD coupon for emergencies 
will be assessed a 10% avoidance penalty. However, it is likely 
that the EFTPS's Fedwire emergency same-day settlement 
procedure will not be widely available to taxpayers. (See 
below.)
    Going from ``over 100,000'' largely voluntary taxpayers to 
1.2 million mandated taxpayers is going to have an unknown 
impact on systems and customer service functions at the EFTPS 
financial agents. This five to-tenfold increase of system use 
all at once without testing is unwise. Regardless of how many 
internal tests have been done, if the system fails to service 
taxpayers, they are subject to penalty assessment and costly 
tax controversy will result. Recently, one financial agent's 
system was unavailable to accept deposits through a good part 
of Monday, March 24th. One APA member, after repeated attempts 
to deposit, finally was able to make a $1.7 million deposit at 
3:00 p.m. What would have happened if five to ten times the 
number of taxpayers had been competing to pay their taxes on 
time?

E. We know of no evidence indicating banks will provide the 
Fedwire emergency same-day settlement procedure to all 
taxpayers who need it. APA predicts taxpayers who do not have 
access to emergency procedures will be penalized.

    Under EFTPS, taxpayers have a choice of three deposit 
options: (1) ACH debit, (2) ACH credit, and (3) the Fedwire 
emergency same-day settlement procedure. ACH debit taxpayers 
must initiate their payment through the Automated Clearing 
House (ACH) system one day before due date by 8 p.m. Eastern 
time. ACH credit taxpayers must initiate their payment by 
deadlines specified by individual bank requirements. These 
deadlines may be as early as several days before the tax due 
date depending on the bank. The Fedwire emergency same-day 
settlement procedure must be initiated in time to settle the 
same day by 2:00 p.m. Local time of the taxpayer's Federal 
Reserve home office.
    If for any reason the taxpayer cannot initiate the tax 
deposit timely for the ACH credit and debit options, the only 
emergency procedure available in EFTPS is the Fedwire emergency 
same-day settlement procedure. The government freely 
acknowledges that there are situations in which a same-day 
settlement procedure will be necessary, and that taxpayers need 
one to avoid late payment penalties.
    A recent survey by Thomson Financial Publishing indicates 
less than 50% of financial institutions will offer the Fedwire 
emergency procedure. This means that taxpayers who do not have 
access to the Fedwire emergency procedure after July 1, 1997 
will be forced into making late deposits.
    Further, proposed rules 31 CFR Part 203, RIN 1510-AA37, 
``Treasury Tax and Loan Depositaries and Payment of Federal 
Taxes,'' Part VI 61 FR 51086 states ``FMS is contemplating 
restricting the use of the same-day option...'' This should not 
be done.

F. Taxpayers will be penalized due to confusion regarding the 
availability of ACH credit services.

    Whether or not banks offer the ACH credit deposit option to 
clients is a decision based on the amount of risk the bank is 
willing to incur. Not all banks will provide this option to all 
clients. Those banks that will provide this service will charge 
for it. As stated above, the bank may require the taxpayer to 
initiate transactions several days prior to the tax due date. 
We believe that some number of already-enrolled taxpayers will 
be uninformed regarding these circumstances and find on July 1, 
1997 that even though they enrolled for the ACH credit option, 
(1) their bank will not offer them ACH credit services, (2) 
they are unable/unwilling to initiate a deposit several days in 
advance of tax due date and/or (3) they cannot afford/do not 
want to pay what the bank is charging for it. Thus, under 
EFTPS's enrollment procedures, they will have to re-enroll and 
wait for the manual enrollment process to be completed while 
the 10% avoidance penalties mount.
    Note: Little public information exists regarding procedures 
taxpayers need to follow. We believe taxpayers are not 
adequately instructed in the enrollment documents regarding 
their options, especially in the case of the Fedwire emergency 
procedure. We encourage Congress to examine EFTPS's enrollment 
documents to conclude for themselves whether the enrollment 
documents and payment instructions are clear and complete.

G. Taxpayers are not the only users of the system who are 
confused regarding system requirements. Nonetheless, taxpayers 
are the ones who will be penalized.

    Despite all efforts of the IRS, Treasury, Small Business 
Administration, tax practitioners and various professional 
associations, and the banking, payroll and payroll service 
bureau industries to increase the awareness of the full extent 
of EFTPS requirements, work remains to be done. For example, 
APA talked to a reporter in New Mexico who recently contacted 
an IRS public affairs officer who she knew had ``a reputation 
for providing accurate information.'' She was told by the IRS 
officer that only employment taxes are due through EFTPS. The 
reporter thought that was wrong, and went on to the Internet. 
She came across information on EFTPS from a ``major accounting 
firm'' which was incomplete and inaccurate. She then called 
Senator Pete Domenici's office and was finally given correct 
information.
    It is important to note that no final regulations exist to 
guide taxpayers about requirements, use of the system and how 
to keep the records necessary to prove timely deposits in case 
of erroneous penalties. The existing proposed guidance either 
was written for the TAXLINK pilot or is vague. This lack of 
definitive guidance from the IRS contributes to the confusion 
and forces taxpayers to rely on whatever information is 
available to them, whether accurate or not.
    We urge IRS and Congress to consider what happened after 
the 1995 and 1996 EFTPS implementation dates. There was 
confusion on the part of the largest and most sophisticated 
companies in the United States. IRS spent time contacting 
companies to help them comply. How much more confusion may exit 
now with smaller, less sophisticated companies?

                    III. Unresolved Technical Issues

A. The IRS's penalty system will not provide timely 
notification to taxpayers of 10% avoidance penalties.

    After July 1, 1997, taxpayers will not be notified 
immediately that they are not depositing correctly. Rather, 10% 
avoidance penalties for every successive deposit will stack 
through the end of the next quarter.

B. No emergency procedures exist in EFTPS for payroll service 
bureaus and other third-party providers who will be processing 
employment and other taxes for almost 50% of the July 1, 1997 
mandated taxpayers.

    Currently, under Revenue Procedure 86-33, third party 
service providers have an emergency procedure which prevents 
late deposits in cases of emergency or natural disaster. 
Without this emergency procedure, unnecessary penalty notices 
will go out to potentially hundreds of thousands of taxpayers. 
It is important to note that this would not happen today. This 
procedure was not provided for in the EFTPS system.

C. ACH Operating Rules for file reversals in cases of erroneous 
deposits have not been followed in EFTPS.

    Under current ACH Operating Rules, ACH reversing entries 
and files are allowed to be sent when transmitted within five 
days of settlement. Stated simply, under today's system, 
taxpayers and banks can quickly retrieve their money if they 
make an error.
    The EFTPS system does not allow this. Under EFTPS, the ACH 
credit taxpayer must ask IRS's permission to reverse a file. It 
is unclear under what circumstances this permission will be 
granted or denied or the criteria on which the decision will be 
based. For the debit option, there is no reversal documentation 
provided to the taxpayer. This refusal to follow ACH Operating 
Rules has resulted in decreased confidence in the EFTPS.
    Further, under current IRS refund procedures, if an 
erroneous deposit is made electronically, a taxpayer will wait 
up to 17 weeks to receive a refund. In addition to the omission 
of the ACH reversal procedure, this lack of a timely method of 
recovering monies transmitted in error is eroding confidence in 
the system still further.

D. There is no immediate, electronic acknowledgment of ACH 
credit deposits that is equal to the ACH debit acknowledgment.

    While the debit method provides a deposit acknowledgment 
number equal to the postmark on the FTD coupon for proving 
compliance, the ACH credit method does not. Rather, taxpayers 
will have to call their financial agent's customer service line 
on the morning of tax due date to make sure their deposit 
arrived. It is unknown how this system will service potentially 
thousands of taxpayers trying to confirm their deposits within 
a window of the few hours they have before a Fedwire emergency 
deposit will be needed. Taxpayers who choose the ACH credit 
option should have the same ease and assurance as debit 
taxpayers in receiving acknowledgment of deposits.
    The National Automated Clearing House Association has 
recently approved a change to the ACH Operating Rules that will 
allow for such an ACH credit acknowledgment. APA urges Congress 
to insist on its inclusion in the EFTPS.

                          IV. Recommendations.

    In order to ensure a successful EFTPS implementation 
without inappropriate taxpayer penalties and the resulting loss 
of confidence in the new system, APA recommends the following:

A. Congress should insist on and continually monitor an IRS 
plan to prevent inappropriate penalty assessments during the 
critical first two quarters of EFTPS implementation. This plan 
should ensure that:

    1. taxpayers are immediately notified they are non-
compliant;
    2. the notification is by tax type;
    3. the taxpayer is allowed a penalty-free period while the 
EFTPS manual
    enrollment process is being completed;
    4. deposits made by either ACH credit or debit or the 
Fedwire emergency same-day settlement procedure should be 
accepted by EFTPS during this time; and
    5. this amnesty period should be no less than 180 days.

B. IRS and FMS should work with the payroll service bureau 
industry to immediately develop emergency procedures.

C. The government should work with the banking industry to 
ensure that the Fedwire emergency same-day settlement services 
are available to every taxpayer who needs it. If the private 
sector cannot provide this, EFTPS must be altered to provide an 
alternate emergency same-day settlement procedure which would 
be available to all taxpayers.

D. The EFTPS should be altered to follow file reversal 
procedures that fall within the current ACH Operating rules and 
an expedited refund procedure should be developed.

E. System bias between the ACH debit and ACH credit options 
should be eliminated insofar as confirmation of tax deposits is 
concerned.

F. The unnecessarily punitive 10% penalty should be eliminated. 
If a taxpayer mistakenly uses the FTD coupon instead of the 
EFTPS system, taxes are still paid accurately and on time. Why 
is the penalty for that higher than for a late payment? The 10% 
penalty is grossly punitive and should be drastically reduced 
after the amnesty period expires.

G. Final regulations providing guidance to taxpayers, payroll 
service bureaus, banks, and tax practitioners should be issued 
as soon as possible.

    In closing, APA feels it is essential that Congress closely 
monitor the progress of solutions to all of the above. APA 
supports the successful implementation of the EFTPS system and 
hopes that it can work with the federal government on the 
resolution of these issues.. I thank you for this opportunity 
present APA's concerns. I am pleased to answer any questions 
you may have.
      

                                

    Chairman Johnson [presiding]. Thank you very much, Ms. 
Kelley.
    Mr. Foehl.

 STATEMENT OF JOHN M. FOEHL, JR., CHIEF FINANCIAL OFFICER AND 
   TREASURER, HOUSING AUTHORITY INSURANCE; ON BEHALF OF THE 
   TREASURY MANAGEMENT ASSOCIATION; ACCOMPANIED BY ARLENE S. 
  CHAPMAN, STANDARDS MANAGER, TREASURY MANAGEMENT ASSOCIATION

    Mr. Foehl. Good afternoon, Madam Chairman and Members of 
the Subcommittee. Arlene Chapman, TMA's standards manager, and 
I would like to offer these brief comments on EFTPS. I 
currently serve as chair of the TMA's EFTPS task force and am 
also a member of their government relations committee.
    TMA represents approximately 10,000 Treasury professionals 
who, on behalf of over 4,000 corporations and other 
organizations, are significant participants in the Nation's 
payment systems. Many of our members are responsible for making 
Federal tax payments and using EFTPS. Housing Authority 
Insurance, the company for which I work, is a mandated taxpayer 
as of July 1 of this year. TMA has been actively involved in 
presenting its members' views on Treasury's electronic tax 
collection initiatives for over 5 years. We support the 
government's planned transition from paper to electronic 
payments, a move which is also underway in the private sector.
    In the association's view, EFTPS offers cost-effective 
payment and reporting efficiencies that benefit both businesses 
and the Federal Government. The concerns that TMA will express 
today are offered in the spirit of constructive criticism, 
based on the experience of having successfully worked with both 
the IRS and the FMS to deal with problems similar to those that 
are faced today.
    Our testimony will describe three specific problem areas 
where inefficient or nonexistence procedures and confused 
communications impose burdens on corporate taxpayers who would 
otherwise welcome the transition from paper to electronic 
payments. The IRS and the FMS can and should be able to address 
and resolve these problems in a timely manner.
    The three problems we would like to address are: Barriers 
to the use of same-day payment methods, such as Fedwire; 
difficulties in reversing ACH tax payments made to the 
government in error; and excessively harsh penalties for 
incorrectly formatted or late payments and for failure to pay 
taxes electronically.
    Barriers to the use of same-day payment methods continue to 
plague taxpayers who need to employ this option. Without such 
mechanisms, tax payments may be late because the main 
electronic payment method requires the taxpayer to report the 
amount of the tax payment 1 day in advance of the due date. 
Same-day tax payments may have to be made for three reasons: As 
a backup in the event of emergencies, by companies that do not 
have the information on the amount of their tax payment 1 day 
in advance, or for better management of cash flows and timing 
of large funds transfers.
    However, the government continues to communicate confusing 
messages to taxpayers on the availability of same-day methods. 
The procedures for enrollment are either nonexistent or vague, 
and no government agency is responsible for helping taxpayers 
use the Fedwire system. What are the consequences of this 
failure to communicate with the taxpayer? The experience of a 
recent caller to TMA reveals that the taxpayer is left 
completely in the dark.
    The caller's company is mandated to pay electronically 
starting July 1. The company has more than $100,000 in payroll 
tax liability and is required to pay taxes 1 day after payday. 
It does not know the amount of the tax payment 1 day in advance 
of the tax-due date and must use the same-day method. The 
company bank calling officer--from one of the Nation's top five 
banks--was not able to explain to the taxpayer the information 
such as name control and tax type that needs to be included in 
the Fedwire. The taxpayer called the EFTPS customer service 
hotline of both financial agents. He was told that this 
customer service is provided by a subcontractor to the IRS, 
which is only responsible for handling ACH. They had no 
information on Fedwire.
    How can the IRS, with a system that lacks clear and concise 
instructions, legitimately penalize a taxpayer for erroneous or 
delayed payments?
    Second, the IRS continues to block the use of industry 
practices to correct erroneous ACH payments. TMA recognizes the 
regulatory challenges that confront the IRS and FMS arising 
from the need to develop procedures to correct errors that were 
not prevalent in the paper check environment. Such a situation 
exists when a financial institution that originates an ACH 
credit at the direction of the taxpayer finds it necessary to 
correct an error. Treasury, which has chosen not to adopt 
industry rules, requires both the taxpayer and the financial 
institution to obtain advance approval to correct an error by 
means of unexplained procedures.
    This is a recipe for confusion, delay, and dissatisfaction 
with EFTPS, and it will cost taxpayers money whether they use 
ACH credits or debits because they cannot obtain compensation 
for the government's use of their funds. I will note, though, 
that Mr. Donelson of the IRS stated today that they were 
exploring using NACHA operating rules. We would strongly 
support this position.
    Third, penalties imposed by the IRS for erroneous or late 
payments are unduly harsh. We refer to the 10-percent failure-
to-deposit penalty for not making a tax payment by EFT, and the 
penalty of up to 10 percent for the failure to make a timely 
tax deposit. We believe that compliance is always easier when 
the carrot is larger than the stick.
    In summary, the deficiencies outlined in our testimony 
today can be remedied if the IRS and the FMS recognize them and 
take prompt and thorough steps to address them. They need not 
and should not stand in the way of the transition from paper to 
more efficient electronic payment methods or the scheduled 
implementation of EFTPS.
    We would recommend the following: That the IRS and FMS 
should clarify and improve procedures for same-day payment 
mechanisms; that they should adopt NACHA operating rules for 
the reversal of erroneous ACH tax payments; and, finally, that 
they should adjust the penalty rules for 6 months following the 
effective date of the mandate to use EFTPS.
    We appreciate the opportunity to present the views of the 
Treasury Management Association on this important transition to 
electronic tax payments, and we will welcome any questions that 
you may have. Thank you.
    [The prepared statement follows:]

Statement of John M. Foehl, Jr., Chief Financial Officer and Treasurer, 
Housing Authority Insurance; on Behalf of the Treasury Management 
Association

    Good morning, Madame Chairman and members of the 
Subcommittee on Oversight of the Committee on Ways and Means. I 
am John M. Foehl, Jr., Chief Financial Officer and Treasurer of 
Housing Authority Insurance, an insurance company based in 
Connecticut that provides insurance coverage to public and non-
profit housing authorities throughout the United States. I am 
honored to offer this statement on behalf of the Treasury 
Management Association (TMA). I serve as Chair of the TMA EFTPS 
Task Force and am also a member of the Association's Government 
Relations Committee. Today, I am accompanied by Arlene S. 
Chapman, TMA Standards Manager.
    TMA represents about 10,000 treasury professionals who, on 
behalf of over 4,000 corporations and other organizations, are 
significant participants in the nation's payment systems and 
manage their organizations' banking relationships. Corporations 
represented by our members are drawn generally from both 
Fortune 1000 and middle market companies. Many of our members 
are responsible for making federal tax payments and using the 
Electronic Federal Tax Payment System (EFTPS). Corporations 
employing TMA's members were among the approximately 800 
taxpaying organizations mandated to pay electronically in 1995 
and among the 700 mandated last year. A significant percentage 
of our member's employers will be mandated starting July 1, 
1997.
    TMA has been actively involved in presenting its members' 
views on the Treasury's electronic tax collection initiatives 
for over five years, even before the inception of TAXLINK, the 
test system that preceded EFTPS. We have sought to work with 
the Internal Revenue Service (IRS) and the Financial Management 
Service (FMS) in support of their stated goals: to automate and 
expedite federal revenue collection procedures and to reduce 
the administrative burden imposed on taxpayers and the 
government by the collection system.
    We support the government's planned transition from paper 
to electronic payments, a move which is also underway in the 
private sector. In the Association's view, electronic commerce 
generally--and EFTPS specifically--offers cost-effective 
payment and reporting efficiencies that benefit businesses, the 
tax-paying public, and the federal government.
    TMA has not hesitated to voice its concerns, however, when 
we believed that the government's regulations, procedures and 
instructions to the public increase administrative burdens on 
corporate taxpayers, lack clarity and consistency in their 
definition and application, and impede the efficiency of the 
electronic tax collection process.
    In our view, the exchange of information and a process of 
discussion and negotiation between the private sector and the 
government are critical to increased public understanding and 
user-friendly implementation of EFTPS. The concerns that TMA 
will express today are offered, therefore, in a spirit of 
constructive criticism, based on the experience of having 
successfully worked with IRS and FMS to deal with significant 
payment system and liability issues and communications problems 
similar to those that are faced today.
    The Subcommittee's announcement of this hearing identified 
three issues to be examined: the current status of EFTPS 
implementation; concerns about specific features of EFTPS; and 
the need for an additional delay or changes to the program. Our 
testimony will describe three specific problem areas where 
inefficient or non-existent procedures and confused 
communications impede public understanding and impose burdens 
on corporate taxpayers who would otherwise welcome the 
transition from paper to electronic payments. The IRS and the 
FMS can and should be able to address and resolve these issues 
promptly and successfully.

                         Problem Identification

    TMA has recently called the attention of the IRS and the 
FMS to unresolved problems in three EFTPS operating areas that 
have the potential to significantly increase the time and cost 
of taxpayer compliance with EFTPS, masking the real advantages 
of electronic payment methods and giving rise to resistance 
among taxpayers who might benefit most. They involve:
     Barriers to the use of same-day payment methods, 
such as Fedwire.
     Difficulties in reversing ACH tax payments made to 
the government in error.
     Excessively harsh penalties for incorrectly 
formatted or late payments and for failure to pay taxes 
electronically.

1. Barriers to the Use of Same-Day Payment Methods Continue to 
Plague Taxpayers Who Need to Employ this Option.

    Taxpayers making electronic tax deposits need a way to pay 
the government on the same day that the tax payments are due. 
Without such mechanisms, the tax payments may be late, because 
the primary payment method--the ACH--requires the taxpayer to 
report the amount of the tax payment one day in advance of tax 
due date. There are three reasons that same-day tax payment 
mechanisms are critical to all taxpayers:
     As an emergency back-up: Prudent risk management 
of electronic systems requires taxpayers--especially those 
paying by ACH credit--to have a back-up, contingency payment 
mechanism in the event of ACH systems failures, emergencies or 
disasters. The Federal Reserve's Fedwire electronic system 
settles payments on a same-day basis. The ability to use 
Fedwire to make urgent, time-critical tax payments is essential 
to compliance by taxpayers with IRS payment deadlines and to 
avoiding the time-consuming penalty assessment and abatement 
process.
     For next-day deposits: Companies with $100,000 or 
more in payroll tax liability are required to pay their taxes 
one day after pay day. Many of them are unable to report the 
amount of their tax payment one day in advance--that is, on pay 
day--as is necessary in the ACH environment. A same-day payment 
method allows taxpayers to both report and pay their taxes on 
tax due date.
     For better management of cash flows and the timing 
of large funds transfers: A company may be required to transfer 
funds early in the morning to pay for large securities 
settlements or to repay loans. If a large ACH tax payment is 
posted to the company's account at 8:30 a.m. Eastern Time--
which is the time that funds are deducted from the accounts of 
taxpayers who use the ACH credit method--the company may be 
unable to meet its business obligations. Requiring the company 
to maintain idle balances in its account in anticipation of an 
early morning tax payment posting would represent an added cost 
of paying taxes. Fedwire tax payments are not due to the 
government until 2:00 p.m. local Federal Reserve head office 
zone time.
    Three same-day Fedwire tax payment mechanisms have been 
developed by the Federal Reserve. They are in place and 
available for use by taxpayers. TMA has recommended to the IRS 
and the FMS a number of times over the past few years that 
these same-day payment mechanisms be available to all business 
taxpayers who need to use them, without restrictions and 
without prior written approval from Treasury.
    Nevertheless, confusing messages on Fedwire availability 
continue to be conveyed by the government, the procedures for 
enrolling in and using Fedwire are either non-existent or vague 
at best, and no government agency is taking the responsibility 
to help taxpayers understand and use the Fedwire system for tax 
payments.

Availability of same-day payment mechanisms: confusing messages

    The FMS, in its proposed rule for financial institutions 
and Federal Reserve Banks processing tax payments through EFTPS 
(31 CFR Part 203), would restrict same-day methods to ``certain 
taxpayers that do not have information available to initiate 
the transaction one business day prior to the tax due date, or 
to correct a deficiency in an ACH payment.'' This would appear 
to eliminate the category of taxpayers that requires a same-day 
payment mechanism for cash management purposes.
    It also contradicts the EFTPS Payment Instruction Booklet 
issued by the Treasury's Financial Agents to enrolled 
taxpayers. These instructions state that ``taxpayers who cannot 
[emphasis added] use the Automated Clearing House (ACH) payment 
mechanisms may use one of the Same Day Payment mechanisms.'' 
Later in the same paragraph, however, taxpayers are advised 
that ``these mechanisms...are available to all [emphasis added] 
business taxpayers who have enrolled in EFTPS.''

Same-day payment mechanisms: non-existent enrollment procedures

    A same-day payment mechanism is not listed--or even 
mentioned--as a payment option on IRS's EFTPS Business 
Enrollment Form 9779. TMA has received a number of calls from 
its members asking how they can arrange to use a same-day 
payment method.
    The instructions to taxpayers that accompany the enrollment 
form state only that ``in some instances a business may find it 
necessary to make a same day payment,'' adding that ``further 
information on Same Day Payments will be provided in your 
enrollment confirmation package.'' These statements strongly 
imply that same-day payments are a rarely used exception 
procedure, they do not explain the importance of same-day 
mechanisms, and they fail to educate the taxpayer seeking 
information on how to enroll for them.

Same-day payment mechanisms: Instructions for use are unclear 
or non-existent

    When their enrollment is processed, each taxpayer receives 
an EFTPS Payment Instruction Booklet prepared by one of the 
Treasury's EFTPS Financial Agents.
    Nowhere in the instructions to taxpayers chosing the ACH 
Credit payment method is there mention of the need to be 
prepared to use a back-up, same-day electronic payment method 
in the event of emergencies. There is no reference to the 
availability of Fedwire same-day payment mechanisms for this 
purpose and no instruction on how to use them.
    In a separate section on Same Day Payments, the instruction 
booklet advises taxpayers to contact their financial 
institutions to ensure that their bank has received Fedwire tax 
payment instructions from the Federal Reserve, which operates 
same-day mechanisms. The taxpayer is instructed to include 
specific information--such as taxpayer name control and tax 
type--when sending the payment. That is the only guidance the 
taxpayer receives from the government on how to use an 
emergency, time-critical payment mechanism.
    What are the consequences of this failure to communicate 
with the taxpayer? The experience of a recent caller to TMA 
reveals that the taxpayer is thereby left completely in the 
dark, because financial institutions--even the largest of 
them--may not be prepared to instruct taxpayers on how to use 
Fedwire mechanisms, and the Treasury Financial Agent's Customer 
Service Hotline disclaims all responsibility.
    The caller's company is mandated to pay electronically 
starting July 1. The company has more than $100,000 in payroll 
tax liability and is required to pay taxes one day after pay 
day. It does not know the amount of the tax payment one day in 
advance of tax due date, and must use a same-day method.
    The company's bank calling officer--from one of the top 
five banks in the country--was not able to explain to the 
taxpayer the information, such as name control and tax type, 
that needed to be included in the Fedwire.
    The taxpayer called the EFTPS Customer Service Hotline 
Numbers of both Financial Agents. He was told that this 
Customer Service is provided by a subcontractor of the IRS 
which is only responsible for handling ACH. They had no 
information on Fedwire.
    An electronic tax system that is not prepared to 
communicate emergency instruction procedures to taxpayers 
facing severe penalties for untimely payments is a system that 
is not prepared to deal with the emergencies that may be faced 
by taxpayers, whether they be flood, electrical outages or 
system failures.
    An electronic tax system whose agents do not provide 
instruction to taxpayers on the proper use of one of the 
authorized payment mechanisms is not a system that can 
legitimately penalize taxpayers if the tax payment information 
is erroneous or the tax payment is delayed.

Same-day payments: reversed for format errors

    Taxpayer grievances resulting from these failures to 
adequately define procedures and communicate instructions will 
be compounded if FMS's Rule 31 CFR Part 203 takes effect as 
proposed. Section 203.14 (1)(iii) of the rule states that the 
Federal Reserve Banks (FRB) may reverse a same-day transaction 
if it ``does not meet the edit and format requirements set 
forth in the procedural instructions.''
    Given the complexity of the Fedwire format and the lack of 
adequate training and instruction, errors will be made, 
especially at first, by taxpayers and financial institutions. 
The FMS and the Federal Reserve Banks should not lightly 
undertake to reverse high dollar tax payments made in good 
faith, causing taxpayers to incur potentially huge penalties. A 
major U.S. oil company has already suffered penalties in excess 
of $100,000 as a result of a simple format error.

2. IRS Continues to Block the Use of Traditional Procedures to Correct 
                         Erroneous ACH Payments

    TMA recognizes the regulatory challenge that confronts the IRS and 
FMS arising from the need to develop procedures to correct errors that 
were not prevalent in the paper check environment.
    Such a situation exists when a financial institution that 
originates an ACH credit at the direction of the taxpayer finds it 
necessary to correct an error. The financial institution might have 
transmitted duplicate payments--a single duplicate tax payment, a batch 
of duplicates, or an entire file--multiple batches--of duplicate 
credits. Or the taxpayer might have made the error, designating the 
Treasury as the recipient of a payment that should have gone to another 
party, or specifying the wrong payment amount.
    The NACHA Operating Rules that govern the ACH have procedures to 
deal with these types of errors. They are efficient, timely and 
responsible procedures that have served the originators and receivers 
of payments as well as the financial industry for many years.
    The NACHA rules governing ``Reversing Entries'' state that a 
reversal to correct an erroneous entry must be transmitted or made 
available to the receiving financial institution by midnight of the 
fifth banking day following the settlement date of the erroneous entry. 
Under NACHA rules, the originating financial institution--in this case 
the taxpayer's bank--agrees to indemnify all parties against claims or 
losses resulting from that reversing entry. Advance approval is not 
required to reverse the erroneous payment.
    However, Treasury has chosen not to adopt industry rules, although 
it has yet to spell out its procedures.
    The EFTPS Payment Instruction Booklet sent to enrolled taxpayers 
warns taxpayers that ``if a duplicate payment has been made, IRS must 
approve an ACH Credit reversal.'' If approval is not received in 
advance, the reversal ``will be returned to your financial institution 
as an unauthorized entry. For specific instructions for initiating an 
ACH Credit reversal, contact EFTPS Customer Service.'' Instructions are 
not explained in the booklet.
    The FMS is also developing reversal procedures that the banks must 
follow. FMS's proposed rule, 31 CFR Part 203, Section 203.13, states 
that ``correction of ACH credit entries must be approved in advance by 
the IRS. The financial institution will find procedures for requesting 
corrections in the procedural instructions.'' The proposed rule was not 
accompanied by procedural instructions.
    Requiring both the taxpayer and the financial institution to obtain 
advance approval to correct an error by means of unexplained procedures 
is a recipe for confusion, delay and dissatisfaction with EFTPS by all 
parties. Taxpayer grievances will be compounded by the FMS's proposed 
ruling in Section 203.12 that ``Treasury will not pay interest on any 
payments erroneously paid to Treasury and subsequently refunded to the 
financial institution.''
    Failure to adopt equitable, efficient procedures for reversing 
erroneous credit entries will discriminate against taxpayers choosing 
to pay via ACH credit. It will also give rise to substantial criticism 
from taxpayers who experience significant loss of time and money as a 
consequence of their inability to correct errors on a timely basis or 
obtain compensation for the government's use of their funds.

3. Penalties Imposed by the IRS for Erroneous or Late Payments Are 
Unduly Harsh.

    The IRS is concerned that all mandated taxpayers comply with the 
law and use electronic methods to pay federal taxes. The agency also 
requires that the taxpayer's electronic payment information be 
correctly formatted and error-free, so that the payment can be 
processed in an automated, timely and cost-effective manner.
    While these concerns are understandable, the unnecessarily harsh 
penalties imposed by the IRS for failure to comply with its 
requirements undermine the agency's stated intention to work in 
partnership and cooperation with the business community to achieve its 
goals and benefit taxpayers at the same time. We refer specifically to 
(1) the 10% failure-to-deposit penalty for not making a tax deposit by 
EFT and (2) the general penalty of up to 10% for failure to make a tax 
deposit on a timely basis.
    We believe that adjustments should be made to the penalty 
assessment rules for newly mandated taxpayers for six months following 
the effective date of the mandate to use EFTPS. Special forebearance 
during the early implementation stages is amply justified by the 
confusion, concerns and fears of taxpayers caused by the government's 
poorly defined procedures and inadequate, incomplete communication 
about how the system works. Adjustments to penalties would help 
overcome taxpayer resistance to EFTPS by signaling that the IRS is 
interested in working with taxpayers in a cooperative rather than a 
confrontational manner.

                      Summary and Recommendations

    In its testimony today, TMA has focused on three areas 
where communications to taxpayers about EFTPS are unclear, 
incomplete or non-existent, where EFTPS procedures cause built-
in inefficiencies, delays and taxpayer expense, and where there 
are significant gaps in taxpayer education and understanding.
    The three problem areas are:
    1. Barriers to the use of same-day payment methods continue 
to plague taxpayers who need to employ this option.
    2. IRS continues to block the use of traditional procedures 
to correct erroneous ACH payments.
    3. Penalties imposed by the IRS for erroneous or late 
payments are unduly harsh.
    These deficiencies are remediable if IRS and FMS recognize 
them and take prompt and thorough steps to address them. They 
need not and should not stand in the way of the transition from 
paper to more efficient electronic payment methods or the 
scheduled implementation of EFTPS.
    TMA recommends the following:

Clarify and improve procedures for same-day payment mechanisms.

    1. IRS and FMS regulations for EFTPS should clearly state 
that same-day payment mechanisms are available to all business 
taxpayers who wish to use them, without restrictions and 
without prior written approval from Treasury.
    2. IRS should (1) revise Business Enrollment Form 9779 to 
include a same-day payment option for mandated taxpayers, and 
(2) revise Enrollment Form Instructions to explain the use of 
same-day payment mechanisms in an emergency and the 
availability of such mechanisms to mandated taxpayers for other 
purposes.
    3. IRS and FMS should provide additional instruction and 
education to depository institutions and taxpayers on the use 
of same-day payment methods.
    4. IRS and FMS should identify Customer Service 
responsibility for same-day payment methods and communicate 
that information to depository institutions and taxpayers.
    5. Same-day payments by mandated taxpayers should not be 
reversed for edit and format errors for six months following 
the effective date of the mandate or until after the second use 
of the same-day mechanism, whichever comes later.

Follow industry rules for the reversal of erroneous ACH tax 
payments

    Procedures for reversing erroneous ACH payments should 
follow time-tested NACHA rules, which are clearly defined, do 
not require prior approval, and contain indemnification 
provisions. In TMA's view, such procedures would not be 
detrimental to the interests of the Treasury in protecting 
public funds. The FMS states in Sec. 203.16 of 31 CFR Part 203, 
its proposed EFTPS rule, that it has ``instituted operational 
safeguards to scrutinize all debit entries sent to the 
Treasury.'' Procedures are in place, therefore, to monitor and 
return illegitimate reversals and guard against unauthorized 
access to government accounts.

Adjust penalty rules for six months following the effective 
date of the mandate to use EFTPS.

    Adjust penalties against newly mandated taxpayers in the 
following circumstances:
    1. Format or data errors in a timely payment. Penalties 
should not be assessed against the taxpayer, nor should the 
payment be returned, for six months following the effective 
date of the mandate to use EFTPS if errors in format or data 
cause a delay in posting the payment to the taxpayer's account. 
The IRS or the Treasury Financial Agents should work with 
taxpayers and their financial institutions to identify and 
correct the errors during this period.
    2. Late payments. During the first six months of the 
mandate's effective date, taxpayers may be confused or 
uncertain about ACH requirements and procedures. As a result, 
their tax payments may be delayed. During this six-month 
period, a newly mandated taxpayer whose electronic tax payment 
is late and who thereby retains use of tax funds should pay 
compensation to the government based on the time value of those 
funds, rather than on a percentage of the tax amount as 
specified in the IRS penalty rule. Traditional compensation 
rules use a formula involving the amount of the payment and the 
number of days the payment was late, with the overnight federal 
funds rate determining the value of the funds.
    3. Failure to deposit by EFT.
    a. Enrolled taxpayers who fail to deposit by EFT. A 
taxpayer who has enrolled in EFTPS on a timely basis but 
continues to pay taxes with a paper coupon instead of 
depositing by EFT should be granted a 90-day waiver of failure-
to-deposit penalties, effective from the date of the mandate.
    b. Unenrolled taxpayers who fail to deposit by EFT. A 
taxpayer who fails to enroll in EFTPS by the mandate date 
should be granted a 60-day waiver of failure-to-deposit 
penalties, effective from the date of the IRS notice of non-
compliance. The taxpayer thereby is given about 30 days to 
complete the enrollment process and 30 days to become familiar 
with the EFTPS system.

Other EFTPS Recommendations

    TMA made recommendations regarding other EFTPS procedures 
in comments to FMS on 31 CFR Part 203, the proposed rule for 
financial institutions and Federal Reserve Banks that use 
electronic funds transfer mechanisms to process Federal tax 
payments through EFTPS. TMA's January 13, 1997, comment letter 
to FMS is included as an attachment to this testimony.
    We appreciate the opportunity to present the views of the 
Treasury Management Association on this important transition to 
electronic tax payments.
      

                                

    Chairman Johnson. Thank you very much for your excellent 
testimony that has focused very clearly, I think, on the 
problems that need to be solved before July. And we look 
forward to working with you as we review the material presented 
here today over the course of the day and work with the IRS as 
well to see what problems can be addressed in a timely fashion.
    Mr. Portman.
    Mr. Portman. Thank you, Madam Chair, and I thank the 
panelists for helping us out with some of the specific, what I 
would consider mitigating, factors that could be put in place 
to try to make the program work better, should we move ahead, 
or even if we were to phase it in.
    I have a number of questions first for Ms. Kelley with 
regard to your proposal on amnesty. As you know, we in essence 
have already done that. We suspended the program. You can also 
waive penalties. You can abate penalties--in other words, have 
them be assessed and then be abated. You mentioned in your 
closing statement 180 days. Specifically, what kind of amnesty 
are you talking about and how would it work with regard to 
penalties?
    Ms. Kelley. Because we support a successful implementation 
of EFTPS and a broad implementation, we think that the worst 
thing that could happen to it is a bunch of penalty notices 
going out to taxpayers. That probably is the thing that will 
decrease taxpayer confidence the most in the system.
    We feel that if the government and the private sector work 
together to resolve these issues, they can probably be resolved 
fairly quickly.
    We suggested two quarters to allow time for timely 
notification of taxpayers who are not aware of their 
obligation, and also we allowed that Congress monitor the 
process of this and keep the amnesty period open until such a 
time as the systems issues and the further taxpayer education 
issues have been addressed.
    Mr. Portman. Ms. Lee, do you have any comment on that?
    Ms. Lee. Well, I would agree that abating the penalties 
will not work. We do not want to have tens of thousands of 
notices going out to taxpayers. Rather, we would support 
waiving the penalties so that notices will not be issued while 
we work through these issues.
    Mr. Portman. Let me ask you a followup question to one that 
we got into earlier with the Service and with the bankers, and 
that was with regard to the data and the payment. In many 
instances, particularly among our smaller businesses, there 
might be an instance where payment can be made, but the data 
would follow. You indicated, Ms. Lee, that you were encouraged 
by what you heard from Mr. Donelson with regard to emergency 
situations, that there could be some separation between those 
two.
    The larger concern that I heard expressed here earlier 
today was that because of financial management concerns, 
particularly the GAO audits of the Internal Revenue Service, 
that it would be problematic for them not to have the data 
accompanying the payment.
    I assume you have been in discussions with the Service and 
others in the private sector on this issue. Can you give us 
some insight about that? Do you think that is a legitimate 
concern? If so, how could it be resolved?
    Ms. Lee. That concern has never been raised with me by the 
IRS. However, if the concern is the need to provide how much of 
the dollars are for Federal withholding versus Medicare or 
Social Security, we certainly can do that and give them a very 
good estimate. We also believe that significant controls can be 
put in place so GAO would not have a concern. I would think 
that GAO would support a process that would result in notices 
not being generated, and payment being made in a timely manner. 
This would be in contrast to not having such a solution, where 
the funds do not flow to Treasury; and a lot of penalty notices 
are issued. In that case, the IRS, the employer and the service 
provider have to deal with all of those notices. We are happy 
to work with both the Service and the GAO on this matter.
    Mr. Portman. I think that is a constructive comment, and it 
surprises me that you did not realize that that was a policy 
concern of theirs. And if indeed it is, it sounds as though 
there may be ways to address it by, as you say, providing the 
data in a segregated form so that, in fact, we can know what is 
going to the Social Security Trust Fund or the Medicare Trust 
Fund.
    Ms. Lee. Right, if that is the question that they have, 
yes.
    Mr. Portman The other final comment, I guess, and question 
that I would have is with regard to timely notification. Your 
data there is very compelling, and it is a general concern that 
many of us have with the tax system, that the notification 
comes out, in this case a few months later, in other cases a 
couple of years later. And if it were a more timely 
notification process, then taxpayers could resolve some of 
these issues.
    I would ask you the same question. With regard to your 
discussions with the Internal Revenue Service, do you think 
that this is something that can be realistically handled? If 
not, what are the barriers to it and how can we get at that?
    Ms. Lee. At a recent meeting, the IRS said that they are 
exploring a solution that would not modify their normal notice 
process but would complete a one-time run of all of the 
taxpayers that would have been subjected to penalty because 
they are not using the system. This would be done perhaps 45 
days after July 1. We still think that is not enough time.
    Also, under the current notice process, a service provider 
receives a copy of that notice so that we can work with that 
taxpayer and we resolve the problem for the taxpayer. If the 
IRS goes outside the notice process, we will not get a copy of 
that notice. We have asked them to try to consider a way to 
allow us to get a copy of the notice.
    Mr. Portman. Do you get that notice electronically, or do 
you get it in the mail?
    Ms. Lee. Actually, right now it is paper, but we are 
working--we have made a proposal through one of the service 
centers--to come up with a way to get those notices 
electronically. This would allow us to resolve those issues 
quickly before the taxpayer even gets the paper notice and help 
the IRS provide better service to the taxpayer.
    Mr. Portman. Just as the government would like the money 
more rapidly through electronic transfer, I would think the 
notice coming out electronically would make a lot of sense to 
the extent you have that kind of communication link with the 
Service.
    Ms. Lee. Yes.
    Mr. Portman. And that would certainly be encouraged.
    The final related point here is the enrollment period, and 
I would hope, again, that could be resolved. If it takes 2 to 
10 weeks to enroll, people do not learn about this for a lot of 
reasons until July 1, that would, it seems to me, also fall in 
that category. We need to come up with some way for that period 
to be shortened or for some enrollment amnesty to be able to 
avoid the penalties being assessed.
    Again, I thank you all for working with this Subcommittee, 
with our staff, and with the Internal Revenue Service to try to 
come up with a constructive way to handle this.
    Thank you, Madam Chair.
    Chairman Johnson. Thank you all for your input. We do 
intend to put a lot of effort into working with you and the IRS 
and others on the problems, because we are at this point after 
1 year's deferral because we did not plan a good notification 
and marketing strategy. So we have, in a sense, minimized 
taxpayers' ability to enter into the system positively and to 
comply easily.
    It is, I think, our responsibility to try to correct those 
past problems, to work through the difficulties that we see 
there, because I agree with you. When all of a sudden, many 
more taxpayers are going to participate, you are going to see 
little problems mushroom and be very, very big problems.
    So we hope to do this, to really take the input that we 
have heard today seriously, because we want this to go better, 
but we also want to use what we have learned about this, and we 
want the IRS to use what they have learned about this next 
time, in the next implementation of whatever. Because if you 
look at the modernization challenge before the IRS, this is a 
very small challenge. And if we cannot figure out how to do 
this one right, we certainly want to lay the foundation for the 
next one and the next one and finally the very big 
modernization challenges that we really have to be capable of 
meeting both as a bureaucracy and as a people.
    Thank you very much for your input, and we look forward to 
working with you.
    Oh, excuse me. Karen, I am sorry. I did not realize you 
were still here. I will have to excuse myself. We were talking 
earlier about our schedules. Thank you, Karen.
    Ms. Thurman. Thank you, Madam Chairman. Just a couple of 
quick questions.
    From what I have gathered, is it my interpretation that all 
of you believe this is a good program? I mean, forget the 
problems, but you believe that Congress should go forward.
    Mr. Foehl. Yes.
    Ms. Kelley. Yes.
    Ms. Lee. Yes. We believe if the problems can be solved, 
then certainly we should go forward. And we support electronic 
filing. It is more efficient. It will help the government do 
their job better.
    Ms. Thurman. OK. Then, Ms. Kelley, in yours--and I imagine 
Ms. Lee, too; Mr. Foehl, I do not remember. You were involved 
with the educational process.
    Ms. Kelley. Yes, very much so.
    Ms. Thurman. OK.
    Ms. Lee. As were we.
    Mr. Foehl. As we have been, also.
    Ms. Thurman. OK. I needed to know that. And I notice that 
you also have been sitting here all day listening to the 
testimony. Would you agree with some of the testimony prior to 
this about where the problems have been? And do you believe 
those are some of the myths that are still out there? Or do you 
believe these things have been looked at, or are just a lack of 
education? What else can we do? Give us some ideas here because 
that seems to be the big issue.
    Ms. Lee. I would like to compliment the IRS--I do not know 
that anyone did that today--on their training. ADP has worked 
very closely with the IRS, and they have been very supportive 
of our goals. They have worked with us on sharing information, 
and have even attended some of our seminars. So I think they 
have made a very big effort. They were given a very difficult 
task. I know that ADP has done hundreds of seminars, and we are 
continuing to do hundreds of seminars today. I personally have 
given many seminars and listened to questions from small 
business people. I think the problem was you had a tight period 
of time, taxpayers were notified last June--I believe it was 
June--of this challenge. And even with the 6-month delay, you 
really only had 1 year.
    We deal with a lot of small business people. And on a 
technical matter such as this, it is almost repetition, 
repetition, repetition. There was a major challenge out there. 
For example, we have had an issue with our taxpayers/clients 
where they need to enroll on their own. ADP has sent out notice 
after notice to them, and as of March, we had 200,000 
taxpayers/clients who had not enrolled on their own. It is not 
the fault of the IRS. They have sent notices; we have sent 
notices.
    So I think a lot of it is time and repetition.
    Mr. Foehl. Ms. Thurman, I would also like to comment. I 
think the issues that were raised today are valid issues, even 
the small business issues. I think it is a case of 
communication, and there has to be continued communication back 
and forth between all of the taxpayers out there and the 
associations, and the IRS and the FMS. And if that occurs, I 
think we can get over the issues that were raised, but it has 
to continue.
    Ms. Kelley. I would as well like to compliment the IRS and 
the Treasury and the financial agents who helped me proof 
information that I wrote and sent out and who did a lot of 
phone communication at a time when they were hard pressed to 
accomplish what they were doing, to say the least. And, again, 
I think the concerns presented today, I would agree, are 
legitimate concerns. And I would say that there is a difference 
between informing and educating, and because this system is so 
brand new, a good job has been done of informing taxpayers, but 
it is going to take a little while before that knowledge 
becomes institutional and people really understand this, so 
that people are going to their banks and the banks know how to 
advise them, the tellers are advised to say something other 
than, ``EFTPS? What is that?''; that tax practitioners know 
where to go for accurate information.
    The people on this panel are very lucky. We know the people 
in the government and at the financial agencies who are very 
skilled and very knowledgable and can answer our questions so 
that we can produce education for our members, and I know in 
everybody's case here, not only our members but going out to 
newspapers and magazines to try to get the information out to 
the country as well as our members.
    So I think, yes, that if we keep working together, we can 
get to a point where taxpayers are adequately informed about 
the system.
    Ms. Thurman. I guess one of the things that we should have 
asked as Congresspeople who make these laws is how long we 
should take to implement this system. I would just like to say 
that we should remember that we have got a lot of good folks 
out there with our small businesses. We have people that come 
talk to us all the time. Maybe it should have been incumbent on 
us, instead of beating up on the agency that we directed this 
work to go to, that we should have taken the time and asked 
those people that were involved with the system what they 
thought was reasonable and a reasonable time in making a system 
like this work. And so, quite frankly, I appreciate the 
testimony because that gives me an idea so that I can ask that 
question next time we start to take on a new program. Not to 
say that we still would not do it, it is simply whether we can 
do it reasonably, and what has to be worked out to make it more 
efficient. I think this program is a very good program, but 
because of some of the quirks in it, it is going to get a bad 
review, and that is unfortunate.
    I appreciate you all being here, and I certainly appreciate 
all of the testimony that we have received today, because I 
really think it is something we have to think about when we 
make changes here.
    Thank you.
    Mr. Portman [presiding]. Thank you. I just have to make one 
comment here. We do even worse, sometimes, with regard to major 
substantive changes to the Tax Code and expect them to be 
effective for the next tax year. So at least we gave the IRS a 
couple of years here to get that first letter out. But that is 
an excellent point. We should have had not only the IRS but the 
private sector more involved at the outset to be sure that we 
understood these transition issues.
    Thank you all very much for being here. I appreciate your 
testimony. With that, this hearing is adjourned.
    [Whereupon, at 2:46 p.m., the hearing was adjourned.]
    [Submissions for the record follow:]

Statement of James R. Burkle, Vice President, Corporate Tax, Ceridian 
Corporation, Minneapolis, MN

    Madam Chairman and members of the subcommittee, Ceridian 
Corporation, headquartered in Minneapolis, Minnesota, is a 
leading information services company that provides integrated 
human resource management systems, outsourced payroll 
processing, tax filing, training and other consulting services 
to predominantly large and mid-sized businesses. We serve over 
40,000 employers in the US, including 40 percent of the Fortune 
1,000 and 30 percent of the Fortune 100. As a bulk tax filer, 
Ceridian makes over $60 billion in federal tax deposits 
annually with the Internal Revenue Service (IRS)--about 14 
percent of all federal taxes deposited. We are proud of the 
service we have provided to our employer customers and the IRS 
in over 20 years of tax filing.
    With that experience and reputation for customer service, 
Ceridian has been able to work with the IRS on a number of 
initiatives to update tax reporting and data collection 
processes, such as STAWRS. When NAFTA implementing legislation 
charged them with developing an electronic tax payment system, 
the IRS called on Ceridian to help with technical aspects. We 
believe a successful electronic payment system will benefit 
employer taxpayers and the IRS alike by easing the paperwork 
burden, reducing employers' time and effort to make semi-
monthly, monthly or quarterly tax deposits and improving the 
overall efficiency of the Service.
    Ceridian was prepared to meet the January 1, 1997, deadline 
for the next phase of the IRS' electronic tax payment system, 
EFTPS, and has enrolled all our customers who are now required 
to comply by July 1, 1997. Throughout the EFTPS development 
process we worked with the IRS to address a number of system 
administration problems that concern all bulk tax filers. We 
are encouraged about upcoming meetings with the IRS, but remain 
concerned that issues such as timely notification, emergency 
procedures, the ability to reverse a file and enrollment 
procedures, if left unresolved, will be exacerbated by the 
magnitude of taxpayers required to comply with EFTPS on July 1.
    Approximately 1.2 million additional employers are required 
to make their tax payments through EFTPS on July 1, 1997. Only 
1,500 employers are currently mandated. An 800-fold increase in 
taxpayers to be supported by EFTPS--all at once--could 
undermine the integrity of the system and cost employers 
unnecessary penalties. EFTPS should be well-tested and 
outstanding issues resolved before hundreds of thousands of 
taxpayers enter the system. The principle of tax equity demands 
that our government not unfairly penalize taxpayers for 
failures of the system.
    While resolution of these systems issues will alleviate 
many situations in which penalties may be unduly assessed, 
penalty administration goes beyond this initial enrollment 
phase and will continue to be a concern for taxpayers who are 
generally in compliance. One of the greatest fears of employers 
is that despite a general history of compliance, one 
inadvertent mistake or technical error will cost them excessive 
penalties. Appropriate penalty administration is important to 
Ceridian and our employer customers and key to successful 
taxpayer compliance with EFTPS. Ceridian appreciates the 
opportunity it has had to discuss penalty administration with 
the IRS and subcommittee staff, and looks forward to continuing 
those discussions in the future.

                         Penalty Administration

    Taxpayers who in good faith are trying to comply with EFTPS 
are judged by the same criteria and subject to the same 
penalties as those who may be purposefully evading the law. 
Employers are penalized two percent of their payroll tax 
liability, per deposit, for late payments, and 10 percent of 
their payroll tax liability, per deposit, for failing to 
deposit taxes using EFTPS. Penalties are automatically assessed 
regardless of the reason payment was late, or was not made 
through EFTPS even if tax funds are deposited on time. The 
penalty system also does not take into account a taxpayer's 
compliance record.
    For compliant taxpayers and bulk filers, inadvertent human 
or technical errors occur infrequently, but the price for those 
mistakes is dear. For example, because of a miscommunication 
between one Ceridian employee and one employee of a new 
customer, that customer was not correctly identified as an 
EFTPS/TAXLINK payer and months of deposits were made 
incorrectly, all subject to penalties even though the tax was 
paid on time. In this situation where a bulk filer like 
Ceridian has a 99 percent accuracy rate in its filing process, 
penalties were unduly assessed.
    A fair and effective penalty system should take into 
account a taxpayer's compliance experience. An experience 
rating mechanism would give taxpayers a clear financial 
incentive to comply and improve the integrity of the system--
penalties would be less arbitrary and more focused on non-
compliance.

                          Timely Notification

    Despite education efforts on the part of IRS, payroll 
associations, payroll service providers and other third party 
providers, there is a significant number of taxpayers who 
either don't clearly understand or are unaware of their EFTPS 
obligations. According to the IRS, over 200,000 employers 
required to make deposits through EFTPS on July 1 have not yet 
enrolled. When July 1 arrives these taxpayers may mistakenly 
continue to pay their taxes by the FTD paper coupon method or 
magnetic media, not by EFTPS.
    The IRS currently will notify taxpayers only on a quarterly 
basis if they have not paid their taxes through EFTPS, thus, a 
taxpayer may continue to make tax deposits in the usual way 
unaware of its new EFTPS obligations for up to five months 
before IRS notifies them of non-compliance. In the meantime, a 
10 percent penalty will have accumulated on each successive 
deposit over those five months--even if the tax was paid on 
time. The penalty incurred is significant and can amount to 
almost as much as the tax due in one quarter. Penalties of this 
amount and frequency are unwarranted. A more timely 
notification system would help taxpayers successfully comply 
with EFTPS.

                          Emergency Procedures

    The EFTPS electronic filing system accelerates the 
transmission of funds. It also requires related taxpayer 
information to be transmitted at the same time as the tax 
payment. A tax payment is considered late if not accompanied by 
the taxpayer data and therefore subject to a penalty. Because 
of the tight time frames under EFTPS, a system failure caused 
by anything from technical complications to natural disasters 
can interrupt or prevent timely tax deposits--whether that be 
an hour or a day late. And a system failure could affect any 
one of the players in the EFTPS process--the taxpayer, payroll 
service provider, or the Treasury Financial Agent--but the 
taxpayer would receive the penalty notice for failure to 
deposit on time.
    Currently, payroll service providers making tax deposits 
via magnetic media have up to five days following a tax deposit 
to send the IRS the related taxpayer information. This gives 
bulk filers the flexibility to make any necessary data 
adjustments when the correct data is not immediately available 
from the taxpayer. EFTPS minimizes opportunities to make these 
adjustments. For next day taxpayers, there is no opportunity to 
adjust data. A penalty situation can be avoided if emergency 
procedures are provided to allow for flexibility in the 
transmission of taxpayer data as is provided under the current 
system.

                             File Reversals

    The IRS has not yet established clear procedures for 
payroll service providers on how to reverse an erroneous bulk 
file after the file has been transmitted. Service providers 
deposit funds and transfer the accompanying taxpayer 
information to the IRS on behalf of hundreds of thousands of 
taxpayers. Because of technical or human error, one bulk file 
may contain duplicate data or funds. There currently is no 
procedure under EFTPS to reverse a bulk file after it has been 
deposited. Without a mechanism to reverse files, numerous 
unnecessary penalty notices will be sent to taxpayers.

                               Enrollment

    There continues to be confusion surrounding the EFTPS 
enrollment process. For example, the IRS' TAXLINK unit 
mistakenly informed a taxpayer that it was not enrolled only to 
determine two days later that the taxpayer actually was 
enrolled. This confusion caused the taxpayer's deposit to be 
late by one day and a penalty was assessed. Despite repeated 
communication by the public and private sector, many taxpayers 
do not fully understand their EFTPS obligations or remain 
unaware that they must pay business taxes as well as payroll 
taxes through EFTPS.
    Enrollment also can take up to 10 weeks during which 
deposits cannot be made through EFTPS until enrollment is 
complete. There is no clear procedure yet for making compliant 
tax deposits for taxpayers who may be partially enrolled on 
July 1; for newly created companies who must make payroll tax 
deposits before fully enrolled; and for new customers of 
payroll service providers. These partially enrolled taxpayers 
could make timely tax deposits outside EFTPS but would be 
assessed a 10 percent penalty. Procedures should be developed 
to accommodate those taxpayers who are making every effort to 
comply with EFTPS.
    Madam Chairman, I appreciate the opportunity to provide 
this testimony to the Oversight Subcommittee and welcome any 
comments. Ceridian looks forward to working with Subcommittee 
Members and the IRS in finding solutions to the issues 
identified.
      

                                

Statement of Hon. Scott Klug, a Representative in Congress from the 
State of Wisconsin

    Thank you, Mr. Chairman, for allowing me the opportunity to 
testify today. I would like to commend my colleague from 
Washington, Mr. Hastings, for introducing this important piece 
of legislation.
    As I'm sure you are aware, 99.7 percent of the nation's 
employers are small businesses and they employ 53 percent of 
the private work force. Small businesses also account for 47 
percent of all sales in the United States and are responsible 
for 50 percent of the private gross domestic product.
    Yet, small business owners face a tax and regulatory system 
that frustrates and discourages them. Government is meant to be 
the servant of the people, yet the existing federal tax and 
regulatory state unfairly acts as judge, jury, and master of 
honest, hardworking Americans.
    In the last two years, Congress has tried to help small 
business escape from under the thumb of the federal government. 
However, there is still a ways to go. This Congress is 
dedicated to championing legislation designed to encourage 
small business growth and prosperity, and I am dedicated to 
becoming one of its supporters.
    A perfect example of federal regulatory tyranny is the 
impending mandate on small business to comply with the EFTPS. 
This system requires any business with payroll taxes in excess 
of $50,000 to file these taxes electronically. If businesses do 
not comply by July 1, 1997, they will be subject to penalties. 
What's more alarming is that the compliance level drops to 
$20,000 for calendar year 1997, affecting an estimated 1 
million more of our nation's small businesses. This kind of 
mandate on small business owners is outrageous.
    As the implementation date approaches, several major 
concerns about EFTPS have been raised beyond the fundamental 
issue of more Federally imposed regulation. First and foremost, 
increased fees imposed by banks to process these transactions 
amount to a new tax on small businesses. Second, there is a 
perception that the IRS, albeit indirectly, will have 
electronic access to businesses' bank accounts. Third, in the 
event of a dispute with the IRS, there is no paper trail for a 
business to provide in its own defense. Fourth, many groups, 
including the Chamber of Commerce of the United States, the 
Small Business Survival Committee, and the National Federation 
of Independent Business are concerned about the IRS' ability to 
handle the increased volume of electronic filings.
    Again, I commend my colleague, Mr. Hastings, for 
introducing H.R. 722 to make compliance for small business 
voluntary--returning decisions about how to conduct business to 
the small business owner. Mr. Chairman, the Small Business Tax 
Payment Relief Act will free approximately 2,500 businesses in 
my district alone from this mandate. I hope this Congress will 
act quickly to relieve our nation's small business owners from 
this federal mandate. Thank you, Mr. Chairman.
      

                                

Statement of Hon. Ray LaHood, a Representative in Congress from the 
State of Illinois

    Mr. Chairman, thank you for holding this hearing and 
allowing me to testify on behalf of the many small business men 
and women in the State of Illinois. As you know, I am a sponsor 
of the Small Business Tax Payment Relief Act (HR 722) which 
eliminates a costly and unnecessary burden on America's small 
business. The bill is endorsed by both the National Federation 
of Independent Business (NFIB) and the Chamber of Commerce. But 
more importantly, Mr. Chairman, I support the legislation 
because of the Everett Birdsell's of the world. Everett is a 
small businessman in Jacksonville, Illinois. He is opposed to 
the federal government forcing America's small businesses to 
comply with yet another costly federal mandate.
    In 1993, Congress ordered all businesses to begin filing 
payroll taxes electronically. The Electronic Federal Tax 
Payment System (EFTPS) was mandated in the NAFTA Implementation 
legislation as a revenue raiser. Over 1.2 million businesses 
with an annual federal payroll tax of $50,000 or more are 
currently facing a mandatory EFTPS compliance date of July 1, 
1997. By 1999, all businesses with an annual federal payroll 
tax of more than $20,000 will be forced to comply.
    Many small businesses in my district, and in districts 
across the country, simply do not want to be forced to comply 
with this federal mandate. While the EFTPS system has proven to 
be an efficient method of transferring federal payroll taxes to 
the Treasury Department, it should be optional. Employers who 
wish to continue to make their federal tax deposits with 
traditional paper coupons should not face penalties from the 
Internal Revenue Service (IRS).
    Small businesses are the backbone of our economy, and their 
existence is already threatened by excessive government 
regulation. That is why I am a cosponsor and a supporter of 
legislation sponsored by my good friend and colleague, Mr. 
Hastings (WA). HR 722, the Small Business Payment Relief Act, 
will provide small businesses with the option of complying with 
the EFTPS. The bill will help businesses to maintain control of 
how their deposits are made and will prevent the imposition of 
a new, burdensome set of regulations. The decision on how to 
pay federal payroll taxes should be left in the hands of the 
small business owners, not dictated by the federal government.
    Mr. Chairman, thank you for your time and support.
      

                                

Statement of Hon. Frank A. LoBiondo, a Representative in Congress from 
the State of New Jersey

    I want to thank Chairwoman Johnson for holding this 
important hearing on H.R. 722, the Small Business Tax Payment 
Relief Act. I would like to also thank Representative Doc 
Hastings for introducing this vital legislation.
    The Small Business Tax Payment Relief Act would provide 
small businesses with the option of complying with the 
Electronic Federal Tax Payment System (EFTPS). EFTPS was 
mandated in 1993 in legislation implementing the North America 
Free Trade Agreement, requiring that all businesses with 
payroll taxes greater than $50,000 file their payroll taxes 
electronically. I have heard from small business owners in the 
Second District who are concerned about the cost of complying 
with this mandate and are wary of being charged penalties for 
not filing electronically. I spent more than twenty five years 
in a small business and the last thing a small business owner 
needs is another government mandate to worry about. I 
experienced first hand the frustrations of regulations that do 
not make sense and paperwork that is onerous and duplicative.
    Tax payment decisions should be made by small business 
owners, not the federal government. While electronic filing of 
tax information pursues the laudable goal of reducing federal 
paperwork demands, mandating electronic filing puts a serious 
burden on small businesses who do not have the technological 
capabilities to comply with this requirement. This legislation 
solves this dilemma by simply making electronic filing a 
voluntary action.
    Small businesses provide vital goods and services in our 
communities and they employ a majority of our workforce. 
Eliminating this unfunded mandate would give our businesses a 
helping hand as they work to grow and create jobs in our 
communities. As a Member of the Small Business Committee, I 
look forward to working with my colleagues on the committee and 
with other interested colleagues to provide relief for small 
businesses from this costly federal mandate.
      

                                

Statement of Elliott C. McEntee, President and Chief Executive Officer, 
National Automated Clearing House Association, Herndon, Virginia

    The National Automated Clearing House Association (NACHA) 
appreciates this opportunity to present its views on the 
federal government's Electronic Federal Tax Payment System 
(EFTPS) and legislation (H.R.722) that would exempt certain 
small businesses from the requirement to pay taxes 
electronically under this program. NACHA is a nonprofit trade 
association representing the Automated Clearing House (ACH) 
Network which provides government agencies, businesses, and 
consumers a safe, reliable, and cost-effective electronic 
payment mechanism.\1\ This payment mechanism supports Direct 
Deposit, Direct Payment, and many other consumer and commercial 
electronic payment applications, including federal tax payments 
under the EFTPS program.
---------------------------------------------------------------------------
    \1\ Through its thirty-eight member associations and more than 
14,000 member financial institutions, NACHA establishes the rules, 
guidelines, and standards for the exchange of commercial electronic 
payments via the ACH Network.
---------------------------------------------------------------------------

                             A. The Problem

    The United States Congress, thousands of corporations, and 
the Nation's financial institutions are concerned with the 
readiness of the federal government and taxpayers to 
successfully implement the next phase of the Electronic Federal 
Tax Payment System (EFTPS), which requires as many as 1.2 
million taxpayers to begin paying their federal taxes 
electronically. These concerns have been magnified because of 
the fear that the mandate will result in taxpayers incurring 
Internal Revenue Service (IRS) late payment and avoidance 
penalties of up to 10 percent of the tax payment due. NACHA 
believes that virtually all these concerns would be eliminated 
if the IRS provides temporary relief on avoidance penalties and 
imposes late payment penalties in a manner similar to those 
used in the private sector for compensating a party that is 
``injured'' by a late or erroneous payment.
    With the EFTPS program, the federal government has elected 
to use the ACH Network to collect tax payments electronically. 
The ACH Network was largely built by the private sector and its 
use will save the Federal government hundreds of millions of 
dollars in its revenue collection operations. Because the 
Federal government has elected to use a private sector payment 
network, we believe it should follow the rules governing that 
network except where such rules are inconsistent with public 
policy.

                            B. The Solution

    NACHA's proposed solution would only apply to business 
taxes collected through the EFTPS program and addresses the 
problems facing taxpayers required to begin making electronic 
tax payments by the July 1, 1997 deadline.
    In the private sector, if an electronic payment is delayed, 
then the party that has not made this payment on a timely basis 
compensates the party receiving the late payment according to a 
widely used formula. The amount of compensation is based on the 
time value of the funds to be paid and the number of days by 
which the payment was late. The formula, which is incorporated 
into the ACH Network rules, uses the overnight federal funds 
rate as its basis for determining the value of funds.\2\ The 
IRS may also want to assess a minimum fee to cover the 
administrative costs of assessing the penalty.
---------------------------------------------------------------------------
    \2\ Under the NACHA Operating Rules, Appendix Nine (pp. OR 102-
103), $ Compensation = (($ amount of entry)  (Fed. Funds Rate) 
 (# of days back-valued)) / 360. The Fed. Funds rate for April 
7, 1997 quoted in the Wall Street Journal was approximately 5.5 
percent. For EFTPS payments, the 90-day T-bill rate might be 
substituted for the Fed. Funds rate. At the market's close on April 7, 
1997, the 90-day T-bill rate was quoted at 5.16 percent.
---------------------------------------------------------------------------
    For example, if a taxpayer owed $100,000 in federal taxes 
and the payment was two days late, the late payment penalty 
would be $30.56 (plus any IRS administrative fee), instead of a 
penalty of up to $10,000.
    As an incentive to ensure that this compensation formula 
for late tax payments is not abused, the current graduated 
penalty structure could be imposed on taxpayers that frequently 
make late payments, or those that delay payment for an 
inordinate period of time following receipt of an IRS notice. 
Also, for reasons of efficiency and convenience to taxpayers, 
we believe the entire process of calculating and assessing the 
penalty should be automated. NACHA would be willing to research 
this issue further and make recommendations as to how best the 
IRS could automate this process.
    Finally, NACHA recommends consideration of the following 
modifications to avoidance penalties related to a taxpayer's 
failure to begin using the EFTPS system when mandated:
     For those mandated taxpayers that have enrolled in 
the EFTPS program by the applicable deadline (e.g., July 1, 
1997), a 90-day waiver of any penalties assessed for a failure 
to deposit their tax payments through EFTPS should be applied. 
This 90-day waiver period would commence with the date on which 
the applicable deadline takes effect; and,
     For those mandated taxpayers that have failed to 
enroll in the EFTPS program by the applicable deadline, a 30-
day waiver of any penalties assessed for a failure to deposit 
their tax payments through EFTPS should be applied. As with the 
90-day waiver for EFTPS-enrolled taxpayers, the 30-day waiver 
period could commence with applicable implementation deadline 
or, to accommodate those taxpayers that are unaware of the need 
to comply, could commence instead with the date on which the 
taxpayer receives an IRS notice of non-compliance, as opposed 
to the date upon which the taxpayer became obligated to pay via 
EFTPS.
    By modifying the late payment and avoidance penalties 
associated with the EFTPS program along the lines we have 
proposed, NACHA believes that taxpayer concerns will be allayed 
without compromising the significant benefits to taxpayers, 
financial institutions and the federal government attributable 
to the program and the smoother implementation process that 
would result.

                 C. Other Comments on the EFTPS Program

    The goals of the federal government with respect to the 
EFTPS program should be supported. NACHA believes that the 
federal government has taken a significant step forward by 
developing a program that will reduce the costs and 
inefficiencies borne by taxpayers, financial institutions and 
the federal government associated with the current paper-based 
tax deposit system. To achieve these objectives, we believe it 
is correct for the federal government to require the use of the 
EFTPS program for most business taxpayers according to the 
implementation schedule now in place.
    Compliance with the Federal EFTPS mandate is facilitated 
greatly by the government's selection of the ACH Network as the 
primary means to handle federal tax payments under the program. 
The ACH Network is a mature and reliable payments system 
currently used by over a half-million companies, thousands of 
financial institutions, and federal and state government 
agencies in support of daily commerce. It is also used by 
forty-six states for business tax collection purposes. Finally, 
the ACH Network represents a low cost alternative to either the 
current Federal Tax Deposit (FTD) paper-based coupon system or 
the Fedwire option under EFTPS (which exists more as a 
contingency so that same-day payments may be accommodated when 
necessary) offering universal access to taxpayers.
    However, some modifications to EFTPS are necessary. With 
minimal changes to the EFTPS program as currently envisioned, 
including the modified penalties described above, difficulties 
associated with its intended implementation schedule should be 
avoided. As described in the attachment, however, NACHA also 
has some concerns of a technical or operational nature 
regarding the EFTPS program that we have communicated to the 
Treasury Department's Financial Management Service (FMS) and 
the IRS. It is our hope that these concerns will be resolved as 
quickly as possible to ensure that the EFTPS program operates 
in a manner fully consistent with private-sector payments 
system rules and operating procedures.
    Federal Tax Deposit coupon processing costs must be 
recouped. Maintaining both electronic and paper tax deposit 
methods for large numbers of taxpayers is redundant and costly. 
Moreover, we expect that the cost to financial institutions for 
serving each of their business customers' tax deposit needs 
will be magnified if the EFTPS mandate is limited, as proposed 
in H.R.722, or delayed in its implementation. Therefore, as 
long as the option remains available to a significant number of 
taxpayers to pay federal taxes through the FTD coupon process, 
we believe that financial institutions must be capable of 
recouping the significant processing costs they bear.
    Until recently, financial institutions participating as 
Treasury Tax and Loan (TT&L) depositories were able to recoup 
the costs of processing FTD coupon payments (which can run 
upward of $2-$4 per coupon) with the float benefits 
attributable to holding FTD balances overnight. However, now 
that the larger taxpayers have begun paying federal taxes 
electronically under the EFTPS program or its predecessor, 
TAXLINK, the balances held overnight for federal tax payments 
have declined substantially. Consequently, the float benefits 
attributable to these balances have also declined 
substantially, while the number of FTD coupons processed has 
only declined marginally since most taxpayers continue to use 
this method. The result for the typical TT&L depository 
financial institution is that processing costs now exceed the 
float benefits associated with the FTD coupon process.
    This imbalance between the costs and benefits associated 
with playing such a critical role in the federal government's 
revenue collection operations is justified in our view only if 
it exists for a reasonably brief period. Since limiting the 
EFTPS mandate to only larger taxpayers would lock in this 
imbalance, and extending the current implementation period 
would prolong it, NACHA believes that either action would be 
unacceptable to the banking industry without adequate 
compensation for the processing of FTD coupon payments. 
Moreover, without such relief, financial institutions might be 
compelled to leave the TT&L program, thus possibly meaning an 
access problem for taxpayers choosing not to pay federal taxes 
electronically.

                                

Attachment

NACHA Concerns with EFTPS Technical and Operational Issues

    NACHA has the following concerns with certain technical and 
operational issues raised by the current operation of the EFTPS 
program and proposed Internal Revenue Service (IRS) and 
Financial Management Service (FMS) policies and operating 
procedures.\3\ NACHA believes that the policies and procedures 
governing the operation of the EFTPS program should reflect 
current operating rules in the private-sector, which for the 
ACH Network are detailed in the NACHA Operating Rules.
---------------------------------------------------------------------------
    \3\ Proposed 31 CFR Part 203 (61 Fed. Reg. 190, September 30, 
1996).
---------------------------------------------------------------------------

                            Acknowledgments.

    NACHA recently approved a change to the NACHA Operating 
Rules that will allow Receiving Depository Financial 
Institutions (RDFIs) to send acknowledgment entries over the 
ACH Network to confirm the receipt of ACH credit payments. Two 
new optional standard entry class codes (i.e., ACK and ATX) 
have been established to send acknowledgments in response to an 
Originator's request to confirm receipt by the RDFI of a 
corporate credit payment. This rule change takes effect 
September 19, 1997. Now that the capability for sending 
acknowledgments over the ACH Network has been developed, NACHA 
has asked the IRS to commit to having their Financial Agents 
send acknowledgments for ACH credit tax payments when requested 
by the taxpayer.

                         Automated Enrollment.

    In September 1996, a NACHA rule change took effect that 
allows RDFIs to send automated enrollment entries (ENR) to 
Federal Government agencies to enroll consumers for direct 
deposit. The ENR format is optional for RDFIs and Federal 
Government agencies. The Social Security Administration has 
begun using ENR as one of many options for enrollment, and in 
November 1996 had already received and processed over 50,000 
ENR entries. NACHA has asked the IRS to commit to offering an 
automated enrollment option to taxpayers if NACHA revises the 
automated enrollment format to accommodate corporate EFTPS 
enrollments.

                               Reversals.

    Proposed 31 CFR Part 203 would require financial 
institutions to receive approval from the IRS in advance to 
reverse erroneous or duplicate ACH credit entries. The EFTPS 
Payment Instruction Booklet states that an ACH credit reversal 
entry will be returned as unauthorized if the taxpayer has not 
received prior approval to send the reversal. As reversing 
entries and files are allowed to be sent without prior 
authorization under the NACHA Operating Rules when transmitted 
within five days of settlement, this requirement for prior 
authorization will cause confusion to taxpayers and financial 
institutions. As a result, errors may not be corrected in a 
timely fashion and the likelihood of penalties increases. NACHA 
has asked the IRS and FMS to consider allowing for the reversal 
of entries and files to correct duplicate or erroneous entries 
or files without prior authorization from the IRS.

                  Prenotification/Zero Dollar Entries.

    With EFTPS, the corporate taxpayer would have the option of 
sending a prenotification with an addenda record or a zero 
dollar payment prior to the first EFTPS ACH credit payment. As 
proposed, EFTPS would be using both these entries in an 
atypical fashion. Prenotification entries are typically not 
sent with an addenda record as the RDFI is only required to 
verify the account number. As a zero dollar entry is considered 
a non-value transaction, these entries are not associated with 
the ten-day waiting period associated with a prenotification. 
In order to use these transactions in an accurate fashion, the 
prenotification entry should be required without an addenda 
record and/or the zero dollar entry should be required without 
a ten day waiting period. NACHA has asked the IRS and FMS to 
consider our recommendation to require prenotification entries 
without an addenda record or to allow for zero dollar entries 
without a ten day waiting period.

  Financial Institution Requirement to Sign ACH Debit Enrollment Form.

    The EFTPS enrollment form requires that, when a taxpayer 
elects the ACH debit method, the taxpayer's financial 
institution must sign the enrollment form. As the enrollment is 
between the taxpayer and the IRS, it is inappropriate for the 
financial institution to be required to sign the enrollment 
form. Taxpayer verification of certain information with the 
financial institution can be accomplished by telephone or fax 
without the necessity of a financial institution 
representative's signature. NACHA has asked the IRS to consider 
removing the requirement from the enrollment form that the 
taxpayer's financial institution sign the enrollment for the 
ACH debit option.

                             Compensation.

    Proposed 31 CFR Part 203 states that FMS will impose a fee 
on financial institutions to recover the value of funds lost 
when the financial institution is responsible for a late tax 
payment. The proposed rule does not explain what procedures FMS 
will use to determine whether a financial institution is at 
fault for a late payment, or what procedure the financial 
institution should use to demonstrate that it was not at fault, 
as the case may be. Furthermore, the NACHA Operating Rules 
define a procedure for compensation where one party is unjustly 
enriched or injured. NACHA has asked the IRS and FMS to 
consider adopting NACHA's compensation rules as the appropriate 
method for recovering the value of funds due for late payments 
for which a financial institution is held responsible.
      

                                

Statement of J. Drew Hiatt, Executive Vice President and Director of 
Government Affairs, National Business Owners Association, Alexandria, 
VA

    Madame Chairman, Ranking Member Coyne, and members of the 
Subcommittee, my name is J. Drew Hiatt. I am Executive Vice 
President and Director of Government Affairs for the National 
Business Owners Association (NBOA). We appreciate this 
opportunity to present our views regarding the Electronic 
Federal Tax Payment System (EFTPS).
    The National Business Owners Association represents small 
business owners. Its philosophy is based on the belief that a 
vibrant and robust private sector and a strong and competitive 
free enterprise economy are essential to create and increase 
economic growth, opportunity, jobs, and prosperity for all 
Americans. NBOA vigorously represents the interests of its 
members before Congress and the federal government. It works to 
influence the enactment of policies that promote economic 
growth and entrepreneurship. As part of its efforts to advocate 
the adoption of beneficial laws and regulations, NBOA 
consistently communicates the concerns and legislative 
priorities of business owners to lawmakers, government 
officials, the public, and the media.
    We commend you, Madame Chairman, for your leadership in 
convening this hearing to examine the status of the Internal 
Revenue Service's Electronic Federal Tax Payment System, its 
announced plans to force small business enrollment in this 
system, and the new burdens that federally mandated electronic 
filing would impose on small firms. Many of our small business 
members will be required to enroll in the EFTPS as of July 1, 
1997, unless they are exempted from this requirement and 
enrollment in the electronic filing system is made voluntary. 
Rep. Doc Hastings (R-WA) has introduced legislation--The Small 
Business Tax Payment Relief Act (H.R. 722)--that would provide 
small businesses with the option of enrolling in the EFTPS. His 
bill correctly leaves to the discretion of small business 
owners the method they can elect to pay federal taxes and 
prevents the imposition of new and costly burdens on them. Our 
members wholeheartedly endorse H.R. 722 and urge Congress to 
pass it and President Clinton to sign it into law this year.

            Background of the Electronic Filing Requirement

    Businesses are required to withhold or pay numerous federal 
taxes such as income, FICA (Federal Insurance Contributions 
Act), FUTA (Federal Unemployment Tax Act), excise, and 
corporate estimated taxes. By law, companies must deposit tax 
payments in a bank or savings institution identified by the 
Treasury Department as a tax and loan depository. Tax payments 
are listed on a federal deposit coupon providing the name of 
the taxpayer, identification number, tax period, and tax being 
paid. The bank or savings institution processes the payment, 
forwarding it to the federal government, along with relevant 
information indicated on the coupon.
    An obscure but seemingly innocuous provision contained in 
the North American Free Trade Agreement Implementation Act 
(P.L. 103-182) enacted in 1993 mandated a change in the way 
federal tax payments are deposited and received by the Treasury 
Department. This law requires all businesses to gradually begin 
filing electronically taxes withheld from employees, the 
employer and employee portions of payroll taxes, excise taxes, 
and corporate estimated tax payments.
    The intent of the law is to effect the transition from the 
current system to a nationwide system for filing taxes 
electronically. A new filing system--The Electronic Federal Tax 
Payment System--was developed to replace the current deposit 
coupon system and to ensure a more efficient and effective way 
for businesses to pay taxes to the Treasury. Furthermore, the 
law requires that the IRS collect, as determined by statute, a 
percentage of business taxes using the electronic payment 
method in each year during the five-year phase-in of the new 
system.
    In July 1994, the IRS promulgated regulations to aid the 
changeover to the EFTPS in stages over the next five years. 
These new rules require businesses to enroll in the new 
electronic tax filing payment system if their annual employment 
tax deposits exceed certain thresholds. These thresholds were 
established by regulation as follows:

------------------------------------------------------------------------
                                                         Deadline for
  Annual Deposit of More Than:     In Calendar Year    Switch to EFTPS:
------------------------------------------------------------------------
$47 million.....................  1993/1994.........  1/1/96
$50 thousand....................  1995..............  1/1/97
$50 thousand....................  1996..............  1/1/98
$20 thousand....................  1997..............  1/1/99
------------------------------------------------------------------------


    Under the new regulations, businesses with annual federal 
payroll tax deposits of more than $50,000--an estimated 1.2 
million small firms nationwide--were required to file taxes 
electronically as of January 1, 1997. The IRS began informing 
these companies of their responsibilities under the new law and 
warned them to comply or face a substantial penalty. Those 
firms that do not file their taxes electronically--insisting 
instead on using the current method--would face a 10 percent 
penalty on the taxes owed and could be forced to allow the 
agency to deduct the amount owed from their bank accounts.
    The new law and IRS letters to small companies regarding it 
provoked an outcry from small firms facing the approaching 
compliance deadline. Their protest prompted Congress to delay 
mandatory filing six months until July 1, 1997. Less than two 
years from this date, if the law is not changed, all 
businesses--even smaller firms with annual federal payroll tax 
deposits of more than $20,000--will be forced to comply with 
the electronic filing requirement.

   Current Federal Tax Payment System versus Electronic Federal Tax 
                             Payment System

    On the face of it, electronic filing appears to have many 
advantages over the current system. Advanced electronic and 
computer technology offers vastly improved capabilities for the 
transmission of data and information. Switching to a federal 
tax payment system that is paperless and speeds tax deposits to 
the Treasury arguably provides benefits the current system does 
not. Yet these benefits may not be sufficient in themselves to 
justify the abandonment of the current system and its 
replacement with the Electronic Federal Tax Payment System. 
While the EFTPS solves some problems for banks and the Treasury 
Department--reducing paperwork burdens for depository 
institutions and ensuring faster receipt of taxes for the 
Treasury--it creates an entirely new set of unforeseen and 
costly burdens for small businesses. It is these problems--the 
disadvantages of electronic filing--that concern small business 
owners about switching over to the new system.
    From the perspective of the bank and savings institution or 
the Treasury Department, moving to a paperless filing system 
makes sense. Yet this change will prove detrimental to small 
business owners. Because electronic filing does not create 
documentable, verifiable records taxpayers may need to defend 
themselves if the IRS makes a mistake or orders an audit, many 
small business owners oppose it. Small businesses are also 
reluctant to give the IRS or its designated banking 
intermediaries direct access to their accounts.
    Company owners also object to the additional cost burden 
the new system would impose on them. For example, some banks 
assess fees for electronic filing services. Yet what upsets 
small businesses more than the extra fees is that they would be 
required to pay their taxes six days in advance of the due 
date. This is tantamount to a hidden tax increase.

A Case for Choice: Preserving Small Businesses' Choice in How They Pay 
                              Their Taxes

    At issue in the electronic filing debate is small business 
owners' vehement opposition to forced compliance with the new 
federal electronic tax filing requirement. Their opposition 
turns on a fundamental and well-established principle at the 
heart of our democratic system--that is, the freedom to choose. 
Small business owners take seriously their responsibility to 
pay federal taxes, but how they discharge that obligation, they 
argue, should be their choice. The federal government should 
not be allowed to dictate the method small business owners must 
use to make federal tax payments, particularly when its 
prescribed method would impose additional burdens on businesses 
as the Electronic Federal Tax Payment System clearly would do.
    We support The Small Business Tax Payment Relief Act (H.R. 
722), sponsored by Rep. Doc Hastings (R-WA), that would give 
small firm owners the option of enrolling in the Electronic 
Federal Tax Payment System. It would accomplish this by locking 
in the effective date for compliance at a much higher 
qualifying amount, thereby relieving small business owners of 
their responsibility to enroll in the EFTPS. Making enrollment 
in the EFTPS an option rather than an obligation for small 
businesses would preserve their choice in how they pay federal 
taxes and avoid the imposition of new and costly burdens on 
them.

                               Conclusion

    Madame Chairman, Ranking Member Coyne, and members of the 
Subcommittee, we appreciate this opportunity to offer our views 
and comments regarding the Electronic Federal Tax Payment 
System and the burdens forced in it would place on small 
businesses. Unless the law is changed soon, 1.2 million small 
firms will have no choice but to file their taxes 
electronically with the federal government. We believe that the 
Small Business Tax Payment Relief Act (H.R. 722) provides a 
workable alternative to mandatory small business enrollment in 
the EFTPS, preserves small businesses' options in how they meet 
their federal tax responsibilities, spares small firms more 
onerous federal regulation to comply with, and protects them 
from unwarranted government intrusion in business operations 
and decision-making. We urge you as members of this 
Subcommittee and the Congress at large to pass H.R. 722 and the 
president to enact it into law this year.
    Thank you.
      

                                

Statement of William T. Sinclaire, Senior Tax Counsel and Director of 
Tax Policy, U.S. Chamber of Commerce

    The U.S. Chamber of Commerce appreciates this opportunity 
to express its views on the Electronic Federal Tax Payment 
System (EFTPS). The U.S. Chamber is the world's largest 
business federation, representing an underlying membership of 
more than three million businesses and organizations of every 
size, sector and region. This breadth of membership places the 
Chamber in a unique position to speak for the business 
community.

                              Introduction

    In 1993, the EFTPS was enacted as part of the North 
American Free Trade Agreement Implementation Act (P.L. 103-
182). Under the EFTPS, most employers will be required to 
electronically deposit not only payroll taxes, but also their 
income and other tax liabilities as well. Traditional paper 
coupons will no longer be accepted by the Internal Revenue 
Service (IRS) for these deposits. Taxpayers who fail to timely 
deposit their taxes electronically will be subject to a 10-
percent penalty for each failure.
    There are two main methods which employers can choose from 
in order to make their electronic deposits--the Automated 
Clearing House debit method (ACH debit method), and the 
Automated Clearing House credit method (ACH credit method). 
Under the ACH debit method, an employer authorizes the IRS to 
withdraw a certain amount of funds from its bank account. Under 
the ACH credit method, an employer directs its bank to transfer 
funds from its account to the IRS. Under either method, a 
business would have to initiate its electronic deposit with its 
bank at least one day prior to the actual due date of the 
payment. If a business is unable to initiate a timely deposit 
under either the ACH debit or credit method, it may be able to 
use an emergency same-day settlement procedure.
    The EFTPS is being phased-in over a five-year period which 
began in 1995. Under the current stage, only those businesses 
that deposited more than $47 million in payroll taxes during 
the 1994 calendar year are presently required to comply with 
the EFTPS. Given this high deposit threshold, few businesses 
are currently subject to the EFTPS. It is estimated that less 
than 1,600 businesses are affected, and many of these had 
previously been depositing their taxes electronically through 
TAXLINK.
    Beginning July 1, 1997 (delayed from January 1, 1997 by the 
Small Business Job Protection Act of 1996 (P.L. 104-188)), 
businesses that remitted $50,000 or more in payroll taxes 
during calendar year 1995 will be required to deposit their 
taxes electronically. It is estimated that an estimated 1.2 
million businesses will be affected by this next stage of the 
phase-in of the EFTPS. In addition, beginning January 1, 1999, 
businesses that remit $20,000 or more in payroll taxes during 
calendar year 1997 will also be subject to the next and final 
step of the phase-in of the EFTPS. This final step of the 
phase-in will cause an estimated one million additional small 
businesses to be subjected to the mandate.
    The $50,000 payroll threshold was originally scheduled to 
be phased-in on January 1, 1997, by P.L. 103-182. However, as a 
result of the many concerns expressed by numerous parties, the 
IRS announced on July 31, 1996, that it would not impose any 
penalties until July 1, 1997, on the 1.2 million depositors 
required by law to begin making their tax payments 
electronically on January 1, 1997, for their failure to begin 
making deposits through the EFTPS. In addition, a provision was 
added to P.L. 104-188 which delayed the effective date for 
implementation of the January 1, 1997 step of the EFTPS until 
July 1, 1997. Accordingly, small businesses with payroll tax 
deposits of $50,000 or more in calendar year 1995 will now 
become subject to the EFTPS on July 1, 1997.

                          Concerns about EFTPS

    With the July 1, 1997 deadline fast approaching, the U.S. 
Chamber continues to have concerns about the EFTPS. These 
include:
     Complexity and burdens the EFTPS will impose on 
small businesses.
    The EFTPS, despite assertions to the contrary by the IRS, 
will add another layer of complexity to an already Byzantine 
web of tax rules and procedures. Small businesses currently 
comply with an array of complicated and administratively 
burdensome income, payroll, excise, and sales tax laws. In the 
payroll tax area, employers are required to compute and 
withhold their employees' share of taxes, file quarterly 
federal and state payroll tax returns, and timely deposit such 
taxes manually either on a monthly or semiweekly basis 
depending on the amount of taxes deposited during a ``lookback 
period.'' The EFTPS, with its various rules and procedures 
relating to ACH debit and credit methods, emergency same-day 
deposits, and penalties, will further complicate an already 
complicated and burdensome tax system.
     Imposition of another government mandate on small 
businesses.
    In addition to the myriad of tax rules and regulations, 
small businesses must comply with various other federal, state 
and local laws such as environmental and workplace regulations. 
Small businesses have been successfully depositing their taxes 
manually for years and can ill-afford another burdensome 
government mandate, especially on how to pay their taxes. Given 
the low payroll threshold of $50,000 (for July 1, 1997 deposit 
requirement, and $20,000 for January 1, 1999 deposit 
requirement), virtually all small businesses will be subject to 
the EFTPS. Although some small businesses may wish to deposit 
their taxes electronically, and they should be encouraged to do 
so, many others will prefer to continue using traditional paper 
coupons, and should be permitted to do so.
     Will the IRS and the Treasury Financial Agents be 
able to handle the large volume of electronic deposits?
    There is a real fear in the business community that the IRS 
and the Treasury Financial Agents will be unable to adequately 
process the electronic deposits of over 1.2 million businesses 
starting July 1, 1997, and an additional one million on January 
1, 1999. The impact that this mass infusion of deposits will 
have on IRS systems and customer service is unknown at this 
time. Its ability to handle electronic deposits for 
approximately 1,600 businesses is not a sufficient basis for 
determining that it and the financial agents can handle the 
deposits for an additional 1.2 million businesses on July 1, 
1997, and another one million businesses on January 1, 1999. 
Furthermore, taxpayer confidence in IRS's ability to handle the 
upcoming onslaught is seriously undermined by the fact that it 
takes up to ten weeks to enroll in the program, if everything 
goes smoothly.
     Punitive 10-percent penalty on late deposits.
    Beginning July 1, 1997, the IRS could start imposing a 10-
percent penalty on every mandated tax deposit that is not made 
through the EFTPS. Most small business owners are outraged that 
the IRS may consider imposing such a harsh penalty on them 
considering they are being forced to switch to a new, untried 
deposit system. Since taxpayers who use the ACH debit and 
credit methods will have to initiate their deposits at least 
one day before the tax due dates, those businesses that are 
unable to do so in time will be subject to penalties. 
Furthermore, taxpayers who are unaware that the deposit 
requirement applies to income and other taxes may be subject to 
penalties. It is unjust for the IRS to penalize a small 
business who remits its payroll taxes to a depository bank on 
the tax due dates.
     Banking fees relating to electronic deposits.
    Many smaller banks will not be able to offer the ACH credit 
or emergency one-day settlement options to their customers, 
thereby prompting many employers to move their banking business 
to banks that do offer such services. Banks that offer these 
services will undoubtedly charge their customers service fees 
for processing such transactions. While their is no direct cost 
to business owners for using the ACH debit deposit method, many 
employers will want to open a separate bank account, at 
additional cost, solely for deposit transactions due to privacy 
concerns.
     Perception that the IRS has access to taxpayers' 
bank accounts.
    While the IRS will not be able to withdraw funds from an 
employer's bank account unless it is specifically authorized by 
the employer, there is a misperception by many that the IRS 
could unilaterally access an employer's account for taxes, 
interest, or penalties. This is due to a poor communication 
effort on the part of the IRS.
     Lack of a paper trail.
    Many taxpayers will prefer to have a paper trail of their 
payroll deposits for bookkeeping purposes or in case they are 
audited by the IRS. While electronic transfers will eventually 
be shown on customers' bank statements, many taxpayers prefer 
to have an immediate acknowledgement of their deposits, such as 
copies of their Federal Tax Deposit Coupons. Electronic 
deposits are not likely to be evidenced by such an 
acknowledgement.
     Overall confusion about the EFTPS.
    There is a great deal of anxiety, anger, and confusion in 
the business community about the EFTPS. Much of it has to do 
with the way in which the IRS informed businesses about the 
requirement. Even though the EFTPS was created in 1993, 
taxpayers were first made aware of the new mandate in an IRS 
letter late last spring or early summer. In this letter, the 
IRS informed taxpayers that they would have to enroll soon in 
order to make electronic transfers beginning January 1, 1997, 
otherwise they would face a 10-percent penalty. The tone and 
threatening nature of this letter understandably angered many 
in the business community. While the IRS has since apologized 
for the way it notified taxpayers of the EFTPS, many business 
owners are still appalled at the way they were treated and 
remain confused about how the EFTPS works. Many employers who 
have since enrolled in the program have done so out of fear of 
being penalized by the IRS, and not out of desire to make their 
payroll and income tax deposits electronically.

              Legislative Proposals in the 105th Congress

    Legislation has been introduced in the 105th Congress which 
would alleviate many of the concerns business has about the 
EFTPS. In the House of Representatives, Congressman Hastings 
(R-WA) introduced the Small Business Tax Payment Relief Act 
(H.R. 722). The bill would provide small businesses with the 
option of continuing to remit their payroll taxes with 
traditional paper coupons or through the EFTPS. This would be 
done by freezing the five-year phase-in of the EFTPS at its 
current stage and allowing those not mandated to use the EFTPS, 
to use it voluntarily. The Chamber supports this proposal.
    In the Senate, Senator Nickles (R-OK) introduced S. 570. 
This bill would phase-in the EFTPS more slowly, and would 
permanently exempt businesses whose annual depository taxes do 
not exceed $5 million. In addition, the bill would encourage 
all taxpayers to voluntarily enroll in the EFTPS. The Chamber 
also supports this proposal.

                               Conclusion

    Due to the many concerns about the EFTPS, small businesses 
should be able to decide for themselves whether or not they 
want to remit their taxes electronically. Many businesses will 
no doubt prefer electronic deposits to manual coupon deposits, 
but they, and not the IRS, should be the ones that choose this 
method of payment.

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