[Federal Register Volume 59, Number 131 (Monday, July 11, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-16477]


[[Page Unknown]]

[Federal Register: July 11, 1994]


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Part II





Department of the Treasury





_______________________________________________________________________



Internal Revenue Service



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26 CFR Part 1 et al.




Federal Tax Deposits by Electronic Funds Transfer; Temporary Regulation 
and Proposed Rule
DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Parts 1, 31, and 40

[TD 8553]
RIN 1545-AS80

 
Federal Tax Deposits by Electronic Funds Transfer

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Temporary regulations.

-----------------------------------------------------------------------

SUMMARY: This document contains temporary regulations relating to the 
deposit of taxes by electronic funds transfer. The temporary 
regulations describe the taxpayers that must make deposits by means of 
electronic funds transfer, the types of taxes that must be so 
deposited, and when the deposits must commence. The temporary 
regulations reflect changes to the Internal Revenue Code made by 
section 523 of the North American Free Trade Agreement Implementation 
Act (NAFTA). The text of the temporary regulations also serves as the 
text of the cross-reference notice of proposed rulemaking on this 
subject in the Proposed Rules section of this issue of the Federal 
Register.

DATES: These temporary regulations are effective July 11, 1994.
    For dates of applicability, see Sec. 31.6302-1T(h) of these 
regulations.

FOR FURTHER INFORMATION CONTACT: Vincent G. Surabian, 202-622-6232 (not 
a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

    Section 523 of NAFTA amended section 6302 of the Internal Revenue 
Code of 1986 (Code) by enacting a new subsection (h) authorizing the 
Secretary of the Treasury to prescribe such regulations as may be 
necessary for the development and implementation of an electronic funds 
transfer (EFT) system to be used for the collection of depository 
taxes. The depository taxes are the taxes required to be deposited with 
an authorized financial institution or Federal Reserve bank pursuant to 
any regulations prescribed by the Secretary (generally FICA and 
railroad retirement taxes, income tax withheld, corporate income and 
estimated taxes, and various Federal excise taxes). The new system will 
be designed to ensure that the depository taxes are credited to the 
Treasury's general account by the due date of the deposit.

Explanation of Provisions

A. Current Tax Deposit System

    At present, taxpayers are required to deposit taxes with an 
authorized government depository (generally, a commercial bank or 
savings institution or a Federal Reserve bank) by various dates 
specified in regulations. Each deposit must be accompanied by Form 
8109, Federal Tax Deposit Coupon, which contains the taxpayer's name, 
identification number, the amount and type of tax being deposited, and 
the tax period for which the deposit is being made. The government 
depository forwards the coupon to the appropriate IRS Service Center. 
The Service Center compares the information entered on the coupon with 
the liabilities reported by the taxpayer on the return for the 
applicable tax period. The funds are transferred by the depository to 
the Treasury on the business date following the date of the deposit.

B. An Electronic Tax Deposit System

    Section 6302(h) of the Code authorizes a new system which will 
allow for the transfer of tax deposit amounts electronically from 
taxpayer accounts to the Treasury's general account. The new system 
will be phased in over a period of several fiscal years, beginning with 
fiscal year 1994 (October 1, 1993, to September 30, 1994), by gradually 
increasing the percentage of the total depository taxes required to be 
collected by EFT. The temporary regulations implement this phase-in by 
gradually increasing the number of taxpayers that must deposit all of 
their depository taxes by EFT.
    The requirement to deposit by EFT under these temporary regulations 
applies only to those taxpayers required to make deposits pursuant to 
regulations under section 6302 of the Code, and only for those taxes 
required to be deposited. At present, many small taxpayers are excluded 
from the various deposit requirements imposed by regulations under 
section 6302. For example, filers of Form 720, Quarterly Federal Excise 
Tax Return, are not required to make deposits for any calendar quarter 
in which the net tax liability reported on the Form 720 does not exceed 
$2,000. Similarly, filers of Form 941, Employer's Quarterly Federal Tax 
Return, are not required to make deposits for any calendar quarter in 
which the liability reported on the Form 941 is less than $500.
    The temporary regulations, with one exception, do not apply to 
taxes with respect to wages for domestic service in the private home of 
an employer because these taxes are not required to be deposited but 
are remitted quarterly with Form 942, Employer's Quarterly Federal Tax 
Return for Household Employees. The sole exception is if the employer 
is a sole proprietor filing Form 941, Employer's Quarterly Federal Tax 
Return, who chooses to report wages to household employees on that 
form.
    In order to achieve an expedited and orderly conversion to an EFT 
system, NAFTA prescribed a schedule of minimum percentages of taxes 
that must be deposited by EFT during a phase-in period. These 
percentages depend in part on whether the taxes are: (a) The taxes 
imposed by chapters 21 (Federal Insurance Contributions Act), 22 
(Railroad Retirement Tax Act), and 24 (Collection of Income Tax at 
Source on Wages) of the Code, or (b) ``other'' depository taxes 
(generally corporate income taxes and various excise taxes). The 
statutorily prescribed minimum percentages for each year are as 
follows: 

------------------------------------------------------------------------
                                                     Chapter            
                                                    21, 22, &    Other  
                   Fiscal year                       24 taxes    taxes  
                                                    (percent)  (percent)
                                                                        
------------------------------------------------------------------------
1994..............................................          3          3
1995..............................................       16.9         20
1996..............................................       20.1         30
1997 & 1998.......................................       58.3         60
1999 and later....................................         94        94 
------------------------------------------------------------------------

    For the period prior to January 1, 1995, the first step of the 
phase-in of the EFT system will be carried out through binding 
agreements entered into between the Commissioner of Internal Revenue 
and certain third party bulk data processors (processors) under which 
the processors have committed to make deposits of Federal depository 
taxes of certain of their customers by EFT in such a manner as to 
ensure that the amounts are credited to the general account of the 
Treasury by the deposit due date. These agreements will take effect 
beginning in the latter part of fiscal year 1994 and will continue for 
a period of time into fiscal year 1995. A taxpayer who is a customer of 
a processor that is a party to one of these agreements may have its 
deposits that are subject to such an agreement made by the processor 
pursuant to the terms of the agreement until the expiration or 
termination of the agreement. However, the taxpayer continues to be 
responsible for the deposit of those depository taxes that are not 
subject to such agreement. If a taxpayer whose deposits are being made 
by a processor pursuant to such an agreement becomes required to 
deposit by electronic funds transfer pursuant to Sec. 31.6302-
1T(h)(1)(ii) of these temporary regulations, the taxpayer is 
responsible for making deposits by electronic funds transfer of those 
depository taxes not subject to the agreement.
    For periods after December 31, 1994, the temporary regulations 
require that deposits be made by EFT based on the taxpayer's total 
deposits of taxes imposed by chapters 21, 22, and 24 during certain 
``determination'' periods. If a taxpayer's total deposits of the taxes 
imposed by chapters 21, 22, and 24 during the determination period 
exceed a prescribed dollar threshold, the taxpayer must begin 
depositing by EFT on and after the applicable effective date prescribed 
in the regulations, unless otherwise exempted. (A taxpayer will become 
subject to the EFT requirement for the applicable effective date 
``January 1, 1996'' by exceeding the threshold amount during either 
calendar years 1993 or 1994). The phase-in schedule is as follows: 

------------------------------------------------------------------------
                                                   Applicable effective 
   Threshold amount       Determination period             date         
------------------------------------------------------------------------
$78 million............  1-1-93 to 12-31-93.....  January 1, 1995.      
47 million.............  1-1-93 to 12-31-93.....  January 1, 1996.      
47 million.............  1-1-94 to 12-31-94.....  January 1, 1996.      
50 thousand............  1-1-95 to 12-31-95.....  January 1, 1997.      
50 thousand............  1-1-96 to 12-31-96.....  January 1, 1998.      
20 thousand............  1-1-97 to 12-31-97.....  January 1, 1999.      
------------------------------------------------------------------------

    The thresholds set forth in this phase-in schedule have been set by 
taking into account the minimum percentages prescribed by NAFTA, the 
need for administrative convenience and simplicity, and the potential 
need for exemptions from the EFT system for certain small businesses. 
Therefore, the thresholds for the January 1, 1995 and January 1, 1996 
effective dates were specifically set to satisfy the statutory minimum 
percentages. The $50,000 threshold for the January 1, 1997 effective 
date will result in receipts of depository taxes somewhat in excess of 
the percentage prescribed by NAFTA. For purposes of administrative 
convenience and simplicity, this threshold was adopted to require the 
participation of an entire class of taxpayers, that is, those taxpayers 
that are classified as ``semi-weekly'' depositors of employment taxes 
(the taxes imposed by chapters 21, 22, and 24). Finally, the $20,000 
threshold for the January 1, 1999 effective date was set to satisfy the 
statutory percentage while allowing for the possibility that the 
smallest of depositors will be exempted from the EFT system. As 
described in paragraph C of this preamble, the IRS solicits comments on 
the impact of these regulations on small businesses. Based on those 
comments, the IRS will determine those categories of small businesses, 
if any, that should be exempted from the EFT requirements, and may 
adjust the threshold for the January 1, 1999 effective date to bring in 
additional taxpayers while at the same time accommodating any 
appropriate exemptions.
    Although only the taxes imposed by chapters 21, 22, and 24 are used 
to determine whether a taxpayer is subject to the EFT deposit 
requirement, the requirement, once triggered, applies to all federal 
taxes (not just the taxes imposed by chapters 21, 22, and 24) that the 
taxpayer is required to deposit pursuant to regulations prescribed 
under section 6302 of the Code. Once a taxpayer becomes subject to the 
EFT deposit requirement, the taxpayer must continue to deposit by EFT.
    At present the IRS has in place a voluntary electronic funds 
transfer (EFT) system in which a taxpayer may by telephone or computer 
effectuate an electronic funds transfer through the use of one of two 
payment options: debit and credit. The debit option is effected by 
using a Financial Agent of the Department of Treasury. The taxpayer 
requests the Financial Agent to initiate the transfer of funds from the 
taxpayer's bank account(s) to Treasury's general account and transmit 
the related tax payment data, supplied by the taxpayer, to the IRS. The 
credit option is effected by using the taxpayer's financial 
institution. The taxpayer requests the financial institution to 
initiate the transfer of funds to the Treasury's general account and 
submit the related tax data, supplied by the taxpayer, to a Financial 
Agent for transmission to the IRS. The EFT system required to be used 
in connection with these regulations will employ similar options and 
procedures.

C. Exemptions

    Section 6302(h)(1)(B) of the Code, as added by NAFTA, provides that 
the regulations may contain such exemptions as the Secretary may deem 
appropriate. The Senate Report accompanying section 6302(h) strongly 
encourages the Secretary of the Treasury to consider the impact of the 
regulations on small businesses. S. Rep. No. 103-189, 103d Cong., 1st 
Sess., at 61 et. seq. (1993). The report recommends that the 
regulations should not create hardships for small businesses and that 
no small business should be required to purchase computers or gain 
access to any electronic equipment other than a touch-tone telephone. 
Further, the report urges the Secretary to take into account the 
specific needs of small employers, including possible exemption for the 
very smallest businesses from the new electronic funds transfer system. 
The phase-in schedule included in the temporary regulations defers use 
of the EFT system by the smallest businesses until at least calendar 
year 2000. The IRS welcomes comments about the impact of the temporary 
regulations on small businesses and will consider any suggestions 
regarding how small businesses should be treated under the regulations 
in order to implement Congressional intent. Based on the comments and 
suggestions received, the IRS will determine those categories of small 
businesses, if any, that should be exempted from the EFT requirements 
and publish such determinations in the Internal Revenue Bulletin. (See 
Sec. 601.601(d)(2)(ii)(b)).

Special Analyses

    It has been determined that these temporary regulations are not a 
significant regulatory action as defined in EO 12866. Therefore, a 
regulatory assessment is not required. It also has been determined that 
section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) 
and the Regulatory Flexibility Act (5 U.S.C. chapter 6) do not apply to 
these regulations and, therefore, a Regulatory Flexibility Analysis is 
not required. Pursuant to section 7805(f) of the Internal Revenue Code, 
a copy of these regulations will be submitted to the Chief Counsel for 
Advocacy of the Small Business Administration for comment on its impact 
on small business.

Drafting Information

    The principal author of these regulations is Vincent G. Surabian, 
Office of the Assistant Chief Counsel (Income Tax & Accounting), IRS. 
However, other personnel from the IRS and Treasury Department 
participated in their development.

List of Subjects

26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

26 CFR Part 31

    Employment taxes, Income taxes, Penalties, Pensions, Railroad 
retirement, Reporting and recordkeeping requirements, Social Security, 
Unemployment compensation.

26 CFR Part 40

    Excise taxes, Reporting and recordkeeping requirements.

Amendments to the Regulations

    Accordingly, 26 CFR parts 1, 31, and 40 are amended as follows:

PART 1--INCOME TAXES

    Paragraph 1. The authority citation for part 1 is amended by adding 
an entry in numerical order to read as follows:

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

    Sections 1.6302-1T, 1.6302-2T and 1.6302-3T also issued under 26 
U.S.C. 6302(h). * * *

    Par. 2. Section 1.6302-1T is added to read as follows:


Sec. 1.6302-1T  Use of Government depositaries in connection with 
corporation income and estimated income taxes and certain taxes of tax-
exempt organizations--deposits required to be made by electronic funds 
transfer after December 31, 1994 (temporary).

    (a) through (b)(1) [Reserved].
    (b)(2) Deposits by electronic funds transfer. For the requirement 
to deposit corporation income and estimated income taxes and certain 
taxes of tax-exempt organizations by electronic funds transfer, see 
Sec. 31.6302-1T(h) of this chapter. A taxpayer not required to deposit 
by electronic funds transfer pursuant to Sec. 31.6302-1T(h) of this 
chapter remains subject to the rules of Sec. 1.6302-1(b).

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


Sec. 1.6302-2T  Use of Government depositaries for payment of tax 
withheld on nonresident aliens and foreign corporations--deposits 
required to be made by electronic funds transfer after December 31, 
1994 (temporary).

    (a) through (b) [Reserved].
    (c) Deposits by electronic funds transfer. For the requirement to 
deposit taxes withheld on nonresident aliens and foreign corporations 
by electronic funds transfer, see Sec. 31.6302-1T(h) of this chapter. A 
taxpayer not required to deposit by electronic funds transfer pursuant 
to Sec. 31.6302-1T(h) of this chapter remains subject to the rules of 
Sec. 1.6302-2(b).

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


Sec. 1.6302-3T   Use of Government depositaries in connection with 
estimated taxes of certain trusts--deposits required to be made by 
electronic funds transfer after December 31, 1994 (temporary).

    (a) through (b) [Reserved].
    (c) Cross-references. For further guidance and instructions for 
certain banks and financial institutions acting as fiduciaries with 
respect to taxable trusts, see Revenue Procedure 89-49, 1989-2 C.B. 615 
(see Sec. 601.601(d)(2) of this chapter) or any successor revenue 
procedure. For the requirement to deposit estimated tax payments of 
taxable trusts by electronic funds transfer, see Sec. 31.6302-1T(h) of 
this chapter.

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

    Par. 5. The authority citation for part 31 is amended by adding 
entries in numerical order to read as follows:

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

    Section 31.6302-1T also issued under 26 U.S.C. 6302(h). * * *
    Section 31.6302(c)-3T also issued under 26 U.S.C. 6302(h). * * *

    Par. 6. Section 31.6302-1T is added to read as follows:


Sec. 31.6302-1T   Federal tax deposit rules for withheld income taxes 
and taxes under the Federal Insurance Contributions Act (FICA)--
deposits required to be made by electronic funds transfer after 
December 31, 1994 (temporary).

    (a) through (g) [Reserved].
    (h) Time and manner of deposit--deposits required to be made by 
electronic funds transfer--(1) In general. Section 6302(h) of the 
Internal Revenue Code requires the Secretary to prescribe regulations 
as may be necessary for the development and implementation of an 
electronic funds transfer system to be used for the collection of 
depository taxes as described in paragraph (h)(2) of this section. 
Section 6302(h)(2) of the Code provides a phase-in schedule which sets 
forth escalating minimum percentages of those depository taxes to be 
deposited by electronic funds transfer, starting with the fiscal year 
beginning October 1, 1993, and ending September 30, 1994. This section 
prescribes the rules necessary for implementing an electronic funds 
transfer system for collection of depository taxes and for effecting an 
orderly and expeditious phase-in of that system.
    (i) Period prior to January 1, 1995. The Commissioner of Internal 
Revenue has entered into binding agreements with third party bulk data 
processors. These agreements require that the third party bulk 
processors deposit certain depository taxes of certain of their 
customers by electronic funds transfer in a manner designed to ensure 
that those amounts are credited to the general account of the Treasury 
by the deposit due date. A taxpayer who is a customer of a third party 
bulk data processor that is a party to such an agreement may have its 
deposits that are subject to such agreement made by the processor until 
the expiration or termination of the agreement. However, the taxpayer 
continues to be responsible for the deposit of those depository taxes 
that are not subject to such agreement.
    (ii) Periods after December 31, 1994. (A) Taxpayers whose aggregate 
deposits of the taxes imposed by Chapters 21 (Federal Insurance 
Contributions Act), 22 (Railroad Retirement Tax Act), and 24 
(Collection of Income Tax at Source on Wages) of the Internal Revenue 
Code during a 12-month determination period exceed the applicable 
threshold amount are required to deposit all depository taxes (as 
described in paragraph (h)(2) of this section) due on and after the 
applicable effective date by electronic funds transfer (as defined in 
paragraph (h)(3) of this section) unless exempted under paragraph 
(h)(4) of this section. In general, each applicable effective date has 
one 12-month determination period. However, for the applicable 
effective date January 1, 1996, there are two determination periods. If 
the applicable threshold amount is exceeded in either of those 
determination periods, the taxpayer becomes subject to the requirement 
to deposit by electronic funds transfer, effective January 1, 1996. The 
threshold amounts, determination periods, and applicable effective 
dates are as follows:

------------------------------------------------------------------------
                                                   Applicable effective 
   Threshold amount       Determination period             date         
------------------------------------------------------------------------
$78 million............  1-1-93 to 12-31-93.....  January 1, 1995.      
47 million.............  1-1-93 to 12-31-93.....  January 1, 1996.      
47 million.............  1-1-94 to 12-31-94.....  January 1, 1996.      
50 thousand............  1-1-95 to 12-31-95.....  January 1, 1997.      
50 thousand............  1-1-96 to 12-31-96.....  January 1, 1998.      
20 thousand............  1-1-97 to 12-31-97.....  January 1, 1999.      
------------------------------------------------------------------------

    (B) Once a taxpayer is required to deposit by electronic funds 
transfer pursuant to paragraph (h)(1)(ii) of this section, the taxpayer 
will continue to deposit by electronic funds transfer. Until such time 
as a taxpayer is required by this section to deposit by electronic 
funds transfer, the taxpayer may voluntarily make deposits by 
electronic funds transfer, or must make deposits following the rules of 
Sec. 31.6302-1(h), pertaining to deposits by Federal tax deposit (FTD) 
coupon.
    (C) Any taxpayer whose deposits are being made by a third party 
bulk data processor pursuant to an agreement described in paragraph 
(h)(1)(i) of this section, and who is required to deposit by electronic 
funds transfer pursuant to this paragraph (h)(1)(ii), may have its 
deposits that are subject to such agreement made by the third party 
bulk data processor until the expiration or termination of the 
agreement. The taxpayer, however, is responsible for making deposits by 
electronic funds transfer of those depository taxes not subject to such 
agreement.
    (2) Taxes required to be deposited by electronic funds transfer. 
Any taxpayer who is required under paragraph (h)(1)(ii) of this section 
to deposit by electronic funds transfer the taxes imposed by chapters 
21, 22, and 24 of the Internal Revenue Code must also deposit by 
electronic funds transfer, beginning with the same applicable effective 
date, the taxes required to be deposited under Secs. 1.6302-1, 1.6302-
2, 1.6302-3 of this chapter, 31.6302(c)-3, and 40.6302(c)-1 of this 
chapter.
    (3) Electronic funds transfer defined. For purposes of this 
section, an electronic funds transfer is any transfer of depository 
taxes made in accordance with Revenue Procedure 94-48, 1994-29 I.R.B. 
(see Sec. 601.601(d)(2) of this chapter), or in accordance with 
procedures subsequently published by the Commissioner.
    (4) Exemptions. The Commissioner of Internal Revenue will identify 
by guidance published in the Internal Revenue Bulletin those categories 
of taxpayers, if any, that are to be exempted from the requirement to 
deposit by electronic funds transfer. (See Sec. 601.601(d)(2)(ii)(b) of 
this chapter.)
    (5) Separation of deposits. A deposit for one return period must be 
made separately from a deposit for another return period.
    (6) Payment of balance due. If the aggregate amount of taxes 
reportable on the applicable tax return for the return period exceeds 
the total amount deposited by the taxpayer with regard to the return 
period, then the balance due must be remitted in accordance with the 
applicable form and instructions.
    (7) Time deemed deposited. A deposit by electronic funds transfer 
will be deemed made--
    (i) At the time a debit is made (the amount is withdrawn from the 
taxpayer's account) if the Government's authorized financial agent 
debits the taxpayer's account; or
    (ii) In all other cases, at the time the funds are credited to 
Treasury's general account.
    (8) Time deemed paid. In general, amounts deposited under this 
paragraph (h) will be considered paid at the time deemed deposited 
under paragraph (h)(7) of this section, or on the last day prescribed 
for filing the return (determined without regard to any extension of 
time for filing the return), whichever is later. In the case of the 
taxes imposed by chapters 21 and 24 of the Internal Revenue Code, for 
purposes of section 6511 and the regulations thereunder (relating to 
the period of limitation on credit or refund), if an amount is 
deposited prior to April 15th of the calendar year immediately 
succeeding the calendar year that includes the period for which the 
amount was deposited, the amount will be considered paid on April 15th.
    Par. 7. Section 31.6302(c)-3T is added to read as follows:


Sec. 31.6302(c)-3T  Use of Government depositaries in connection with 
tax under the Federal Unemployment Tax Act--deposits required to be 
made by electronic funds transfer after December 31, 1994 (temporary).

    (a) through (b) [Reserved].
    (c) Manner of deposit--deposits required to be made by electronic 
funds transfer. For the requirement to deposit tax under the Federal 
Unemployment Tax Act by electronic funds transfer, see Sec. 31.6302-
1T(h). A taxpayer not required to deposit by electronic funds transfer 
pursuant to Sec. 31.6302-1T(h) remains subject to the rules of 
Sec. 31.6302(c)-3(b).

PART 40--EXCISE TAX PROCEDURAL REGULATIONS

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

    Authority: 26 U.S.C. 7805. * * *
    Section 40.6302(c)-1T also issued under 26 U.S.C. 6302 (a) and 
(h). * * *

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


Sec. 40.6302(c)-1T  Use of Government depositaries--deposits required 
to be made by electronic funds transfer after December 31, 1994 
(temporary).

    (a) through (d)(1) [Reserved].
    (d)(2) Deposits by electronic funds transfer. For the requirement 
to deposit excise taxes by electronic funds transfer, see Sec. 31.6302-
1T(h) of this chapter. A taxpayer not required to deposit by electronic 
funds transfer pursuant to Sec. 31.6302-1T(h) of this chapter remains 
subject to the rules of Sec. 40.6302(c)-1(d).
Michael P. Dolan,
Acting Commissioner of Internal Revenue.
    Approved: June 27, 1994.
Leslie Samuels,
Assistant Secretary of the Treasury.
[FR Doc. 94-16477 Filed 7-6-94; 1:01 pm]
BILLING CODE 4830-01-U