The President signs NAFTA - requiring most U.S. employers to deposit federal taxes electronically by 1999.

• Author: Kelley, Carolyn M.

Introduction

Tax professionals should be aware how the funding provisions of the North American Free Trade Agreement Implementation Act (NAFTA) will affect them. Section 523 of NAFTA amends section 6302(h)of the Internal Revenue Code to require the Internal Revenue Service to establish an Electronic Federal Tax Payment System (EFTPS) for the collection of federal depository taxes including employment, excise, and corporate income taxes. The Office of Management and Budget (OMB) estimates that the system will raise $2.2 billion in revenue over the next five years. The revenue arises from a one-day acceleration of funds available to the government.

NAFTA sets forth mandatory targets for the percentage of federal depository taxes to be collected electronically. The requirement is phased in according to the following schedule by government fiscal year:

Government Fiscal Year Percentage of Deposits 1994 3% 1995 16.9% 1997 58.3% 1998 58.3% 1999 and thereafter 94% Although the NAFTA implementation strategy will be pursued initially through changes in the payroll tax deposit system, the Internal Revenue Service's ultimate goal will require deposits of corporate income and excise taxes through electronic means as well. Thus, although the balance of this article deals with the concerns arising from expected changes to the payroll tax deposit system, tax executives should consider whether other issues arise in connection with income and excise tax deposits.

TAXLINK

TAXLINK is a pilot program initiated in 1991 to study the feasibility of electronic payment of federal depository taxes. The pilot program is operating out of the IRS's Atlanta Service Center with voluntary employer participation. Employer participation to date has been low, in part because of a general lack of awareness about the test program and employer hesitation to commit resources to endeavors without cost-saving potential. In addition, existing cash management agreements with banks may preclude some larger employers from participating.

American Payroll Association (APA) and Tax Executives Institute (TEI) have raised concerns about TAXLINK at meetings with IRS and Treasury officials and representatives of the banking industry. A summary of those concerns and the status of the IRS's response follow.

IRS Meeting on TAXLINK

On November 8, 1993, IRS Commissioner Margaret M. Richardson convened a meeting among IRS officials, APA, and TEI representatives to discuss the issues raised. The...