CC: DOM:CORP:R (REG-100729-98)
Courier's Desk
Internal Revenue Service
1111 Constitution Avenue, N.W.
Washington, D.C. 20224

Re: 26 CFR Parts 1, 20, 25, 31 and 40 Electronic Funds Transfers of Federal Deposits

The Treasury Management Association (TMA) welcomes the opportunity to comment on proposed regulations relating to the deposit of federal taxes by electronic funds transfer (EFT).  The proposal increases from $50,000 to $200,000 the annual tax deposit threshold requiring businesses to make deposits by EFT.  These comments are submitted on behalf of TMA and the National Automated Clearing House Association (NACHA).

TMA represents more than 12,000 finance and treasury professionals who, on behalf of 5,000 corporations and other organizations, are significant participants in the payments system.  Organizations represented by its members are drawn generally from the Fortune 1,000 companies and the largest of the middle market companies.  Many of our members are responsible for making federal tax payments and are paying by EFT, using the Electronic Federal Tax Payment System (EFTPS).

TMA has been actively involved in presenting its members' views on the Treasury's electronic tax collection initiatives for almost a decade.  We have worked in cooperation  with the Internal Revenue Service (IRS) and the Financial Management Service (FMS) in support of their stated goals: to automate and expedite federal revenue collection procedures and to reduce the administrative burden imposed on taxpayers and the government by the collection system.

The Treasury Department's electronic tax collection system has been in operation since 1996.  It has achieved notable success in introducing large numbers of business taxpayers to the benefits of electronic payments, thanks in large part to the government's flexibility and responsiveness to the views of its users.  At the urging of TMA, Treasury offered taxpayers the option of paying via ACH credits as well as ACH debits, and using same-day payment methods such as Fedwire.  Reversals of erroneous ACH credits no longer require advance IRS approval.  Taxpayer instruction booklets have been revised to clarify payment procedures.  Customer Service representatives were instructed to assist taxpayers with format problems.  IRS penalties were delayed until businesses became familiar with the electronic payment system.  And a marketing outreach program, although belated, has introduced a more user-friendly approach to taxpayers.

TMA strongly endorses efforts to migrate payments from paper to electronic, which we believe will strengthen the safety and soundness of the payments system.  The Association supports the federal government's initiative and leadership in encouraging the transition to electronic payments.  And we believe that the Electronic Federal Tax Payment System offers cost-effective payment and reporting efficiencies that benefit businesses, the tax-paying public, the federal government, and the economy generally.

TMA Recommendation

TMA opposes the proposal to increase the current $50,000 tax deposit threshold requiring businesses to make tax deposits by electronic funds transfer.  Under the proposed $200,000 tax deposit threshold, only 9% of all business taxpayers would be required to deposit by EFT.  Moreover, 65% of taxpayers currently required to use EFTPS could resume making paper coupon deposits beginning in 2000.  This proposal would start the new millennium with a giant step into the past.  Instead, TMA advocates -- as we have previously -- a delay in penalty assessments against newly mandated taxpayers to give them an opportunity to learn to use the system effectively.

TMA finds the following to be compelling arguments in favor of retaining the current threshold level.

• Federal EFT Mandate Promotes a Secure and Efficient Payment System
  
  The landmark 1998 TMA member Survey on Migration from Check to Electronic Payments revealed that federal mandates were the most important single factor in an organization's original decision to adopt electronic payment capability.  In TMA's view, greater use of electronic payment methods will contribute to the maintenance of a secure and efficient payment system, a principle incorporated into the Association's mission statement. We believe that current federal regulations strengthen the payment system and simultaneously introduce large groups of taxpayers to the advantages of electronic payments.
  
  The benefits of electronic payments were recognized and clearly identified by the business users of electronic payments who responded to the TMA survey.  Chief among them were lower costs, certainty of payment date, improved cash flow projections and reduced check fraud.
   
• Electronic Payments Increase Global Competitiveness of the U.S. Economy
  
  Manual handling of the checks and coupons used to make federal tax deposits in a paper environment increases costs and imposes administrative burdens on taxpaying organizations, financial institutions and the federal government.  In the highly competitive global marketplace, the U.S. economy cannot afford the toll of this wasteful expenditure on the efficiency and cost-effectiveness of U.S. businesses and financial institutions.
  
  Having sponsored the development of a complex, efficiently operated electronic tax collection system, the federal government should not forego the economies of scale that could be achieved by processing larger volumes of payments.  If the threshold is raised, financial institutions and the federal government must continue to process millions of checks and paper coupons annually, while unused electronic capacity stands idle.
  
  The smaller businesses that the government claims to benefit by raising the threshold might, in fact, see an increase in bank fees arising from the increased costs of manual processing.  Even if taxpayers continue to enroll voluntarily, the burden of processing large volumes of checks and coupons will be far heavier than it would be if the threshold were to remain unchanged.
   
• Businesses Not Required to Invest in New Technology
  
  Through EFTPS, taxpayers have a choice of payment mechanisms.  Taxpayers can initiate ACH debit payments via touch-tone phone access to a voice response system, available 24 hours a day, seven days a week.  They are not required to invest in computer equipment and modem hookups to communicate payment instructions.  By eliminating a trip to the bank to deposit check and coupon, organizations can reduce the time and expense of making tax deposits.  EFTPS provides an EFT number upon receipt of the tax payment instruction, which serves the taxpayer as verification that the information was accepted.  Some 85% of electronic federal tax deposits are ACH debits.  Most businesses also use ACH debits to make state tax payments.
  
  The IRS justifies its proposal to raise the threshold as being necessary in order to allow businesses to "adopt electronic funds transfers in their other business operations."  In fact, businesses do not operate in an "either/or" environment.  According to the TMA survey cited above, most respondents who use electronic payments also make check payments; they do not use EFT exclusively.

Use Penalty Waivers as Electronic Payment Incentives

The federal government can continue to play a leadership role in the conversion of checks to electronic payments by waiving penalties for newly mandated taxpayers until they become adept at using the EFTPS system efficiently and accurately.  The IRS has already proven that a mandate with penalty waivers can introduce almost 1.5 million mandated taxpayers to the benefits of using electronic payments.

In testimony before the Subcommittee on Oversight of the U.S. House of Representatives Committee on Ways and Means, TMA recommended that penalties should not be assessed against the taxpayer, nor should the payment be returned, for six months following the effective date of the mandate to use EFTPS if errors in format or data cause a delay in posting the payment to the taxpayer's account.  The IRS or the Treasury's Financial Agents would, during that period, work with taxpayers and their financial institutions to identify and correct errors.  TMA reaffirms this recommendation, which offers an incentive to taxpayers to experience the advantages of electronic payments without fear of financial loss.

Summary of Recommendations

TMA recommends that the IRS withdraw its proposal to increase from $50,000 to $200,000 the tax deposit threshold requiring businesses to make tax deposits electronically.  The federal EFT mandate:

• Promotes a secure and efficient payment system
• Advances the global competitiveness of the U.S. economy
• Requires no technology investment by businesses
• Could significantly increase the migration from checks to electronic payments through the added incentive of penalty waivers.

Another provision of the proposed regulation relates to the taxes taken into account in applying the threshold.  TMA has in the past commented in support of the aggregate deposits test adopted in this proposal, which we felt would extend EFT benefits to a larger number of taxpayers.  This test states that the threshold amount requiring an organization to deposit by EFT is calculated by using an aggregate of employment and other depository taxes combined.

TMA looks forward to continuing to cooperate with the IRS in an expanded effort to  educate taxpayers and promote the use of electronic payments to make federal tax deposits.  If you have any question about the points raised in this comment letter, please call Arlene Chapman of TMA at 301-961-8825.

Sincerely,

/s/ Nolan L. North, CCM
Vice President and Asst. Treasurer
T. Rowe Price Associates, Inc.
Chair, TMA Government Relations Committee

/s/ David P. Smay, CCM
General Credit Manager and Treasurer
Chevron Products Company
Chair, TMA Payments Advisory Group