IRS Provides Guidance on Waiver of Penalties for Certain EFT Deposits.

• Author: Fiore, Nicholas J.

Sec. 6302(h)(1)(A) provides that the IRS will prescribe regulations necessary for the development and implementation of an electronic funds transfer (EFT) system for the collection of depository taxes. Sec. 6302(h)(2) provides a phase-in schedule for the system.

Regs. Sec. 31.6302-1(h) prescribes rules for implementing an EFT system for the collection of depository taxes. Taxpayers are required to deposit taxes by EFT if their depository taxes in a specified earlier year exceed the applicable threshold amount. Taxpayers with more than $50,000 of Federal employment tax deposits in calendar year 1995 were required to use EFT to make deposits due on or after July 1, 1997, relating to return periods beginning after 1996. Taxpayers with more than $50,000 in employment tax deposits in calendar year 1996 had to use EFT to make deposits of taxes relating to return periods beginning after 1997. Taxpayers with more than $50,000 in employment tax deposits in calendar year 1997 had to start to use EFT to make deposits of taxes relating to return periods beginning after 1998.

In addition, under the regulations, taxpayers with no employment tax deposits in either 1995 or 1996, but with more than $50,000 in other Federal tax deposits in either 1995 or 1996, were required to use EFT to make deposits of taxes relating to return periods after 1997. Taxpayers with no employment tax deposits in 1997, but with more than $50,000 in other Federal tax deposits in 1997, had to use EFT to make deposits of taxes relating to return periods beginning after 1998.

Sec. 6656(a) provides that in the case of any failure by any person to deposit taxes on the prescribed date in an authorized government depository, a penalty applies unless the failure is due to reasonable cause and not due to willful neglect. Rev. Rul. 95-68 provided that, absent reasonable cause, a taxpayer required to deposit Federal taxes by EFT was subject to the 10% failure-to-deposit penalty if the taxpayer deposited the taxes by means other than EFT.

Notice 97-43, provided that, for taxpayers first required to deposit electronically after June 30, 1997, the IRS would not impose the failure-to-deposit penalty under Sec. 6656 solely for the failure to make the deposit electronically, provided it was otherwise made timely. This waiver applied only to deposit obligations incurred before 1998.

Section 931 of the Taxpayer Relief Act of 1997 provided that...