The Electronic Federal Tax Payment System.

• Author: Ferm, Paul R.
• Position: Includes related article on misconceptions about the EFTPS

State and local governments are required to participate in EFTPS just as any other business taxpayer. Here are the facts of the system and the choices offered to the taxpayer.

More than 1.2 million business taxpayers have been notified to start making federal tax payments electronically through the Electronic Federal Tax Payment System (EFTPS) by July 1, 1997. As of March, more than 900,000 required taxpayers have enrolled in EFTPS. An additional number of taxpayers have elected to participate voluntarily - almost 300,000. Approximately 31,000 state and local governments are required to participate in EFTPS. State and local governments enroll and participate in EFTPS just as any other business taxpayer.

The largest corporations have been remitting taxes electronically since 1995 through a prototype system called TAXLINK. EFTPS is a larger, more sophisticated system that has replaced TAXLINK. The Internal Revenue Service (IRS) is currently in the process of converting the TAXLINK participants to the new system.

Congress created EFTPS in 1993 when it passed legislation requiring IRS to collect federal taxes electronically. IRS selected two financial agents - NationsBank and First Chicago/Mercantile Government Services - to build an electronic tax collection system. NationsBank serves the southern half of the United States and First Chicago the northern half. Exhibit 1 shows the service areas covered by the two EFTPS financial agents.

EFTPS is now being phased in between 1997 and 1999 based on a business' tax obligation. If a taxpayer's federal withholding tax meets a certain threshold during a specific period, the taxpayer is required to remit all federal taxes electronically (Exhibit 2). Taxpayers who paid more than $50,000 in federal withholding taxes during 1995 are required to make electronic tax payments by July 1, 1997. In 1997, the requirement drops considerably, and taxpayers who paid more than $20,000 in federal withholding taxes during 1997 must participate in EFTPS by 1999. Ninety percent of all business taxpayers will be affected by the year 2000, when, six million companies will pay an estimated $1 trillion annually in federal income taxes through EFTPS.

Although EFTPS is new to many taxpayers, electronic tax payments are not. Fortyfive states have electronic tax payment programs where automated clearing house (ACH) debit and/or ACH credit are the predominant payment mechanisms, with the Federal Reserve Board's Fedwire as a...