[Federal Register Volume 63, Number 22 (Tuesday, February 3, 1998)]
[Rules and Regulations]
[Pages 5644-5657]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-2494]



[[Page 5643]]

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Part III





Department of the Treasury





_______________________________________________________________________



Fiscal Service



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31 CFR Part 203



Payment of Federal Taxes and the Treasury Tax and Loan Program; Final 
Rule

  Federal Register / Vol. 63, No. 22 / Tuesday, February 3, 1998 / 
Rules and Regulations  

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DEPARTMENT OF THE TREASURY

Fiscal Service

31 CFR Part 203

RIN-1510-AA37


Payment of Federal Taxes and the Treasury Tax and Loan Program

AGENCY: Financial Management Service, Fiscal Service, Treasury.

ACTION: Final rule.

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SUMMARY: The Financial Management Service is issuing this final rule to 
implement provisions of the North American Free Trade Agreement 
Implementation Act (NAFTA), as amended. NAFTA requires the development 
and implementation of an electronic funds transfer (EFT) system for the 
collection of certain depository taxes. This regulation implements the 
Electronic Federal Tax Payment System (EFTPS) by prescribing rules for 
financial institutions and Federal Reserve Banks that use EFT 
mechanisms to process Federal tax payments through the EFTPS. The EFTPS 
began operation in the fall of 1996.
    This regulation also updates the rules governing the changes to the 
Treasury's investment program that were necessitated by the 
implementation of this EFT system.

EFFECTIVE DATE: March 5, 1998.

ADDRESSES: Cynthia L. Johnson, Director, Cash Management Policy and 
Planning Division, Financial Management Service, LCB 420, 401 14th 
Street, S.W., Washington, D.C. 20227.

FOR FURTHER INFORMATION CONTACT: Michael G. Dressler, Senior Financial 
Program Specialist; Cynthia L. Johnson, Director, Cash Management 
Policy and Planning Division, 401 14th Street, S.W., Washington, D.C. 
20227, at (202) 874-6590; or Randall S. Lewis, Principal Attorney, at 
(202) 874-6680. A copy of this final rule is available for downloading 
on the Financial Management Service home page at the following address: 
http://www.fms.treas.gov/regs.html.

SUPPLEMENTARY INFORMATION:

Background

    This regulation is authorized by the North American Free Trade 
Agreement Implementation Act (NAFTA), Public Law 103-182, Section 523, 
107 Stat. 2057, 2161 (1993), the substantive provisions of which are 
codified at 26 U.S.C. 6302(h). NAFTA mandates that the Secretary of the 
Treasury (Secretary) phase-in the collection of a minimum percentage of 
certain types of depository taxes by electronic funds transfer (EFT) 
and develop and implement an EFT system for the collection of such 
taxes. The Secretary has delegated responsibility to the Internal 
Revenue Service (IRS) for the former and to the Financial Management 
Service (FMS) for the latter. With the enactment of NAFTA, the FMS 
achieved its longstanding goal to collect depositary taxes 
electronically. This regulation implements the FMS' Electronic Federal 
Tax Payment System (EFTPS), which began operation on October 28, 1996.
    On September 30, 1996, the FMS published in the Federal Register a 
notice of proposed rulemaking (NPRM) that would govern the deposit of 
Federal taxes using EFT mechanisms (61 FR 51186). The NPRM also 
proposed rules updating Treasury's investment program to reflect the 
impact of the new electronic system. The original closing date for the 
submission of comments was November 21, 1996. However, the FMS 
published a notice in the Federal Register extending that date to 
January 13, 1997 (61 FR 59211).

Comments on the Proposed Rule

    The title of this part has been changed in two steps for two 
reasons. The first change from ``Treasury Tax and Loan Depositaries'' 
to the NPRM designation as ``Treasury Tax and Loan Depositaries and the 
Payment of Federal Taxes'' reflects the importance of the addition of 
the EFTPS. Secondly, the title used in this Final Rule reverses the 
order in the NPRM title to shift the emphasis from the Treasury Tax and 
Loan (TT&L) depositaries to the payment of Federal taxes through the 
EFTPS because under this Final Rule at Sec. 203.9, ``a financial 
institution does not need to be designated as a TT&L depositary in 
order to process electronic Federal tax payments.''
    Two sections of the NPRM, Secs. 203.4 and 203.5, have been combined 
in this Final Rule as Sec. 203.4 causing all sections of the Final Rule 
after Sec. 203.4 to be renumbered. For clarity, each section citation 
in this Final Rule is identified as either an NPRM or Final Rule 
citation. For example, the NPRM Sec. 203.11 was the section covering 
Enrollment. All references to the NPRM section on Enrollment will 
identify it as NPRM Sec. 203.11 (emphasis added). In the Final Rule, 
the section covering Enrollment is Sec. 203.10. Therefore, all 
references to the Enrollment section of the Final Rule will identify it 
as Sec. 203.10 in the Final Rule (emphasis added).
    By the close of the January 13, 1997, comment period, the FMS 
received comments on the NPRM from twelve organizations: six financial 
institutions and six industry trade associations. The following 
includes a discussion of the significant and most heavily commented 
upon issues:

Conformance With Industry Automated Clearing House (ACH) Rules

    Commenters expressed concern with certain NPRM provisions that 
would require financial institutions to adhere to a set of rules 
different from private industry ACH rules. Eleven of the twelve 
commenters advocated the adoption of the National Automated Clearing 
House Association (NACHA) Operating Rules for ACH processing, 
enrollment, compensation, and/or credit reversals for electronic 
Federal tax payments.
    Currently, the FMS is proposing a revision of 31 CFR Part 210 which 
considers adoption of NACHA rules wherever practicable. The revision as 
proposed would address the role of NACHA rules in all Federal payments 
and collections made through the ACH system. However, as the examples 
that follow illustrate, Part 203 requires certain exceptions to the 
wholesale adoption of industry rules due to EFTPS program 
considerations. Therefore, ACH entries governed by Part 203 are not 
subject to any provisions of Part 210 that are inconsistent with Part 
203.
    The FMS understands the commenters' interest in having a uniform 
set of rules governing both commercial and Federal transactions and has 
recognized these concerns by revising this Final Rule to conform with 
commercial operating rules to the extent practicable. For example, the 
FMS has revised the Final Rule to conform to commercial operating rules 
for both ACH credit reversals and the waiting period between the 
origination of a prenotification entry and the first payment.
    However, Treasury, as an executive agency within the Federal 
Government, is constrained from the wholesale adoption of commercial 
operating rules. For example, the Internal Revenue Code provisions 
governing the disclosure of returns and return information preclude 
Treasury from adopting the commercial operating rules for electronic 
enrollments. In addition, the FMS is constrained from adopting 
commercial operating rules that would require Treasury to pay interest 
for payments erroneously made by financial institutions. Specifically, 
such interest is not recoverable from the United States unless 
expressly provided by statute. The FMS has not identified any statute 
that would authorize Treasury to pay such interest.

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Enrollment and Enrollment Liabilities

    Section 203.11(a) of the NPRM provided that the taxpayer may enroll 
in EFTPS using either a paper-based or electronic enrollment method. 
Section 203.11(b)(2) of the NPRM allowed a financial institution to 
assist its customers by offering electronic enrollment. However, even 
if the financial institution offered electronic enrollment, a 
representative of the financial institution would have to verify and 
sign an enrollment form, and provide a paper copy of the completed form 
to the taxpayer for the taxpayer's signature and submission to the 
Treasury Financial Agent (TFA).
    Five commenters were concerned that no details were provided on how 
an electronic enrollment process would work and recommended that the 
FMS adopt procedures developed by NACHA to transmit enrollment data 
through the ACH using the standard entry class code, ``ENR.'' One 
commenter suggested enrolling taxpayers through the EFTPS home page on 
the Internet. Additionally, five commenters questioned the need for a 
paper copy of the enrollment form to be submitted to the TFA when an 
electronic enrollment option is used. One commenter further recommended 
that the FMS send back an acknowledgment file including an 
acknowledgment number that could take the place of the taxpayer's 
written signature.
    Section 203.10 of the Final Rule deletes all references to 
electronic enrollments since such electronic processes would not 
eliminate the IRS' need for a paper copy of an enrollment form signed 
by the taxpayer. Currently, the IRS requires the taxpayer's written 
signature for all enrollments in EFTPS. The written taxpayer signature 
provides the IRS with the requisite authority to disclose to the TFAs 
and to the taxpayer's financial institution the confidential taxpayer 
return information necessary to effect enrollment and payment 
transactions, provides the TFAs with the authority to initiate debits 
to the taxpayer's account, and provides the IRS with authority to 
resolve issues related to enrollments and payments. Until an all 
electronic enrollment process becomes feasible for IRS tax payments, 
taxpayers will continue to enroll in the EFTPS by means of paper 
enrollment forms.
    Notwithstanding the deletion of the hybrid electronic/paper 
enrollment process from this Final Rule, the FMS understands that the 
IRS is undertaking efforts towards accepting electronic signatures. 
Treasury also will continue to work with entities such as NACHA to 
determine the feasibility of using the ENR enrollment standard entry 
class code for EFTPS enrollments, and may look at other options for an 
all electronic enrollment process in the future.
    NPRM Sec. 203.11(c) provided that if a taxpayer enrolled for the 
ACH debit method, ``* * * an authorized representative of the financial 
institution shall verify the accuracy of the financial institution 
routing number, taxpayer account number, and taxpayer account type * * 
* [and] shall sign the enrollment form attesting to the accuracy of the 
financial institution information.''
    Five commenters suggested that it is unnecessary and inappropriate 
for Treasury to require a financial institution to sign the enrollment 
form to verify bank routing and account numbers. The commenters stated 
that there is no way to verify that the signature is an authorized 
signature of a bank representative and that the banking information 
would be verified in the prenotification process. Another commenter 
supported the requirement for financial institutions to sign the 
enrollment form since it provides taxpayers with an opportunity to talk 
to their financial institutions and to ask questions.
    The FMS agrees with both sets of comments, and has balanced both 
interests in the Final Rule. Specifically, Sec. 203.10(c) of the Final 
Rule deletes the requirement that a financial institution sign the 
enrollment form, but requires the financial institution to verify 
certain information upon the specific request of the taxpayer. A 
financial institution may perform such verification by telephone.
    One commenter requested additional information on the status of an 
enrollment if the form is not signed by a representative of the 
taxpayer's financial institution, and asked what, if any, liability is 
assumed by the financial institution if the form is unsigned or signed 
with inaccurate information. Because the Final Rule deletes the 
requirement that an authorized financial institution representative 
sign the enrollment form, such enrollment forms will be processed 
without a financial institution signature, and the financial 
institutions will not accrue any liabilities if authorized 
representatives do not sign such forms. However, the FMS may hold such 
financial institutions liable under Sec. 203.14(a) of the Final Rule if 
taxpayers request verification of banking data, and the financial 
institutions fail to identify incorrect banking data that result in a 
late tax payment.
    One commenter recommended that Treasury modify the enrollment form 
to require a taxpayer to obtain the signature of a financial 
institution representative as evidence of permission to use ACH credit 
origination services to make EFTPS payments. The FMS recognizes the 
importance of a taxpayer discussing the provision of ACH credit 
services with its financial institution before the taxpayer sends the 
enrollment form. Accordingly, the FMS has revised the enrollment form 
to instruct taxpayers electing the ACH credit option to verify in 
advance whether the financial institution is capable of providing ACH 
credit origination services.
    One commenter inquired whether a taxpayer could enroll via a 
prenotification entry. The prenotification entry cannot be used to 
enroll a taxpayer because it does not provide all the required 
information. Taxpayers must enroll as prescribed in Sec. 203.10 of the 
Final Rule.

Prenotification

    NPRM Sec. 203.13(b)(1) required financial institutions that receive 
an ACH debit entry to ``timely verify the information contained in the 
ACH prenotification entry.'' Three commenters sought clarification on 
what information the financial institution is required to verify in the 
prenotification or zero dollar entry it receives. One financial 
institution commenter asked whether financial institutions must verify 
the taxpayer identification number (TIN). Section 203.12(b)(1) of the 
Final Rule clarifies that financial institutions need to verify the 
account number and account type, and not the TIN. Moreover, because the 
TFAs will not originate zero dollar entries, financial institutions 
will need to verify only information in prenotification entries.
    NPRM Sec. 203.13(c)(1) provided that the financial institution 
``shall originate an ACH credit prenotification entry that may be in 
the form of a zero dollar entry'' and that credit entries may not be 
initiated less than 10 calendar days after the date the prenotification 
was transmitted. Some commenters expressed a preference for 
prenotification entries and some expressed a preference for zero dollar 
entries. Two commenters opposed the mandatory use of prenotification 
entries, and one favored it. Several commenters pointed out that the 
NACHA rules make prenotification entries optional. They noted that it 
would require computer system modifications to identify Federal tax 
payments in several situations: where a

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file could contain Federal tax payments among many other types of 
payments, and where the credits are triggered by customers themselves. 
Nine commenters were critical of the 10 calendar day waiting period 
between origination of a prenotification or zero dollar entry and the 
first payment. Several pointed out that the NACHA rules were changed in 
March, 1997, to require a six business day waiting period between 
prenotification entries and the first payment.
    The FMS recognizes the merits of these comments and has revised the 
Final Rule. Specifically, Sec. 203.12(c)(1) of the Final Rule clarifies 
that the FMS will accept either an ACH prenotification entry containing 
the TIN in the entry detail record (no addenda) or the zero dollar 
entry with the TIN in the addenda record. The TFA will use the 
information to verify with the IRS that the TIN is valid and 
corresponds with an enrolled taxpayer. The FMS has limited the 
requirement that financial institutions originate prenotification 
entries for ACH credits. Under the Final Rule, a prenotification or 
zero dollar entry is not required unless specifically requested by the 
taxpayer. Financial institutions should note, however, that guidance 
sent from the TFAs following enrollment suggests that taxpayers 
instruct their financial institutions to originate zero dollar 
transactions or prenotification entries prior to the first payment. 
Consequently, financial institutions will have to be able to originate 
such entries. The FMS also has deleted the 10 calendar day waiting 
period between the origination of a prenotification entry and the first 
payment in light of the NACHA rules.

Prenotification Liabilities

    The FMS received a number of inquiries regarding what liability, if 
any, is assumed by financial institutions in the prenotification 
process. In the context of ACH debits, the TFA will initiate a 
prenotification, not a zero dollar entry, for each taxpayer enrolling 
for ACH debit. Sections 203.12(b)(1) and (2) of the Final Rule require 
the financial institution receiving an EFTPS prenotification to 
``timely verify the account number and account type contained in the 
ACH prenotification entry [and] timely and properly return a 
prenotification entry that contains an invalid account number or 
account type, or is otherwise erroneous or unprocessable.'' In 
addition, Sec. 203.14(a) in the Final Rule clarifies NPRM 
Sec. 203.15(a) by providing that the FMS may assess interest where a 
financial institution failed to respond to an ACH prenotification entry 
as required in Secs. 203.12(b) and 203.12(c) of the Final Rule, where 
such failure resulted in a late tax payment. In the context of ACH 
credits, the FMS may hold a financial institution liable under 
Sec. 203.14(a) of the Final Rule if a late tax payment results from the 
financial institution's failure to initiate a taxpayer-requested 
prenotification or zero dollar entry.
    The FMS believes that the potential imposition of such liabilities 
on financial institutions during the prenotification process is fair, 
equitable, and a logical outgrowth of the NPRM. Specifically, the 
preamble to the NPRM notified readers that the liability provisions 
generally were geared towards placing liability for errors on the party 
making the errors. The FMS believes that this principle serves two 
important purposes here. First, it is an incentive for financial 
institutions to process EFTPS payments in accordance with this Part, 
which will help ensure that depository taxes are credited to the TGA on 
tax due date. Second, it makes the United States whole for the lost 
value of funds resulting from late tax payments. For example, a 
financial institution receiving an ACH debit prenotification entry may 
have little or no incentive to review and return timely a 
prenotification entry containing an invalid account number if it can do 
so without any financial exposure.

Acknowledgments

    NPRM Sec. 203.13(c)(4) required financial institutions originating 
ACH credit tax payments to provide a transaction trace number to their 
customers upon request. One commenter stated that the process for 
assigning and providing a trace number is unclear and the numbers 
provided by financial institution proprietary systems may not be 
sufficient.
    The intent of this provision was to ensure that taxpayers have the 
means to trace their tax payments at the IRS if there is some 
discrepancy or problem. For example, in originating ACH credit entries, 
financial institutions transmit to the IRS transaction trace numbers, 
that are included in the IRS master file. If there is a question 
between the IRS and the taxpayer as to the timeliness of a tax payment, 
the taxpayer may obtain the transaction trace number from its financial 
institution, and provide it to the IRS, which will then trace the 
payment. The FMS seeks to protect the interests of taxpayers by 
ensuring that they have a means of tracing their tax payments while at 
the same time affording financial institutions maximum flexibility in 
providing taxpayers with the means to do so. Accordingly, 
Sec. 203.12(c)(4) of the Final Rule requires financial institutions to 
provide their customers, upon request, either transaction trace numbers 
or some other method to trace the tax payment.
    Four commenters recommended that Treasury implement a system to 
provide electronic acknowledgments for ACH credit tax payments and 
three commenters recommended that Treasury utilize the new ACH 
acknowledgments (``ACK'' and ``ATX'') developed by NACHA. The FMS 
currently is considering the operational implications of developing and 
utilizing the new NACHA acknowledgments.
    Two of the commenters expressed concern over a perceived system 
bias between the ACH debit and the ACH credit acknowledgment process. 
The FMS believes that there is no system bias, and that taxpayers can 
easily obtain ACH acknowledgment numbers for both ACH debit and credit 
transactions. Specifically, EFTPS provides a taxpayer initiating an ACH 
debit through the telephone or personal computer with an automated 
response acknowledgment number at the end of the reporting session. 
Taxpayers initiating an ACH credit transaction may obtain an ACH credit 
acknowledgment number by placing a toll-free call to the EFTPS Customer 
Service Centers on the tax due date.

ACH credit deadlines

    NPRM Sec. 203.13(c)(3) and the preamble to the NPRM left open the 
possibility of a deadline different from that currently required for 
ACH credit entries. In the preamble to the NPRM, the FMS suggested that 
if a different ACH credit deadline were required, that deadline would 
be approximately 11:00 p.m. on the day before the entry was to settle. 
All of the commenters suggested that establishing an ACH credit 
deadline for EFTPS payments that is different from the standard 
deadline already in place for such entries would impose significant 
operational problems for financial institutions and/or confuse 
taxpayers/customers. The commenters were concerned that financial 
institutions would be unaware that ACH files originated by its 
customers would contain such tax payment credit entries subject to an 
earlier deadline. Several commenters suggested that the establishment 
of a separate deadline for EFTPS ACH credit payments may serve as a 
disincentive for financial institutions to offer such services to their 
taxpaying customers.
    Section 203.12(c)(3) of the Final Rule remains substantively 
unchanged. The FMS needs the flexibility to change ACH credit deadlines 
for purposes of maximizing the timely investment of tax

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receipts. However, the FMS emphasizes that it has no current plans to 
impose a deadline different from the existing standard ACH processing 
schedules. Moreover, the FMS would ensure that financial institutions 
are provided with sufficient advance notice of any deadline changes so 
that they may undertake any necessary steps to continue to process 
timely ACH credit entries on behalf of their customers. While the FMS 
recognizes the possibility that any deadline change may cause some 
financial institutions to cease offering such services to their 
customers, the FMS believes that the marketplace would fill any void.

ACH Credit Reversals

    NPRM Sec. 203.13(d) required advance IRS approval for all 
corrections of ACH credit entries. In general, the commenters opposed 
obtaining approval from the IRS for reversals of ACH credit entries, 
remarking that obtaining approval from IRS is cumbersome; the requests 
must be done manually and quickly; and that IRS could not respond 
quickly enough to prevent financial institutions from losing the value 
of funds. Several commenters suggested that the reversals be governed 
by NACHA rules, which at that time did not require ACH credit 
originators to notify receivers when initiating an ACH credit reversal.
    The FMS recognizes the merits of these comments, and has revised 
the Final Rule. Specifically, Sec. 203.12(d) of the Final Rule 
eliminates the need to obtain advance approval from the IRS before 
originating an ACH credit reversal. A December 1997 NACHA rule change 
requires an ACH originator to notify a receiver when making a reversing 
entry to the receiver's account. For the reasons stated above, the 
Final Rule does not require that IRS be notified when an ACH credit 
reversal is initiated. However, financial institutions are reminded of 
ACH record retention rules, and need to be able to provide 
documentation per the requirements of the procedural instructions.

Same-day payments

    NPRM Sec. 203.14(a) proposed a 2:00 P.M. FRB head office local zone 
time (LZT) deadline for all three same-day tax payment methods (Fedwire 
value, Fedwire non-value, and Direct Access). One commenter requested 
that the Fedwire deadline for Federal tax payments be the same as the 
normal Fedwire national deadline currently established for third party 
transactions (6:00 p.m. ET).
    The FMS believes that a uniform same-day payment cutoff time is 
necessary to maximize and meet the needs of Treasury's investment 
program. Under this program, Treasury invests tax payments with the 
taxpayers' financial institutions in open-ended interest-bearing 
obligations or ``note balances.'' In order for these financial 
institutions to receive these investments, Treasury must designate and 
employ them separately as Treasury Tax and Loan (TT&L) note 
depositaries. The 2:00 p.m. LZT cutoff time is necessary to ensure that 
EFTPS tax payments transmitted by these financial institutions via 
Fedwire non-value and Direct Access are credited to their TT&L note 
balances on the same day, thereby maximizing Treasury's investment 
opportunities. Specifically, Fedwire non-value and Direct Access 
transactions are settled through the Federal Reserve's TT&L system. The 
2:00 p.m. LZT cutoff is necessary to provide time for the TT&L system 
to process these two non-value transactions, and create the investment 
entries to credit the note depositaries' balances.
    The FMS has decided to apply this same cutoff time to the Fedwire 
value payment method because it is in the interest of the Treasury's 
investment program that Fedwire value not be favored over the Fedwire 
non-value and Direct Access options. Specifically, tax payments 
remitted via the Fedwire value method are credited to Treasury's 
General Account at the FRB and cannot be invested with note option 
depositaries that day, thereby delaying Treasury's investment 
opportunities. If the cutoff time for the Fedwire value payment method 
was later than for the two non-value payment methods, informal 
conversations with financial institutions and the TFAs indicate that 
Fedwire value likely would be favored over the Fedwire non-value and 
Direct Access payment methods which would have detrimental effects on 
the Treasury's investment program.
    Consequently, the FMS has decided to retain the 2:00 p.m. LZT 
cutoff time for all three same day payment methods. However, 
Secs. 203.13(a), (e)(1)(i), and (e)(3) of the Final Rule delete 
specific references to this cutoff time, and instead refer to the 
procedural instructions that will contain the 2:00 p.m. LZT cutoff 
time.
    Furthermore, the FMS currently is contemplating the adoption of a 
uniform national cutoff time of 5:00 p.m. Eastern Time (ET) for all 
same-day payments with a potential implementation date of mid-1999. The 
possibility of a uniform cutoff time stems from the Riegle-Neal 
Interstate Banking and Branching Efficiency Act of 1994, Public Law 
103-328, 108 Stat. 2338 (1994). Under this law, a financial institution 
will have a single Federal Reserve account where its master account is 
located. The location of this master account will determine the cutoff 
time for all same-day Federal tax payments. If the FMS maintains the 
2:00 p.m. LZT cutoff time, financial institutions with a master account 
located on the West Coast would enjoy a competitive advantage in 
attracting customers over financial institutions with a master account 
on the East Coast due to the additional three hours for making a same-
day Federal tax payment. In order to prevent unfair business advantages 
among financial institutions, the FMS is considering an FRB 
recommendation to implement a uniform national cutoff time of 5:00 p.m. 
ET for all same-day payments. If the FMS decides to adopt such a 
uniform national cutoff time, the FMS will ensure that financial 
institutions will be provided adequate advance notice to make any 
necessary system changes.
    In the preamble to the NPRM, the FMS requested comments on 
restricting the use of the Fedwire non-value and Direct Access same-day 
payment methods to TT&L note depositaries. One commenter supported FMS' 
underlying intent and five commenters opposed such restrictions. The 
FMS has decided against imposing any restrictions, and all three same-
day mechanisms are available for use by any financial institution 
capable of originating these transactions.
    Two commenters expressed concern over limiting the use of same-day 
payment mechanisms to certain categories of taxpayers. This Final Rule 
does not prescribe which payment methods taxpayers must use.
    NPRM Secs. 203.14(b), (c), and (d) provided that upon the request 
of the taxpayer, the taxpayer's financial institution shall provide the 
taxpayer with reference numbers for same-day transactions (the Input 
Message Accountability Data (IMAD) number and the Electronic Tax 
Application (ETA) reference number). For example, for Fedwire 
transactions, the ETA reference number is assigned once the payment has 
been received by the Federal Reserve's ETA. This number is provided to 
the TFAs and the IRS at the end of each business day and is available 
to originating financial institutions from their local FRB upon request 
only. Taxpayers wishing to receive the IMAD or ETA reference numbers on 
a day subsequent to the transaction date also may obtain such reference 
numbers by contacting the EFTPS Customer Service Centers. One

[[Page 5648]]

commenter suggested that the IMAD and ETA reference numbers for same-
day payments should be provided to the taxpayer automatically.
    The FMS does not accept this comment, and as a result, 
Secs. 203.13(b), (c), and (d) of the Final Rule remain substantively 
unchanged. The FMS has weighed the needs of the taxpayers in receiving 
such reference numbers against the burdens that would be imposed upon 
financial institutions if the Final Rule were to require financial 
institutions to provide taxpayers with such numbers automatically. This 
Final Rule balances the needs of both parties by requiring financial 
institutions to provide their customers with such reference numbers 
upon the specific request of their customers. The FMS believes that to 
mandate that financial institutions provide their customers with these 
reference numbers in instances where the customer may not seek such 
numbers would be unduly burdensome on financial institutions given 
certain operational constraints. Taxpayers seeking such reference 
numbers on a continuous basis should tailor their contracts with their 
financial institutions to meet their needs.
    NPRM Sec. 203.14(e) defined the circumstances in which the FRB or 
the IRS could reverse or cancel a same-day payment. Two commenters 
recommended that taxpayers be contacted before the FRB or the IRS 
cancel or reject a same-day payment.
    The FMS does not accept these comments. Therefore, section 
203.13(e) of the Final Rule remains substantively unchanged. Due to the 
time critical nature of the same-day payment mechanism, it is neither 
feasible nor practicable to notify the taxpayer before a same-day 
payment is reversed or canceled. Specifically, all same-day payments 
are edited by the FRB's ETA, which will automatically reverse same-day 
tax payments that are late, e.g., that are received after the ETA 
deadline, or that are timely but do not contain enough information to 
identify the taxpayer. The FRB also reverses same-day payments at the 
direction of the IRS, which may direct a reversal in situations where a 
payment cannot be posted in the IRS database because the TIN is 
invalid, or where a taxpayer or financial institution have requested 
the funds be returned because of an overpayment. The FRB also may 
reverse or cancel tax payments at the request of the originating 
financial institution if the request is received prior to the ETA 
cutoff time on the transaction date.
    In all cases, the FMS believes that it is the responsibility of 
financial institutions to notify their customers if same-day payments 
are returned or canceled. This is especially important where timely 
same-day payments are returned or canceled so that customers may 
attempt to correct the payment prior to the cutoff time.

Interest Assessments for Lost Value of Funds

    NPRM Sec. 203.12(c) provided that Treasury will not pay interest on 
any payments erroneously paid to Treasury and subsequently refunded to 
the financial institution. Several commenters asked that Treasury 
compensate financial institutions for the time value of funds held.
    The FMS rejects these comments, and, as a result, section 203.11(c) 
of the Final Rule remains substantively unchanged. It is a well settled 
principle that interest is not payable by the United States unless 
expressly provided by statute or in a contract authorized by law. This 
principle extends equally to situations where notions of equity would 
seem to militate in favor of the United States paying interest. 
Congress has expressly authorized the payment of interest for tax 
refunds when the IRS pays without being sued and when a taxpayer 
receives a judgment from a court for any overpayment of internal 
revenue taxes. See 26 U.S.C. 6402 and 28 U.S.C. 2411 respectively.
    Because the FMS has not identified any statutory provision that 
authorizes it to pay interest to financial institutions that make 
erroneous payments that subsequently are refunded by Treasury, the FMS 
is unable to compensate financial institutions for their lost value of 
funds.
    NPRM Sec. 203.15 set forth the circumstances and procedures for the 
assessment, calculation, and collection of interest from financial 
institutions for purposes of making the United States whole for the 
lost value of funds resulting from late tax payments. One commenter 
suggested that only taxpayers be held liable for late tax payments. 
Other commenters opposed the interest assessment provisions. One 
commenter recommended that financial institutions only be penalized if 
they transmit a certain number of late tax payments each year.
    The FMS does not accept these comments, and Sec. 203.14 of the 
Final Rule remains substantively unchanged on these points. The 
legislative scheme underlying EFTPS is to ensure that certain 
depository taxes are credited to the TGA on the tax due date. If an 
EFTPS tax payment is not credited to the TGA on the tax due date, the 
IRS will impose a penalty on the taxpayer pursuant to 26 U.S.C. 6656. 
However, IRS Revenue Ruling 94-46 (July 6, 1994) provides that the IRS 
will abate this penalty if the taxpayer establishes that the 
instructions the taxpayer provided to its financial institution were 
timely and correct, and that it had sufficient funds to make the tax 
payment. For example, the FMS understands that if the taxpayer did 
everything right in initiating an ACH credit payment, but the 
taxpayer's financial institution failed to originate the payment 
timely, which resulted in a late tax payment, the IRS will abate the 
penalty imposed upon the taxpayer. However, under these circumstances, 
the United States will have lost the value of funds from the date the 
taxpayer specified that its payment should settle to the TGA to the 
time the late tax payment actually settled to the TGA.
    As a result, the FMS believes that to implement successfully the 
legislative scheme underlying EFTPS, it may be necessary in these 
circumstances to hold a financial institution liable for the lost value 
of funds. Specifically, if a financial institution is not held liable 
for its mistakes which result in a late tax payment, a financial 
institution may have less incentive to process timely such tax payments 
for credit to the TGA on the tax due date. The interest assessment in 
most instances simply recovers the imputed value of funds erroneously 
retained by the financial institution. The FMS further believes that 
financial institutions can minimize this risk by imposing conditions on 
their customers, and by initiating prenotification or zero dollar 
entries.
    Nevertheless, the FMS will not assess interest on financial 
institutions for errors resulting in late tax payments where such 
errors occur before the effective date of this Final Rule.
    Furthermore, Sec. 203.14(b) of the Final Rule limits a financial 
institution's interest liability to seven calendar days for ACH debit 
transactions and 45 calendar days for both ACH credit and same-day 
payment transactions. The FMS has established this cap in recognition 
of the fact that taxpayers have a responsibility, upon learning of 
their financial institution's error, to initiate a new payment 
transaction. The seven calendar day cap for ACH debit transactions 
stems from the fact that if the taxpayer's financial institution 
returns the taxpayer's ACH debit transaction, the TFA will take 
immediate steps to mail the taxpayer a notification letter. The FMS 
believes that upon receipt of this letter from the TFA, the taxpayer 
has a responsibility to initiate a new tax payment transaction. The FMS 
also believes that this process generally should take no longer than

[[Page 5649]]

seven calendar days from the date the tax payment would have settled to 
the TGA. The 45 day cap for ACH credit and same-day payment 
transactions stems from the fact that if the TFA returns an ACH credit 
transaction or if the FRB returns a same-day payment transaction to the 
financial institution, the taxpayer, at the latest, will learn of the 
return upon receipt of its monthly statement of account from its 
financial institution. The 45 days is based upon an estimated 30 day 
statement cycle, and 15 days processing and mail time.
    One commenter asked whether Treasury will assess interest on 
financial institutions when the late tax payment is due to the ACH 
operator, a system problem, a daylight overdraft, or other causes. 
Whether the FMS will assess interest on a financial institution to make 
the United States whole for the lost value of funds depends on the 
specific facts and circumstances. Financial institutions will have the 
right to contest any interest assessment under Sec. 203.16 of the Final 
Rule.
    Several commenters asked for more specific information on the 
interest assessment process. The specific procedures will be published 
in the procedural instructions in the Treasury Financial Manual (TFM).
    NPRM Sec. 203.15(c) provided that a financial institution that 
processes tax payments under this part is deemed to authorize the FRB, 
acting as Treasury's fiscal agent, to debit its reserve account for 
interest assessments. One commenter suggested that Treasury should not 
initiate a debit to a financial institution's reserve account. Another 
commenter suggested that Treasury give financial institutions an 
opportunity to appeal the interest prior to paying it.
    The FMS does not accept these comments, and Sec. 203.14(c) of the 
Final Rule remains substantively unchanged. The FMS believes that the 
operational steps underlying the collection of interest assessments 
will take several months from the date of the late tax payment due to 
the extensive IRS research required. Because the FMS will not assess 
``interest on interest,'' the FMS believes that affording a financial 
institution an opportunity to contest the assessment prior to 
collecting it only would exacerbate the lost value of funds to the 
United States, especially in light of the cap on a financial 
institution's liability at Sec. 203.14(b) of the Final Rule. Moreover, 
Sec. 203.14(c) of the Final Rule, which authorizes the FMS to debit the 
interest assessment from a financial institution's reserve account, is 
consistent with the current process by which FMS recovers the lost 
value of funds from financial institutions in the paper Federal Tax 
Deposit (FTD) system. The FRB will send an electronic message to the 
financial institution the day prior to the day that the financial 
institution's reserve account is debited for the interest assessment.
    NPRM Sec. 203.15(d) and Sec. 203.14(d) of the Final Rule provide 
that Treasury will not assess interest on a financial institution when 
the taxpayer has not satisfied the conditions imposed by its financial 
institution. Several commenters asked what information a financial 
institution would need to provide to establish that the taxpayer failed 
to meet the financial institution's conditions. The FMS has no pre-set 
requirements; however, the FMS will consider such information as the 
written conditions themselves; a saved electronic file; and/or a tape 
of telephonic instructions showing the time and the direction to 
initiate a transaction. The FMS will not regulate the agreements 
between the financial institution and its customers, and therefore, 
will not give guidance on the conditions a financial institution may 
impose.
    One commenter asked if a financial institution must disclose to the 
taxpayer its proof that the taxpayer failed to satisfy its requirements 
for making an EFTPS payment. This part does not regulate the exchange 
of information between a taxpayer and its financial institution.

Unauthorized Debits

    NPRM Sec. 203.16 prohibited financial institutions from initiating 
debits to the TGA unless they had prior written permission. NPRM 
Sec. 203.16 also provided that financial institutions that do initiate 
such unauthorized debit entries are liable for the amount of the debit 
and an interest charge at the Federal funds rate plus two percent, and 
are deemed to authorize the Federal Reserve Bank to debit their reserve 
accounts for the amount of the debit plus interest.
    One commenter pointed out that a customer theoretically could 
initiate a debit to the TGA by using a customer delivery system, and 
that a financial institution would suffer an undue burden if it had to 
ensure that its customers could not initiate such debits. The FMS does 
not accept this comment, and Sec. 203.15 of the Final Rule is 
substantively unchanged on this point. The FMS believes that financial 
institutions are responsible for how they allow their customers to key 
in transaction information. This approach is consistent with commercial 
operating rules, which generally provide that originating depository 
financial institutions warrant that their entries are authorized by 
both the originator and the receiver.
    However, should such a situation occur, the TFA will attempt to 
return the unauthorized debit entry in time for same-day settlement. If 
this return is made on the same day, there will be no need to recover 
the principal nor will there be any interest charge. If the return is 
not accomplished in the same day, the financial institution shall be 
liable to the Treasury for the amount of the transaction and interest 
charges calculated according to the procedural instructions published 
in the TFM.
    One commenter stated that reversals should be excluded expressly 
from this section. The FMS agrees and has clarified Sec. 203.15(a) of 
the Final Rule.
    One commenter recommended that the interest charge assessed for an 
unauthorized ACH debit be lowered to the Federal funds rate. The FMS 
does not accept this comment and Sec. 203.15(d) of the Final Rule 
remains substantively unchanged. This higher rate is intended to deter 
unauthorized debits from the TGA.

Appeal and Dispute Resolution

    NPRM Sec. 203.17 afforded financial institutions the opportunity to 
appeal an interest assessment under NPRM Sec. 203.15 or an interest 
charge under NPRM Sec. 203.16. Several commenters requested an 
explanation as to how this process would work. The FMS will provide 
greater detail on these processes in its procedural instructions in the 
TFM. Nevertheless, Sec. 203.16 of the Final Rule expands the 
administrative remedies afforded financial institutions. Specifically, 
if a financial institution is unsuccessful in contesting an interest 
assessment, it may appeal the administrative denial to a higher level 
Treasury official. This two-step administrative review process is 
similar to the one currently used for the paper FTD system.

Compensation

    NPRM Sec. 203.19(a)(8) prohibited financial institutions serving as 
TT&L depositaries from accepting compensation from taxpayers for 
handling the deposit of tax payments in the paper FTD system. Three 
commenters suggested that the FMS remove this prohibition. The FMS does 
not accept this comment and Sec. 203.18 of the Final Rule is 
substantively unchanged. While the FMS believes that such comments may 
have merit, the NPRM did not give affected parties adequate notice of 
this possibility. As a result, the FMS is constrained from accepting 
these comments. However,

[[Page 5650]]

the FMS intends to issue an NPRM on removing this prohibition.
    Two commenters noted that the NPRM was silent on whether financial 
institutions could charge taxpayers for processing tax payments under 
EFTPS. These commenters recommended that the FMS expressly authorize 
financial institutions to charge their customers for processing their 
EFTPS tax payments. The FMS does not accept these comments, and the 
Final Rule remains silent on whether financial institutions, acting as 
the taxpayers' agents, can charge their customers for processing EFTPS 
payments.
    The decision not to regulate the fees financial institutions can 
charge under EFTPS stems from the fact that the EFTPS eliminates one of 
the benefits currently provided financial institutions under the paper-
based FTD system. Specifically, when a taxpayer makes its tax payment 
under the FTD system, the tax payment is deposited into a non-interest-
bearing TT&L account at the financial institution. The financial 
institution retains the imputed value of these funds until the next day 
when the funds either are credited to the TGA or are invested with the 
financial institution in interest-bearing notes. Under EFTPS, these tax 
payments will no longer be deposited overnight into such non-interest 
bearing accounts, and the financial institutions will no longer retain 
the value of these funds. The FMS believes that it is best left to the 
marketplace to decide what fees, if any, financial institutions will 
charge their customers. However, the FMS believes that any fees for ACH 
credit or debit entries will be insignificant.

Collateral

    NPRM Sec. 203.25(f)(1) was modeled on existing Sec. 203.14(f)(1) 
and provided that in the event of a TT&L depositary's insolvency or 
closure, Treasury may apply the collateral pledged to satisfy any claim 
of the United States. The NPRM preamble explained Treasury's 
longstanding interpretation that ``any claim of the United States'' 
includes, but is not limited to, claims arising out of the depositary 
relationship for which the collateral was originally pledged. One 
commenter suggested that the TT&L collateral only be used to satisfy 
TT&L claims. The FMS does not accept this comment, and the FMS' 
interpretation of Sec. 203.24(f)(1) of the Final Rule remains 
unchanged. The FMS believes that this interpretation is necessary to 
protect the United States from loss.
    NPRM Sec. 203.25 set forth Treasury's collateral security 
requirement for financial institutions serving as TT&L depositaries. 
One commenter asked how a TT&L depositary would be notified of the 
amount in the Note Option/Direct Investment account so that it could 
deposit sufficient collateral to secure the deposits. This information 
appears in the daily Federal Reserve account activity statement, which 
the depositary can access after 9:00 a.m. ET via Fedline by using the 
Accounting Services application and choosing the IAS Account Inquiry 
option or by using the TT&L application and choosing the Host Account 
Activity Report. Section 203.24 of the Final Rule provides that note 
option depositaries that participate in the direct investment program 
are not required to collateralize continuously the pre-established 
maximum balance but must be prepared to pledge collateral on the day 
the direct investment is placed.
    One commenter sought confirmation that same-day EFTPS payments 
initiated by a financial institution serving as a TT&L depositary that 
miss the cutoff time are not required to be collateralized. The 
preamble of the NPRM stated that ``financial institutions processing 
tax payments under the EFTPS . . . need not pledge collateral, unless 
they elect to participate in Treasury's investment program.'' EFTPS 
payments, including those that the depositary is unable to complete, 
are not required to be collateralized.

Regulatory Analysis

    These 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. 
This regulation will not impose significant costs on small entities. It 
is further expected that such costs associated with electronic tax 
payments will be offset by cost savings resulting from reductions in 
the paperwork burden and the availability of a user-friendly electronic 
tax collection system.

List of Subjects in 31 CFR Part 203

    Banks, Banking, Electronic Funds Transfers, Taxes.

    For the reasons set out in the preamble, 31 CFR part 203 is revised 
to read as follows:

PART 203--PAYMENT OF FEDERAL TAXES AND THE TREASURY TAX AND LOAN 
PROGRAM

Subpart A--General Information

Sec.
203.1  Scope.
203.2  Definitions.
203.3  Financial institution eligibility for designation as a 
Treasury Tax and Loan depositary.
203.4  Designation of financial institutions as Treasury Tax and 
Loan depositaries.
203.5  Obligations of the depositary.
203.6  Compensation for services.
203.7  Termination of agreement or change of election or option.
203.8  Application of part and procedural instructions.

Subpart B--Electronic Federal Tax Payments

203.9  Scope of the subpart.
203.10  Enrollment.
203.11  Electronic payment methods.
203.12  Future-day reporting and payment mechanisms.
203.13  Same-day reporting and payment mechanisms.
203.14  Electronic Federal Tax Payment System interest assessments.
203.15  Prohibited debits through the Automated Clearing House.
203.16  Appeal and dispute resolution.

Subpart C--Federal Tax Deposits.

203.17  Scope of the subpart.
203.18  Tax deposits using Federal Tax Deposit coupons.
203.19  Note option.
203.20  Remittance option.

Subpart D--Investment Program and Collateral Security Requirements 
for Treasury Tax and Loan Depositaries

203.21  Scope of the subpart.
203.22  Sources of balances.
203.23  Note balance.
203.24  Collateral security requirements.

    Authority: 12 U.S.C. 90, 265-266, 332, 391, 1452(d), 1464(k), 
1767, 1789a, 2013, 2122, and 3102; 26 U.S.C. 6302; 31 U.S.C. 321, 
323 and 3301-3304.

Subpart A--General Information


Sec. 203.1  Scope.

    The regulations in this part govern the processing of Federal tax 
payments by financial institutions and the Federal Reserve Banks (FRB) 
using electronic payment or paper methods; the designation of Treasury 
Tax and Loan (TT&L) depositaries; and the operation of the Department 
of the Treasury's (Treasury) investment program.


Sec. 203.2  Definitions.

    As used in this part:
    (a) Advice of credit means the Treasury form used in the Federal 
Tax

[[Page 5651]]

Deposit system that is supplied to depositaries to summarize and report 
Federal tax deposits. The current form is Treasury Form 2284. Advice of 
credit information also may be delivered electronically.
    (b) Automated Clearing House (ACH) credit entry means a transaction 
originated by a financial institution in accordance with applicable ACH 
formats and applicable laws, regulations, and procedural instructions.
    (c) Automated Clearing House (ACH) debit entry means a transaction 
originated by a Treasury Financial Agent (TFA), in accordance with 
applicable ACH formats and applicable laws, regulations, and 
instructions.
    (d) Business day means any day on which the FRB of the district is 
open.
    (e) Direct Access transaction means same-day Federal tax payment 
information transmitted by a financial institution directly to the 
Electronic Tax Application at an FRB using the Fedline Taxpayer Deposit 
Application.
    (f) Direct investment means placement of Treasury funds with a 
depositary and a corresponding increase in a depositary's note balance.
    (g) Electronic Federal Tax Payment System (EFTPS) means the system 
through which taxpayers remit Federal tax payments electronically.
    (h) Electronic Tax Application (ETA) means a sub-system of EFTPS 
that receives, processes, and transmits same-day Federal tax payment 
information for taxpayers. ETA activity is comprised of Fedwire value 
transfers, Fedwire non-value transactions, and Direct Access 
transactions.
    (i) Electronic Tax Application (ETA) reference number means the 
unique number assigned to each ETA transaction by an FRB.
    (j) Federal funds rate means the Federal funds rate published 
weekly by the Board of Governors of the Federal Reserve System.
    (k) Federal Reserve account means an account with reserve or 
clearing balances held by a financial institution at an FRB.
    (l) Federal Reserve Bank of the district means the FRB that 
services the geographical area in which the financial institution is 
located, or such other FRB that may be designated in an FRB operating 
circular.
    (m) Federal Tax Deposit (FTD) means a tax deposit or payment made 
using an FTD coupon.
    (n) Federal Tax Deposit coupon (FTD coupon) means a paper form 
supplied to a taxpayer by the Treasury for use in the FTD system to 
accompany deposits of Federal taxes. The current paper form is Form 
8109.
    (o) Federal Tax Deposit system (FTD system) means the paper-based 
system through which taxpayers remit Federal tax payments by presenting 
an FTD coupon and payment to a depositary or an FRB. The depositary 
prepares an advice of credit summarizing all FTDs.
    (p) Federal taxes means those Federal taxes or other payments 
specified by the Secretary of the Treasury as eligible for payment 
through the procedures prescribed in this part.
    (q) Fedwire means the funds transfer system owned and operated by 
the FRBs.
    (r) Fedwire non-value transaction means the same-day Federal tax 
payment information transmitted by a financial institution to an FRB 
using a Fedwire type 1090 message to authorize a payment.
    (s) Fedwire value transfer means a Federal tax payment made by a 
financial institution using a Fedwire type 1000 message.
    (t) Financial institution means any bank, savings bank, savings and 
loan association, credit union, or similar institution.
    (u) Fiscal Agent means the Federal Reserve acting as agent for the 
Treasury.
    (v) Input Message Accountability Data (IMAD) means a unique number 
assigned to each Fedwire transaction by the financial institution 
sending the transaction to an FRB.
    (w) Note option means that program available to a TT&L depositary 
under which Treasury invests in obligations of the depositary. The 
amount of such investments will be evidenced by an open-ended interest-
bearing note balance maintained at the FRB of the district.
    (x) Procedural instructions means the procedures contained in the 
Treasury Financial Manual, Volume IV (IV TFM), other Treasury 
instructions issued through the TFAs, and FRB operating circulars 
issued consistent with this part.
    (y) Recognized insurance coverage means the insurance provided by 
the Federal Deposit Insurance Corporation, the National Credit Union 
Administration, and by insurance organizations specifically qualified 
by the Secretary.
    (z) Remittance option means that program available to a depositary 
that processes FTD payments, under which the amount of deposits 
credited by the depositary to the TT&L account will be withdrawn by the 
FRB for deposit to the Treasury General Account on the day that the FRB 
receives the advices of credit supporting such deposits.
    (aa) Same-day payment means the following ETA payment options:
    (1) Direct Access transaction;
    (2) Fedwire non-value transaction; and
    (3) Fedwire value transfer.
    (bb) Secretary means the Secretary of the Treasury, or the 
Secretary's delegate.
    (cc) Special direct investment means the placement of Treasury 
funds with a depositary and a corresponding increase in a depositary's 
note balance, where the investment specifically is identified as a 
``special direct investment'' and may be secured by collateral retained 
in the possession of the depositary pursuant to the terms of 
Sec. 203.24(c)(2)(i).
    (dd) Tax due date means the day on which a tax payment is due to 
Treasury, as determined by statute and Internal Revenue Service (IRS) 
regulations.
    (ee) Transaction trace number means an identifying number assigned 
by the taxpayer's financial institution to each ACH credit transaction.
    (ff) Treasury Financial Agent (TFA) means a financial institution 
designated as an agent of Treasury for processing EFTPS enrollments, 
receiving EFTPS tax payment information, and originating ACH debit 
entries on behalf of Treasury as authorized by the taxpayer.
    (gg) Treasury General Account (TGA) means an account maintained in 
the name of the United States Treasury at an FRB.
    (hh) Treasury Tax and Loan (TT&L) account means the Treasury 
account maintained by a depositary in which funds are credited by the 
depositary after receiving and collateralizing FTDs.
    (ii) Treasury Tax and Loan depositary (depositary) means a 
financial institution designated as a depositary by the FRB of the 
district for the purpose of maintaining a TT&L account and/or note 
balance.
    (jj) Treasury Tax and Loan (TT&L) Program means the program for 
collecting Federal taxes and investing the Government's excess 
operating funds.
    (kk) Treasury Tax and Loan (TT&L) rate of interest means the 
Federal funds rate less twenty-five basis points (i.e., \1/4\ of 1 
percent).


Sec. 203.3  Financial institution eligibility for designation as a 
Treasury Tax and Loan depositary.

    (a) To be designated as a TT&L depositary, a financial institution 
shall be insured as a national banking association, state bank, savings 
bank, savings and loan, building and loan, homestead association, 
Federal home loan bank, credit union, trust company,

[[Page 5652]]

or a U.S. branch of a foreign banking corporation, the establishment of 
which has been approved by the Comptroller of the Currency.
    (b) A financial institution shall possess the authority to pledge 
collateral to secure TT&L account balances and/or a note balance.
    (c) In order to be designated as a TT&L depositary for the purposes 
of processing tax deposits in the FTD system, a financial institution 
shall possess under its charter either general or specific authority 
permitting the maintenance of the TT&L account, the balance of which is 
payable on demand without previous notice of intended withdrawal. In 
addition, note option depositaries shall possess either general or 
specific authority permitting the maintenance of a note balance, which 
is payable on demand without previous notice of intended withdrawal.


Sec. 203.4  Designation of financial institutions as Treasury Tax and 
Loan depositaries.

    (a) Parties to the agreement. To be designated as a TT&L 
depositary, a financial institution shall enter into a depositary 
agreement with Treasury's fiscal agent, the FRB. By entering into this 
agreement, the financial institution agrees to be bound by this part, 
and procedural instructions issued pursuant to this part.
    (b)(1) Application procedures. An eligible financial institution 
seeking designation as a depositary and, thereby, the authority to 
maintain a TT&L account and/or a note balance shall file with the FRB, 
Financial Management Service Form 458, ``Financial Institution 
Agreement and Application for Designation as a TT&L Depositary,'' and 
Financial Management Service Form 459, ``Resolution Authorizing the 
Financial Institution Agreement and Application for Designation as a 
TT&L Depositary,'' certified by its board of directors. Financial 
Management Service Forms 458 and 459 are available upon request from 
the FRB of the district.
    (2) Depositaries processing tax payments in the FTD system are 
required to elect either the remittance or the note option.
    (c) Designation. Each financial institution satisfying the 
eligibility requirements and the application procedures will receive 
from the FRB notification of its specific designation as a TT&L 
depositary. A financial institution is not authorized to maintain a 
TT&L account or note balance until it has been designated as a TT&L 
depositary by the FRB.


Sec. 203.5  Obligations of the depositary.

    A depositary shall:
    (a) Administer a note balance, if not participating in the FTD 
System.
    (b) Administer a TT&L account and, if applicable, a note balance, 
if participating in the FTD System.
    (c) Comply with the requirements of Section 202 of Executive Order 
11246, entitled ``Equal Employment Opportunity'' (3 CFR, 1964-1965 
Comp. p. 339) as amended by Executive Orders 11375 and 12086 (3 CFR, 
1966-1970 Comp., p. 684; 3 CFR, 1978 Comp. p. 230), and the regulations 
issued thereunder at 41 CFR Chapter 60.
    (d) Comply with the requirements of Section 503 of the 
Rehabilitation Act of 1973, as amended, and the regulations issued 
thereunder at 41 CFR part 60-741, requiring Federal contractors to take 
affirmative action to employ and advance in employment qualified 
individuals with disabilities.
    (e) Comply with the requirements of Section 503 of the Vietnam Era 
Veterans' Readjustment Assistance Act of 1972, as amended, 38 U.S.C. 
4212, Executive Order 11701 (3 CFR 1971-1975 Comp. p. 752), and the 
regulations issued thereunder at 41 CFR parts 60-250 and 61-250, 
requiring Federal contractors to take affirmative action to employ and 
advance in employment qualified special disabled veterans and Vietnam-
era veterans.


Sec. 203.6  Compensation for services.

    Except as provided in the procedural instructions, Treasury will 
not compensate financial institutions for servicing and maintaining the 
TT&L account, or for processing tax payments through the EFTPS or the 
FTD system.


Sec. 203.7  Termination of agreement or change of election or option.

    (a) Termination by Treasury. The Secretary may terminate the 
agreement of a depositary at any time upon notice to that effect to 
that depositary, effective on the date set forth in the notice.
    (b) Termination or change of election or option by the depositary. 
A depositary may terminate its depositary agreement, or change its 
option or election, consistent with this part and the procedural 
instructions, by submitting notice to that effect in writing to the FRB 
effective at a prospective date set forth in the notice.


Sec. 203.8  Application of part and procedural instructions.

    The terms of this part and procedural instructions issued pursuant 
to this part shall be binding on financial institutions that process 
tax payments and/or maintain a note balance under this part. By 
accepting or originating Federal tax payments, the financial 
institution agrees to be bound by this part and by procedural 
instructions issued pursuant to this part.

Subpart B--Electronic Federal Tax Payments


Sec. 203.9  Scope of the subpart.

    This subpart prescribes the rules by which financial institutions 
shall process Federal tax payment transactions electronically. A 
financial institution does not need to be designated as a TT&L 
depositary in order to process electronic Federal tax payments. In 
addition, a financial institution that does process electronic Federal 
tax payments under this subpart does not thereby become a Federal 
Government depositary and shall not advertise itself as one because of 
that fact.


Sec. 203.10  Enrollment.

    (a) General. Taxpayers shall complete an enrollment process with 
the TFA prior to making their first electronic Federal tax payment.
    (b) Enrollment forms. The TFA shall provide financial institutions 
and taxpayers with enrollment forms upon request. The taxpayer is 
responsible for completing the enrollment form, obtaining the 
verifications required on the form, and returning the enrollment form 
to the TFA.
    (c) Verification. If the taxpayer elects the ACH debit entry method 
of paying taxes, an authorized representative of the financial 
institution shall verify the accuracy of the financial institution 
routing number, taxpayer account number, and taxpayer account type at 
the request of the taxpayer.


Sec. 203.11  Electronic payment methods.

    (a) General. Electronic payment methods for Federal tax payments 
available under this subpart include ACH debit entries, ACH credit 
entries, and same-day payments. Any financial institution that is 
capable of originating and/or receiving transactions for these payment 
methods, by itself or through a correspondent financial institution, 
may do so on behalf of a taxpayer.
    (b) Conditions to making an electronic payment. Nothing contained 
in this part shall affect the authority of financial institutions to 
enter into contracts with their customers regarding the terms and 
conditions for processing payments, provided that such terms and 
conditions are not inconsistent with this subpart and applicable law 
governing the particular transaction type.
    (c) Payment of interest for time value of funds held. Treasury will 
not pay

[[Page 5653]]

interest on any payments erroneously paid to Treasury and subsequently 
refunded to the financial institution.


Sec. 203.12  Future-day reporting and payment mechanisms.

    (a) General. A financial institution may receive an ACH debit 
entry, originated by the TFA at the direction of the taxpayer; or, a 
financial institution may originate an ACH credit entry, at the 
direction of the taxpayer. Taxpayers will be credited for the actual 
amount received by Treasury.
    (b) ACH debit. A financial institution receiving an ACH debit entry 
originated by the TFA shall, as applicable:
    (1) Timely verify the account number and account type contained in 
an ACH prenotification entry;
    (2) Timely and properly return a prenotification entry that 
contains an invalid account number or account type, or otherwise is 
erroneous or unprocessable;
    (3) Timely and accurately notify the TFA of incorrect information 
on entries received, using a Notification of Change entry; and
    (4) Timely and accurately return an entry not posted, including but 
not limited to, a return or a contested dishonored return for 
acceptable return reasons, as set forth in the procedural instructions.
    (c) ACH credit. A financial institution originating an ACH credit 
entry at the direction of a taxpayer shall:
    (1) At the request of the taxpayer, originate either an ACH 
prenotification containing the taxpayer's identification number or a 
zero dollar ACH entry with the appropriate addenda record. Additional 
format information is contained in the procedural instructions;
    (2) Format the ACH credit entry in the ACH format approved by 
Treasury for Federal tax payments;
    (3) Originate an ACH credit entry by the appropriate deadline, as 
specified by the FRB or Treasury, whichever is earlier, in order to 
meet the tax due date specified by the taxpayer; and
    (4) Provide the taxpayer, upon request, a transaction trace number, 
or some other method to trace the tax payment.
    (d) ACH credit reversals. Reversals may be initiated for a 
duplicate or erroneous file or entry. No advance approval from, or 
notification to, the IRS is required when originating an ACH credit 
reversal. Documentation of reversals shall be made available as set 
forth in the procedural instructions.


Sec. 203.13  Same-day reporting and payment mechanisms.

    (a) General. A financial institution or its authorized 
correspondent may initiate same-day reporting and payment transactions 
on behalf of taxpayers. A same-day payment must be received by the FRB 
of the district by the deadline established by the Treasury in the 
procedural instructions. Taxpayers will be credited for the actual 
amount received by Treasury.
    (b) Fedwire value transfer. To initiate a Fedwire value tax 
payment, the financial institution shall be a Fedwire participant and 
shall comply with the FRB's Fedwire format for tax payments. The 
taxpayer's financial institution shall provide the taxpayer, upon 
request, the IMAD and the ETA reference numbers for a Fedwire value 
transfer. The financial institution may obtain the ETA reference number 
for Fedwire value transfers from its FRB by supplying the related IMAD 
number. Fedwire value transfers settle immediately to the TGA and thus 
are not credited to a depositary's note balance.
    (c) Fedwire non-value transaction. By initiating a Fedwire non-
value transaction, a financial institution authorizes the FRB of the 
district to debit its Federal Reserve account or, for a TT&L 
depositary, to debit the Federal Reserve account of the depositary or 
its designated correspondent financial institution, for the amount of 
the tax payment specified in the transaction. To initiate a Fedwire 
non-value transaction, the financial institution shall be a Fedwire 
participant and shall comply with the FRB's Fedwire format for tax 
payments. The taxpayer's financial institution shall provide the 
taxpayer, upon request, the IMAD and ETA reference numbers for the 
Fedwire non-value transaction. The financial institution may obtain the 
ETA reference number for Fedwire non-value transactions from its FRB by 
supplying the related IMAD number.
    (1) For a note option depositary using a Fedwire non-value 
transaction, the tax payment amount will be credited to the 
depositary's note balance on the day of the transaction.
    (2) For a remittance option depositary using a Fedwire non-value 
transaction, the tax payment amount will be debited from the Federal 
Reserve account of the depositary or the depositary's designated 
correspondent and credited to the TGA on the day of the transaction.
    (3) For a non-TT&L depositary financial institution using a Fedwire 
non-value transaction, the tax payment amount will be debited from the 
financial institution's Federal Reserve account and credited to the TGA 
on the day of the transaction.
    (d) Direct Access Transaction. By initiating a Direct Access 
transaction, a financial institution authorizes the FRB of the district 
to debit its Federal Reserve account or, for a TT&L depositary, to 
debit the Federal Reserve account of the depositary or its designated 
correspondent financial institution for the amount of the tax payment 
specified in the transaction. The taxpayer's financial institution 
shall provide the taxpayer, upon request, the ETA reference number for 
the Direct Access transaction.
    (1) For a note option depositary using a Direct Access transaction, 
the tax payment amount will be credited to the depositary's note 
balance on the day of the transaction.
    (2) For a remittance option depositary or a non-TT&L depositary 
financial institution using a Direct Access transaction, the tax 
payment amount will be debited from the Federal Reserve account of the 
financial institution or its designated correspondent financial 
institution, and credited to the TGA on the day of the transaction.
    (e) Cancellations and reversals. In addition to cancellations due 
to insufficient funds in the financial institution's Federal Reserve 
account, the FRB may reverse a same-day transaction:
    (1) If the transaction:
    (i) Is originated by a financial institution after the deadline 
established by the Treasury in the procedural instructions;
    (ii) Has an unenrolled taxpayer identification number; or
    (iii) Does not meet the edit and format requirements set forth in 
the procedural instructions; or,
    (2) At the direction of the IRS, for the following reasons:
    (i) Incorrect taxpayer name;
    (ii) Overpayment; or
    (iii) Unidentified payment; or,
    (3) At the request of the financial institution that sent the same-
day transaction, if the request is made prior to the deadline 
established by Treasury in the procedural instructions on the day the 
payment was made.
    (f) Other than as stated in paragraph (e) of this section, Treasury 
is not obligated to reverse all or any part of a payment.


Sec. 203.14  Electronic Federal Tax Payment System interest 
assessments.

    (a) Circumstances subject to interest assessments. Treasury may 
assess interest on a financial institution in instances where a 
taxpayer that failed to meet a tax due date proves to the IRS

[[Page 5654]]

that the delivery of tax payment instructions to the financial 
institution was timely and that the taxpayer satisfied the conditions 
imposed by the financial institution pursuant to Sec. 203.11(b). 
Treasury also may assess interest where a financial institution failed 
to respond to an ACH prenotification entry on an ACH debit as required 
in Sec. 203.12(b) or failed to originate an ACH prenotification or zero 
dollar entry on an ACH credit as described in Sec. 203.12(c) which then 
resulted in a late payment.
    (b) Calculation of interest assessment. Any interest assessed under 
this section will be at the TT&L rate. The interest will be assessed 
from the day the taxpayer specified that its payment should settle to 
the Treasury until the receipt of the payment by Treasury, subject to 
the following limitations: For ACH debit transactions, interest will be 
limited to no more than seven calendar days; for ACH credit and same-
day transactions, interest will be limited to no more than 45 calendar 
days. The limitation of liability in this paragraph does not apply to 
any interest assessment in which there is an indication of fraud, the 
presentation of a false claim, or misrepresentation or embezzlement on 
the part of the financial institution or any employee or agent of the 
financial institution.
    (c) Authorization to assess interest. A financial institution that 
processes Federal tax payments made by electronic payment methods under 
this subpart is deemed to authorize the FRB to debit its Federal 
Reserve account or the account of its designated correspondent 
financial institution for any interest assessed under this section. 
Upon the direction of Treasury, the FRB shall debit the Federal Reserve 
account of the financial institution or the account of its designated 
correspondent financial institution for the amount of the assessed 
interest.
    (d)(1) Circumstances not subject to the assessment of interest. (1) 
Treasury will not assess interest on a taxpayer's financial institution 
if a taxpayer fails to meet a tax due date because the taxpayer has not 
satisfied conditions imposed by the financial institution pursuant to 
Sec. 203.11(b) and the financial institution has not contributed to the 
delay. The burden is on the financial institution to establish, 
pursuant to the procedures in Sec. 203.16, that the taxpayer has not 
satisfied the conditions and that the financial institution has not 
contributed to the delay.
    (2) Treasury will not assess interest on a financial institution if 
the delay causing the interest assessment is due to the FRB or the TFA 
and the financial institution did not contribute to the delay. The 
burden is on the financial institution to establish, pursuant to the 
procedures in Sec. 203.16, that it did not cause or contribute to the 
delay.


Sec. 203.15  Prohibited debits through the Automated Clearing House.

    (a) General. The Treasury has instituted operational safeguards to 
scrutinize all entries that remove funds from the TGA. In the event 
funds are removed from the TGA without authority, this section sets 
forth the liability of financial institutions originating such entries. 
Accordingly, a financial institution shall not originate an ACH 
transaction to debit the TGA without the prior written permission of 
Treasury. Unauthorized entries under this section do not include 
reversal entries of previously initiated ACH credits authorized in 
Sec. 203.12(d).
    (b) Liability. A financial institution that originates an 
unauthorized ACH entry that debits the TGA shall be liable to Treasury 
for the amount of the transaction and shall be liable for interest 
charges as specified in paragraph (d) of this section.
    (c) Authorization to recover principal and assess interest charge. 
By initiating unauthorized debits to the TGA through the ACH, a 
financial institution is deemed to authorize the FRB to debit its 
Federal Reserve account or the account of its designated correspondent 
financial institution for any principal and, if applicable, an interest 
charge assessed by Treasury under this section.
    (d) Interest charge calculation. The interest charge shall be at a 
rate equal to the Federal funds rate plus two percent. The interest 
charge shall be assessed for each calendar day from the day the TGA was 
debited to the day the TGA is recredited with the full amount of 
principal due.


Sec. 203.16  Appeal and dispute resolution.

    (a) Contest. A financial institution may contest any interest 
assessed under Sec. 203.14, any principal or interest assessed under 
Sec. 203.15, or any late fees assessed under Sec. 203.20. The financial 
institution shall submit information supporting its position and the 
relief sought. The information must be received, in writing, by the 
Treasury officer or fiscal agent identified in the procedural 
instructions, no later than 90 calendar days after the date the FRB 
debits the reserve account of the financial institution under 
Secs. 203.14, 203.15, or 203.20. The Treasury officer or fiscal agent 
will: uphold the assessment, or reverse the assessment, or modify the 
assessment, or mandate other action.
    (b) Appeal. The financial institution may appeal the decision to 
Treasury as set forth in the procedural instructions. No further 
administrative review of the Treasury's decision is available under 
this Part.
    (c) Recoveries. In the event of an over or under recovery of either 
interest, principal, or late fees, Treasury will instruct the FRB to 
credit or debit the Federal Reserve account of the financial 
institution or its designated correspondent financial institution, as 
appropriate.

Subpart C--Federal Tax Deposits


Sec. 203.17  Scope of the subpart.

    This subpart applies to all depositaries that accept FTD coupons 
and governs the acceptance and processing of those coupons.


Sec. 203.18  Tax deposits using Federal Tax Deposit coupons.

    (a) FTD coupons. A depositary that accepts FTD coupons, through any 
of its offices that accept demand and/or savings deposits, shall:
    (1) Accept from a taxpayer, cash, a postal money order drawn to the 
order of the depositary, or a check or draft drawn on and to the order 
of the depositary, covering an amount to be deposited as Federal taxes 
when accompanied by an FTD coupon on which the amount of the deposit 
has been properly entered in the space provided. A depositary may 
accept, at its discretion, a check drawn on another financial 
institution, but it does so at its option and absorbs for its own 
account any float and other costs involved.
    (2) Issue a counter receipt when requested to do so by a taxpayer 
that makes an FTD deposit over the counter.
    (3) Place a stamp impression on the face of each FTD coupon in the 
space provided. The stamp shall reflect the date on which the tax 
deposit was received and the name and location of the depositary. The 
timeliness of the tax payment will be determined by reference to the 
date stamped by the depositary on the FTD coupon.
    (4) Credit, on the date of receipt, all FTD deposits to the TT&L 
account and administer that account pursuant to the provisions of this 
part.
    (5) Forward, each day, to the IRS Center servicing the geographical 
area in which the depositary is located, the FTD coupons for all FTD 
deposits received that day. The FTD coupons shall be accompanied by an 
advice of credit reflecting the total amount of all FTD coupons.
    (6) Establish an adequate record of all FTD deposits prior to 
transmittal to the

[[Page 5655]]

IRS Center so that the depositary will be able to identify deposits in 
the event tax deposit coupons are lost in shipment. For tracking 
purposes, a record shall be made of each FTD deposit showing, at a 
minimum, the date of deposit, the taxpayer identification number, and 
the amount of the deposit. The depositary's copy of the advice of 
credit may be used to provide the necessary information if individual 
deposits are listed separately, showing date, taxpayer identification 
number, and amount.
    (7) Deliver its advices of credit to the FRB by the cutoff hour 
designated by the FRB for receipt of advices.
    (8) Not accept compensation from taxpayers for accepting FTDs and 
handling them as required by this section.
    (b) FTD deposits with Federal Reserve Banks. An FRB shall:
    (1) Accept an FTD directly from a taxpayer when such tax deposit 
is:
    (i) Mailed or delivered by a taxpayer; and
    (ii) Provided in the form of cash or a check or postal money order 
payable to the order of that FRB; and,
    (iii) Accompanied by an FTD coupon on which the amount of the tax 
deposit has been properly entered in the space provided.
    (2) Issue a counter receipt, when requested to do so by a taxpayer 
that makes an FTD over the counter; and,
    (3) Place, in the space provided on the face of each FTD coupon 
accepted directly from a taxpayer, a stamp impression reflecting the 
name of the FRB and the date on which the tax deposit will be credited 
to the TGA. Timeliness of the Federal tax payment will be determined by 
this date. However, if a deposit is mailed to an FRB, it shall be 
subject to the ``Timely mailing treated as timely filing and paying'' 
clause of the Internal Revenue Code, 26 U.S.C. 7502; and,
    (4) Credit the TGA with the amount of the tax payment;
    (i) On the date the payment is received, if payment is made in 
cash; or,
    (ii) On the date the proceeds of the tax payment are collected, if 
payment is made by postal money order or check.


Sec. 203.19  Note option.

    (a) Late delivery of advices of credit. If an advice of credit does 
not arrive at the FRB before the designated cutoff hour for receipt of 
such advices, the FRB will post the funds to the note balance as of the 
next business day after the date on the advice of credit. This is the 
date on which funds will begin to earn interest for Treasury.
    (b) Transfer of funds from TT&L account to the note balance. For a 
depositary selecting the note option, funds equivalent to the amount of 
deposits credited by a depositary to the TT&L account shall be 
withdrawn by the depositary and credited to the note balance on the 
business day following the receipt of the tax payment.


Sec. 203.20  Remittance option.

    (a) FTD late fee. If an advice of credit does not arrive at the FRB 
before the designated cutoff hour for receipt of such advices, an FTD 
late fee in the form of interest at the TT&L rate will be assessed for 
each day's delay in receipt of such advice. Upon the direction of 
Treasury, the FRB shall debit the Federal Reserve account of the 
financial institution or the account of its designated correspondent 
financial institution for the amount of the late fee.
    (b) Withdrawals. For a depositary selecting the Remittance Option, 
the amount of deposits credited by a depositary to the TT&L account 
will be withdrawn upon receipt by the FRB of the advices of credit. The 
FRB will charge the depositary's Federal Reserve account or the account 
of the depositary's designated correspondent financial institution.

Subpart D--Investment Program and Collateral Security Requirements 
for Treasury Tax and Loan Depositaries


Sec. 203.21  Scope of the subpart.

    This subpart provides rules for TT&L depositaries on crediting note 
balances under the various payment methods; debiting note balances; and 
pledging collateral security.


Sec. 203.22  Sources of balances.

    Depositaries electing to participate in the investment program can 
receive Treasury's investments in obligations of the depositary from 
the following sources:
    (a) FTDs that have been credited to the TT&L account pursuant to 
subpart C of this part;
    (b) EFTPS ACH credit and debit transactions, Fedwire non-value 
transactions, and Direct Access transactions pursuant to subpart B of 
this part; and
    (c) Direct investments and special direct investments pursuant to 
subpart D of this part.


Sec. 203.23  Note balance.

    (a) Additions. Treasury will invest funds in obligations of 
depositaries selecting the note option. Such obligations shall be in 
the form of open-ended, interest-bearing notes; and additions and 
reductions will be reflected on the books of the FRB of the district.
    (1) FTD system. A depositary processing tax deposits using the FTD 
system and electing the note option shall debit the TT&L account and 
credit its note balance as stated in Sec. 203.19(b).
    (2) EFTPS.
    (i) ACH debit and ACH credit. A note option depositary processing 
EFTPS ACH debit entries and/or ACH credit entries shall credit its note 
balance for the value of the transactions on the date that an exchange 
of funds is reflected on the books of the Federal Reserve Bank of the 
district. Financial institutions may refer to the procedural 
instructions for information on how to ascertain the amount of the 
credit to the note balance.
    (ii) Fedwire non-value and Direct Access. A note option depositary 
processing Fedwire non-value and/or Direct Access transactions pursuant 
to subpart B of this part shall credit its note balance and debit its 
customer's account for the value of the transactions on the date ETA 
receives and processes the transactions.
    (b) Other additions. Other funds from Treasury may be offered from 
time to time to certain note option depositaries through direct 
investments, special direct investments, or other investment programs.
    (c) Note balance withdrawals. The amount of the note balance shall 
be payable on demand without prior notice. Calls for payment on the 
note will be by direction of the Secretary through the FRBs. On behalf 
of Treasury, the FRB shall charge the reserve account of the depositary 
or the depositary's designated correspondent on the day specified in 
the call for payment.
    (d) Interest. A note shall bear interest at the TT&L rate. Such 
interest is payable by a charge to the Federal Reserve account of the 
depositary or its designated correspondent in the manner prescribed in 
the procedural instructions.
    (e) Maximum balance.
    (1) Note option depositaries. A depositary selecting the note 
option shall establish a maximum balance for its note by providing 
notice to that effect in writing to the FRB of the district. The 
maximum balance is the amount of funds for which a note option 
depositary is willing to provide collateral in accordance with 
Sec. 203.24(c)(1). The depositary shall provide the advance notice 
required in the procedural instructions before reducing the established 
maximum balance unless it is a reduction resulting from a collateral 
re-evaluation as determined by the depositary's FRB. That portion of 
any advice of credit or EFTPS tax payment, which, when

[[Page 5656]]

posted at the FRB, would cause the note balance to exceed the maximum 
balance amount specified by the depositary, will be withdrawn by the 
FRB that day.
    (2) Direct investment depositaries. A note option depositary that 
participates in direct investment shall set a maximum balance for 
direct investment purposes which is higher than its peak balance 
normally generated by the depositary's advices of credit and EFTPS tax 
payment inflow. The direct investment note option depositary shall 
provide the advance notice required in the procedural instructions 
before reducing the established maximum balance.
    (3) Special direct investment depositaries. Special direct 
investments, while credited to the note balance, shall not be 
considered in setting the amount of the maximum balance or in 
determining the amounts to be withdrawn where a depositary's maximum 
balance is exceeded.


Sec. 203.24  Collateral security requirements.

    Financial institutions that process EFTPS tax payments, but are not 
TT&L depositaries, have no collateral requirements under this part. 
Financial institutions that are note option depositaries or remittance 
option depositaries have collateral security requirements, as follows:
    (a) Note option.
    (1) FTD deposits and EFTPS tax payments. A depositary shall pledge 
collateral security in accordance with the requirements of paragraphs 
(c)(1), (d), and (e) of this section in an amount that is sufficient to 
cover the pre-established maximum balance for the note, and, if 
applicable, the closing balance in the TT&L account which exceeds 
recognized insurance coverage. Depositaries shall pledge collateral for 
the full amount of the maximum balance at the time the maximum balance 
is established. If the depositary maintains a TT&L account, the 
depositary shall pledge collateral security before crediting deposits 
to the TT&L account.
    (2) Direct investments. A note option depositary that participates 
in direct investment is not required to pledge collateral continuously 
in the amount of the pre-established maximum balance. However, each 
note option depositary participating in direct investment shall pledge, 
no later than the day the direct investment is placed, the additional 
collateral in accordance with paragraphs (c)(1), (d), and (e) of this 
section to cover the total note balance including those funds received 
through direct investment. If a direct investment depositary has a 
history of frequent collateral deficiencies, it shall fully 
collateralize its maximum balance at all times.
    (3) Special direct investments. Before special direct investments 
are credited to a depositary's note balance, the note option depositary 
shall pledge collateral security, in accordance with the requirements 
of paragraphs (c)(2) and (e) of this section, to cover 100 percent of 
the amount of the special direct investments to be received.
    (b) Remittance option. Prior to crediting FTD deposits to the TT&L 
account, a remittance option depositary shall pledge collateral 
security in accordance with the requirements of paragraph (c)(1), (d), 
and (e) of this section in an amount which is sufficient to cover the 
balance in the TT&L account at the close of business each day, less 
recognized insurance coverage.
    (c) Deposits of securities.
    (1) Collateral security required under paragraphs (a)(1), (2), and 
(b) of this section shall be deposited with the FRB of the district, or 
with a custodian or custodians within the United States designated by 
the FRB, under terms and conditions prescribed by the FRB.
    (2)(i) Collateral security required under paragraph (a)(3) of this 
section shall be pledged under a written security agreement on a form 
provided by the FRB of the district. The collateral security pledged to 
satisfy the requirements of paragraph (a)(3) of this section may remain 
in the pledging depositary's possession and the fact that it has been 
pledged shall be evidenced by advices of custody to be incorporated by 
reference in the written security agreement. The written security 
agreement and all advices of custody covering collateral security 
pledged under that agreement shall be provided by the depositary to the 
FRB of the district. Collateral security pledged under the agreement 
shall not be substituted for or released without the advance approval 
of the FRB of the district, and any collateral security subject to the 
security agreement shall remain so subject until an approved 
substitution is made. No substitution or release shall be approved 
until an advice of custody containing the description required by the 
written security agreement is received by the FRB of the district.
    (ii) Treasury's security interest in collateral security pledged by 
a depositary in accordance with paragraph (c)(2)(i) of this section to 
secure special direct investments is perfected without Treasury taking 
possession of the collateral security for a period not to exceed 21 
calendar days from the day of the depositary's receipt of the special 
direct investment.
    (d) Acceptable securities. Unless otherwise specified by the 
Secretary, collateral security pledged under this section may be 
transferable securities, owned by the depositary free and clear of all 
liens, charges, or claims, of any of the classes listed in the 
procedural instructions. Collateral values will be assigned by the FRB 
of the district.
    (e) Assignment of securities. A TT&L depositary that pledges 
acceptable securities which are not negotiable without its endorsement 
or assignment may furnish, in lieu of placing its unqualified 
endorsement on each security, an appropriate resolution and irrevocable 
power of attorney authorizing the FRB to assign the securities. The 
resolution and power of attorney shall conform to such terms and 
conditions as the FRB shall prescribe.
    (f) Effecting payments of principal and interest on securities 
pledged as collateral.
    (1) General. If the depositary fails to pay, when due, the whole or 
any part of the funds received by it for credit to the TT&L account, 
and/or if applicable, its note balance; or otherwise violates or fails 
to perform any of the terms of this part, or fails to pay when due 
amounts owed to the United States or the United States Treasury; or if 
the depositary is closed for business by regulatory action or by proper 
corporate action, or in the event that a receiver, conservator, 
liquidator or any other officer is appointed; then the Treasury, 
without notice or demand, may sell, or otherwise collect the proceeds 
of all or part of the collateral, including additions and 
substitutions; and apply the proceeds, to satisfy any claims of the 
United States against the depositary. All principal and interest 
payments on any security pledged to protect the note balance (if 
applicable) and/or the TT&L account (if applicable), due as of the date 
of the insolvency or closure, or thereafter becoming due, shall be held 
separate and apart from any other assets and shall constitute a part of 
the pledged security available to satisfy any claim of the United 
States.
    (2) Payment procedures.
    (i) Subject to the waiver in paragraph (f)(2)(iii) of this section, 
each depositary (including, with respect to such depositary, an 
assignee for the benefit of creditors, a trustee in bankruptcy, or a 
receiver in equity) shall immediately remit each payment of principal 
and/or interest received by it with respect to collateral pledged 
pursuant to this section to the FRB of the district, as fiscal agent of 
the United States, and in

[[Page 5657]]

any event shall so remit no later than 10 days after receipt of such a 
payment.
    (ii) Subject to the waiver in paragraph (f)(2)(iii) of this 
section, each obligor on a security pledged by a depositary pursuant to 
this section, upon notification that the Treasury is entitled to any 
payment associated with that pledged security, shall make each payment 
of principal and/or interest due with respect to such security directly 
to the FRB of the district, as fiscal agent of the United States.
    (iii) The requirements of paragraphs (f)(2)(i) and (ii) of this 
section are hereby waived for only so long as a pledging depositary 
avoids both termination from the program under Sec. 203.7; and also, 
those circumstances identified in paragraph (f)(1) which may lead to 
the collection of the proceeds of collateral or the waiver is otherwise 
terminated by Treasury.

    Dated: January 27, 1998.
Richard L. Gregg,
Acting Commissioner.
[FR Doc. 98-2494 Filed 2-2-98; 8:45 am]
BILLING CODE 4810-35-P