TAX DEPOSITS GO ELECTRONIC

By John Brozovsky and Roxanne Spindle

As of May 1995, 32,000 taxpayers had abandoned Form 8109, Federal Tax Deposit Coupon, used by millions of employers to deposit payroll and other depository taxes. These taxpayers voluntarily joined the IRS's TAXLINK program to use modern technology instead of paper and pen. Many taxpayers will be required to join them in January 1996; others should consider voluntary adoption.

Prior to joining TAXLINK, each filer filled out a paper coupon, Form 8109, and took it to the bank with a check in the amount of the required deposit. The bank transferred the funds to the government's account and forwarded the coupon to an IRS service center where the information was posted to the taxpayer's file. Now these filers transfer both funds and information without leaving their offices by using technology as sophisticated as a mainframe computer or as simple as the office telephone.

In January 1996, all filers whose total deposits of payroll taxes exceeded $47 million in either 1993 or 1994 will be required to join TAXLINK and use electronic funds transfers (EFT). An EFT is any transfer of funds, other than a transaction originated by check, draft, or similar paper instrument that is initiated through an electronic terminal, telephonic instrument, computer, or magnetic tape. Taxpayers who are classified as semi-weekly depositors (annual deposits of more than $50,000) will be required to use EFT in January 1997. All taxpayers whose annual deposits exceed $20,000 will be required to use EFT by 1999. (Table 1 shows the schedule of the phase-in requirements.)

By the year 2000, the paper coupon will be almost extinct because the North American Free Trade Agreement (NAFTA) requires the IRS to collect a minimum of 94% of all business taxes electronically by 1999.

TAXLINK

TAXLINK is the electronic remittance processing system the IRS uses to accept electronically transmitted Federal tax- deposit information. The IRS began pilot testing TAXLINK in the Southeast region in mid-1992 and went nationwide in 1994. There are currently three banks that are designated as financial agents authorized to receive tax payment information on behalf of the IRS. All information is funneled through one of these agents, regardless of the payment option selected by the taxpayer.

Funds are transferred through the Automated Clearing House (ACH): a central clearinghouse facility where banks exchange EFT instructions. If the taxpayer's financial institution is authorized to send ACH transactions, the taxpayer can have it transfer both the funds and account information. This is referred to as a credit transaction.

Alternatively, the taxpayer can authorize its financial agent to withdraw funds from the taxpayer's account. This is a debit transaction. When a debit transaction is selected, the taxpayer must separately transmit payment information directly to the agent. TAXLINK provides electronic options for this purpose that include computer, touch-tone phone, and operator-assisted reporting.

Both debit and credit transactions must be initiated on a timely basis to avoid penalties. This generally requires the taxpayer to authorize payment one business day prior to the Federal tax deposit (FTD) due date. For many filers, this should not prove to be an issue. Taxpayers whose liability exceeds $100,000 during a deposit period, however, are required to make next-day deposits. If the taxpayer cannot reasonably estimate its payroll tax liability before its financial institution's ACH processing closes for the day, it must use Fedwire to ensure that the payment is received on a timely basis. The IRS will generally treat a deposit as timely if the Fedwire payment is received by the Federal Reserve Bank of Minneapolis no later than 2 p.m. Eastern, Central, or Pacific time, depending on the location of the financial institution that originated the Fedwire payment. This makes it the only same-day payment option available.

Fedwire is the funds-transfer system owned and operated by the Federal reserve banks. Taxpayers required to use TAXLINK can chose to use Fedwire as a routine payment option by indicating such on their initial applications. Required filers cannot revert to the paper system for any reason and must use Fedwire as a backup procedure to ensure timely filing if its normal processing is interrupted for any reason.

In July 1994, the IRS issued Rev. Proc. 94-48 (1994-29 IRB 31) to inform taxpayers and financial institutions who participate in TAXLINK of their obligations to each other and to the IRS. This document contains useful information for any taxpayer contemplating adoption of the EFT system. In addition to providing a glossary of terms, information about the registration procedure and payment options, Rev. Proc. 94-48 provides the criteria for rejection of an ACH credit tax payment. The criteria include, no prenotification on file; unable to locate account; or taxpayer identification number not found, missing, or fails to match the enrollment file.

Voluntary Participation

Taxpayers, of any size, can choose to voluntarily use TAXLINK. Voluntary depositors follow most of the same rules as required depositors. They can, however, after proper notification, choose to return permanently to the paper coupon system until required by law to use EFT. Unlike required depositors, volunteers can also use the paper system (deposit coupons) as a backup if unable to use EFT for any reason. Volunteers can use Fedwire only as a backup procedure and must contact the TAXLINK helpline to enroll with Fedwire.

To obtain an enrollment form or get additional information, businesses can call the TAXLINK HELPLINE at (800) 829-5469 or write to: IRS/Cash Management Site Office, Atlanta Service Center, P.O. Box 47669, Stop 293, Doraville GA 30362. It will take at least 10 weeks to process an application, and the IRS will not accept EFTs until the enrollment process is completed.

Nonpayroll Taxes

While only payroll taxes are used to determine when a taxpayer is required to make EFT deposits, other taxes must also be deposited by EFT once the taxpayer exceeds the payroll-tax threshold. Table 2 shows the tax payments which must be paid by EFT. These payments include corporate income taxes, Federal unemployment taxes (Form 941), and amounts withheld through backup withholding on nonpayroll payments such as dividends and interest (Form 945).

Requiring other taxes to also be paid by EFT, based on employment tax thresholds, could cause some confusion. When a company separates employment taxes from corporate and other nonemployment taxes, it may be difficult to coordinate and implement the change to EFTs that ensures that all nonpayroll taxes are deposited by EFT on a timely basis. This is especially true if an outside service bureau is used to prepare Federal payroll tax deposits.

Penalties for Late Filing

Electronic payments do not change the due dates of tax deposits, the day on which funds are debited from the taxpayer's account, or the due date of any tax returns that are required. If any deposit is late, the taxpayer is subject to a penalty that escalates based on the number of days the payment is late. The penalty applies to the entire amount of the deposit due, not just to the late portion if a partial deposit is made. The IRS has stated that it will abate penalties for EFT filers only if the error was clearly the bank's and the taxpayer's records show that all required information and funds were provided to the bank in a timely manner (Rev. Rul. 94-46, 1994-29 IRB 10).

The IRS feels that EFT will save the government money (the purpose for the transfer to an EFT system under NAFTA) since Federal tax deposits are received by the Treasury 24 hours sooner than under the current paper deposit system. Data processing costs should also be reduced, and the accuracy of postings to taxpayers' accounts is increased.

Smaller taxpayers are exempted from the system until at least the year 2000. The IRS has requested comments and suggestions on the impact of EFT depositing on small business, particularly as to how they should be treated after 1999. The IRS will incorporate these comments into its final determination of which, if any, small businesses should be exempted from EFT requirements.

If your total deposits of payroll taxes exceeded $47 million in either 1993 or 1994, you will be required to join TAXLINK in January 1996. Your enrollment form should already be with the IRS. If you have not started the enrollment process, you should contact the IRS immediately.

The IRS is currently collecting customer satisfaction data from taxpayers enrolled in TAXLINK. Approximately 4,000 surveys were sent out this summer to current users. Hopefully, the IRS will publish this data so that potential voluntary adopters can make an informed decision. Voluntary adopters, however, can always withdraw from the system, so early adoption should be a relatively safe, small technological leap forward for anyone who is interested in avoiding this trip to the bank. *

John Brozovsky is an assistant professor at Virginia Polytechnic Institute and State University and Roxanne M. Spindle, Ph.D., CPA is an assistant professor at Virginia Commonwealth University.

Determination % Payroll % Other Taxes to Period Taxes to Be Be Collected Date EFT Threshold Amount (Calendar year) Collected via EFT via EFT Required

$78 million 1993 16.9% 20% January 1, 1995

$47 million 1993 or 1994 20.1% 30% January 1, 1996

$50 thousand 1995 58.3% 60% January 1, 1997

$50 thousand 1996 58.3% 60% January 1, 1998

$20 thousand 1997 94% 94%

Editor:
Edwin B. Morris, CPA
Rosenberg, Neuwirth & Kuchner

Contributing Editor:
Richard M. Barth, CPA

DECEMBER 1995 / THE CPA JOURNAL

Form Description of Form

720 Quarterly Federal Excise Tax Return

940 Employer's Annual Federal Unemployment Tax Return

941 Employer's Quarterly Tax Return

943 Employer's Annual Tax Return for Agricultural Employees

945 Annual Return of Withheld Federal Income Tax

990-C Farmer's Cooperative Association Income Tax Return

990-PF Return of Private Foundation or IRC Sec. 4947(a)(1) Charitable Trusts Treated as a Private Foundation

990-T Exempt Organization Business Income Tax Return

1042 Annual Withholding Tax Return for U.S. Source Income of Foreign Persons

1120 U.S. Corporation Income Tax Return

CT-1 Employer's Annual Railroad Retirement and Unemployment Repayment Tax Return

DECEMBER 1995 / THE CPA JOURNAL