TMA represents about 10,000 treasury professionals who, on behalf of over 4,000 corporations and other organizations, are significant participants in the nation's payment systems and manage their organizations' banking relationships.  Corporations represented by our members are drawn generally from both Fortune 1000 and middle market companies.  Many of our members are responsible for making federal tax payments and using the Electronic Federal Tax Payment System (EFTPS).  Corporations employing TMA's members were among the approximately 800 taxpaying organizations mandated to pay electronically in 1995 and among the 700 mandated last year.  A significant percentage of our member's employers will be mandated starting July 1, 1997.

TMA has been actively involved in presenting its members' views on the Treasury's electronic tax collection initiatives for over five years, even before the inception of TAXLINK, the test system that preceded EFTPS.  We have sought to work 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.

We support the government's planned transition from paper to electronic payments, a move which is also underway in the private sector.  In the Association's view, electronic commerce generally -- and EFTPS specifically -- offers cost-effective payment and reporting efficiencies that benefit businesses, the tax-paying public, and the federal government.

TMA has not hesitated to voice its concerns, however, when we believed that the government's regulations, procedures and instructions to the public increase administrative burdens on corporate taxpayers, lack clarity and consistency in their definition and application, and impede the efficiency of the electronic tax collection process.

In our view, the exchange of information and a process of discussion and negotiation between the private sector and the government are critical to increased public understanding and user-friendly implementation of EFTPS.  The concerns that TMA will express today are offered, therefore, in a spirit of constructive criticism, based on the experience of having successfully worked with IRS and FMS to deal with significant payment system and liability issues and communications problems similar to those that are faced today.

The Subcommittee's announcement of this hearing identified three issues to be examined: the current status of EFTPS implementation; concerns about specific features of EFTPS; and the need for an additional delay or changes to the program.  Our testimony will describe three specific problem areas where inefficient or non-existent procedures and confused communications impede public understanding and impose burdens on corporate taxpayers who would otherwise welcome the transition from paper to electronic payments.  The IRS and the FMS can and should be able to address and resolve these issues promptly and successfully.

Problem Identification

TMA has recently called the attention of the IRS and the FMS to unresolved problems in three EFTPS operating areas that have the potential to significantly increase the time and cost of taxpayer compliance with EFTPS, masking the real advantages of electronic payment methods and giving rise to resistance among taxpayers who might benefit most.  They involve:

• Barriers to the use of same-day payment methods, such as Fedwire.
• Difficulties in reversing ACH tax payments made to the government in error.
• Excessively harsh penalties for incorrectly formatted or late payments and for failure to pay taxes electronically.

1. Barriers to the Use of Same-Day Payment Methods Continue to Plague Taxpayers Who Need to Employ this Option.

Taxpayers making electronic tax deposits need a way to pay the government on the same day that the tax payments are due.  Without such mechanisms, the tax payments may be late, because the primary payment method -- the ACH -- requires the taxpayer to report the amount of the tax payment one day in advance of tax due date.  There are three reasons that same-day tax payment mechanisms are critical to all taxpayers:

• As an emergency back-up: </b> Prudent risk management of electronic systems requires taxpayers -- especially those paying by ACH credit -- to have a back-up, contingency payment mechanism in the event of ACH systems failures, emergencies or disasters. The Federal Reserve's Fedwire electronic system settles payments on a same-day basis.  The ability to use Fedwire to make urgent, time-critical tax payments is essential to compliance by taxpayers with IRS payment deadlines and to avoiding the time-consuming penalty assessment and abatement process.
   
• For next-day deposits: Companies with $100,000 or more in payroll tax liability are required to pay their taxes one day after pay day.  Many of them are unable to report the amount of their tax payment one day in advance -- that is, on pay day -- as is necessary in the ACH environment.  A same-day payment method allows taxpayers to both report and pay their taxes on tax due date.
   
• For better management of cash flows and the timing of large funds transfers: A company may be required to transfer funds early in the morning to pay for large securities settlements or to repay loans.  If a large ACH tax payment is posted to the company's account at 8:30 a.m. Eastern Time -- which is the time that funds are deducted from the accounts of taxpayers who use the ACH credit method -- the company may be unable to meet its business obligations.  Requiring the company to maintain idle balances in its account in anticipation of an early morning tax payment posting would represent an added cost of paying taxes.  Fedwire tax payments are not due to the government until 2:00 p.m. local Federal Reserve head office zone time.

Three same-day Fedwire tax payment mechanisms have been developed by the Federal Reserve. They are in place and available for use by taxpayers.  TMA has recommended to the IRS and the FMS a number of times over the past few years that these same-day payment mechanisms be available to all business taxpayers who need to use them, without restrictions and without prior written approval from Treasury.

Nevertheless, confusing messages on Fedwire availability continue to be conveyed by the government, the procedures for enrolling in and using Fedwire are either non-existent or vague at best, and no government agency is taking the responsibility to help taxpayers understand and use the Fedwire system for tax payments.

Availability of same-day payment mechanisms: confusing messages

The FMS, in its proposed rule for financial institutions and Federal Reserve Banks processing tax payments through EFTPS (31 CFR Part 203), would restrict same-day methods to "certain taxpayers that do not have information available to initiate the transaction one business day prior to the tax due date, or to correct a deficiency in an ACH payment."  This would appear to eliminate the category of taxpayers that requires a same-day payment mechanism for cash management purposes.

It also contradicts the EFTPS Payment Instruction Booklet issued by the Treasury's Financial Agents to enrolled taxpayers.  These instructions state that "taxpayers who cannot [emphasis added] use the Automated Clearing House (ACH) payment mechanisms may use one of the Same Day Payment mechanisms."   Later in the same paragraph, however, taxpayers are advised that "these mechanisms...are available to all [emphasis added] business taxpayers who have enrolled in EFTPS."

Same-day payment mechanisms: non-existent enrollment procedures

A same-day payment mechanism is not listed -- or even mentioned -- as a payment option on IRS's EFTPS Business Enrollment Form 9779.  TMA has received a number of calls from its members asking how they can arrange to use a same-day payment method.

The instructions to taxpayers that accompany the enrollment form state only that "in some instances a business may find it necessary to make a same day payment," adding that "further information on Same Day Payments will be provided in your enrollment confirmation package." These statements strongly imply that same-day payments are a rarely used exception procedure, they do not explain the importance of same-day mechanisms, and they fail to educate the taxpayer seeking information on how to enroll for them.

Same-day payment mechanisms: Instructions for use are unclear or non-existent

When their enrollment is processed, each taxpayer receives an EFTPS Payment Instruction Booklet prepared by one of the Treasury's EFTPS Financial Agents.

Nowhere in the instructions to taxpayers choosing the ACH Credit payment method is there mention of the need to be prepared to use a back-up, same-day electronic payment method in the event of emergencies.  There is no reference to the availability of Fedwire same-day payment mechanisms for this purpose and no instruction on how to use them.

In a separate section on Same Day Payments, the instruction booklet advises taxpayers to contact their financial institutions to ensure that their bank has received Fedwire tax payment instructions from the Federal Reserve, which operates same-day mechanisms.  The taxpayer is instructed to include specific information -- such as taxpayer name control and tax type -- when sending the payment.  That is the only guidance the taxpayer receives from the government on how to use an emergency, time-critical payment mechanism.

What are the consequences of this failure to communicate with the taxpayer?  The experience of a recent caller to TMA reveals that the taxpayer is thereby left completely in the dark, because financial institutions -- even the largest of them -- may not be prepared to instruct taxpayers on how to use Fedwire mechanisms, and the Treasury Financial Agent's Customer Service Hotline disclaims all responsibility.

The caller's company is mandated to pay electronically starting July 1.  The company has more than $100,000 in payroll tax liability and is required to pay taxes one day after pay day.  It does not know the amount of the tax payment one day in advance of tax due date, and must use a same-day method.

The company's bank calling officer -- from one of the top five banks in the country -- was not able to explain to the taxpayer the information, such as name control and tax type, that needed to be included in the Fedwire.

The taxpayer called the EFTPS Customer Service Hotline Numbers of both Financial Agents.  He was told that this Customer Service is provided by a subcontractor of the IRS which is only responsible for handling ACH.  They had no information on Fedwire.

An electronic tax system that is not prepared to communicate emergency instruction procedures to taxpayers facing severe penalties for untimely payments is a system that is not prepared to deal with the emergencies that may be faced by taxpayers, whether they be flood, electrical outages or system failures.

An electronic tax system whose agents do not provide instruction to taxpayers on the proper use of one of the authorized payment mechanisms is not a system that can legitimately penalize taxpayers if the tax payment information is erroneous or the tax payment is delayed.

Same-day payments: reversed for format errors

Taxpayer grievances resulting from these failures to adequately define procedures and communicate instructions will be compounded if FMS's Rule 31 CFR Part 203 takes effect as proposed.  Section 203.14 (1)(iii) of the rule states that the Federal Reserve Banks (FRB) may reverse a same-day transaction if it "does not meet the edit and format requirements set forth in the procedural instructions."

Given the complexity of the Fedwire format and the lack of adequate training and instruction, errors will be made, especially at first, by taxpayers and financial institutions.  The FMS and the Federal Reserve Banks should not lightly undertake to reverse high dollar tax payments made in good faith, causing taxpayers to incur potentially huge penalties.  A major U.S. oil company has already suffered penalties in excess of $100,000 as a result of a simple format error.

2. IRS Continues to Block the Use of Traditional Procedures to Correct Erroneous ACH Payments

TMA recognizes the regulatory challenge that confronts the IRS and FMS arising from the need to develop procedures to correct errors that were not prevalent in the paper check environment.

Such a situation exists when a financial institution that originates an ACH credit at the direction of the taxpayer finds it necessary to correct an error.  The financial institution might have transmitted duplicate payments -- a single duplicate tax payment, a batch of duplicates, or an entire file -- multiple batches -- of duplicate credits.  Or the taxpayer might have made the error, designating the Treasury as the recipient of a payment that should have gone to another party, or specifying the wrong payment amount.

The NACHA Operating Rules that govern the ACH have procedures to deal with these types of errors.  They are efficient, timely and responsible procedures that have served the originators and receivers of payments as well as the financial industry for many years.

The NACHA rules governing "Reversing Entries" state that a reversal to correct an erroneous entry must be transmitted or made available to the receiving financial institution by midnight of the fifth banking day following the settlement date of the erroneous entry.  Under NACHA rules, the originating financial institution -- in this case the taxpayer's bank -- agrees to indemnify all parties against claims or losses resulting from that reversing entry.  Advance approval is not required to reverse the erroneous payment.

However, Treasury has chosen not to adopt industry rules, although it has yet to spell out its procedures.

The EFTPS Payment Instruction Booklet sent to enrolled taxpayers warns taxpayers that "if a duplicate payment has been made, IRS must approve an ACH Credit reversal." If approval is not received in advance, the reversal "will be returned to your financial institution as an unauthorized entry.  For specific instructions for initiating an ACH Credit reversal, contact EFTPS Customer Service."  Instructions are not explained in the booklet.

The FMS is also developing reversal procedures that the banks must follow.  FMS's proposed rule, 31 CFR Part 203, Section 203.13, states that "correction of ACH credit entries must be approved in advance by the IRS.  The financial institution will find procedures for requesting corrections in the procedural instructions."  The proposed rule was not accompanied by procedural instructions.

Requiring both the taxpayer and the financial institution to obtain advance approval to correct an error by means of unexplained procedures is a recipe for confusion, delay and dissatisfaction with EFTPS by all parties.  Taxpayer grievances will be compounded by the FMS's proposed ruling in Section 203.12 that "Treasury will not pay interest on any payments erroneously paid to Treasury and subsequently refunded to the financial institution."

Failure to adopt equitable, efficient procedures for reversing erroneous credit entries will
discriminate against taxpayers choosing to pay via ACH credit.  It will also give rise to substantial criticism from taxpayers who experience significant loss of time and money as a consequence of their inability to correct errors on a timely basis or obtain compensation for the government's use of their funds.

3. Penalties Imposed by the IRS for Erroneous or Late Payments Are Unduly Harsh.

The IRS is concerned that all mandated taxpayers comply with the law and use electronic methods to pay federal taxes.  The agency also requires that the taxpayer's electronic payment information be correctly formatted and error-free, so that the payment can be processed in an automated, timely and cost-effective manner.

While these concerns are understandable, the unnecessarily harsh penalties imposed by the IRS for failure to comply with its requirements undermine the agency's stated intention to work in partnership and cooperation with the business community to achieve its goals and benefit taxpayers at the same time.  We refer specifically to (1) the 10% failure-to-deposit penalty for not making a tax deposit by EFT and (2) the general penalty of up to 10% for failure to make a tax deposit on a timely basis.

We believe that adjustments should be made to the penalty assessment rules for newly mandated taxpayers for six months following the effective date of the mandate to use EFTPS.  Special forbearance during the early implementation stages is amply justified by the confusion, concerns and fears of taxpayers caused by the government's poorly defined procedures and inadequate, incomplete communication about how the system works.  Adjustments to penalties would help overcome taxpayer resistance to EFTPS by signaling that the IRS is interested in working with taxpayers in a cooperative rather than a confrontational manner.

Summary and Recommendations

In its testimony today, TMA has focused on three areas where communications to taxpayers about EFTPS are unclear, incomplete or non-existent, where EFTPS procedures cause built-in inefficiencies, delays and taxpayer expense, and where there are significant gaps in taxpayer education and understanding.

The three problem areas are:

1. Barriers to the use of same-day payment methods continue to plague taxpayers who need to employ this option.
2. IRS continues to block the use of traditional procedures to correct erroneous ACH payments.
3. Penalties imposed by the IRS for erroneous or late payments are unduly harsh.

These deficiencies are remediable if IRS and FMS recognize them and take prompt and thorough steps to address them.  They need not and should not stand in the way of the transition from paper to more efficient electronic payment methods or the scheduled implementation of EFTPS.

TMA recommends the following:

Clarify and improve procedures for same-day payment mechanisms.

1. IRS and FMS regulations for EFTPS should clearly state that same-day payment mechanisms are available to all business taxpayers who wish to use them, without restrictions and without prior written approval from Treasury.
    
2. IRS should (1) revise Business Enrollment Form 9779 to include a same-day payment option for mandated taxpayers, and (2) revise Enrollment Form Instructions to explain the use of same-day payment mechanisms in an emergency and the availability of such mechanisms to mandated taxpayers for other purposes.
    
3. IRS and FMS should provide additional instruction and education to depository institutions and taxpayers on the use of same-day payment methods.
    
4. IRS and FMS should identify Customer Service responsibility for same-day payment methods and communicate that information to depository institutions and taxpayers.
    
5. Same-day payments by mandated taxpayers should not be reversed for edit and format errors for six months following the effective date of the mandate or until after the second use of the same-day mechanism, whichever comes later.

Follow industry rules for the reversal of erroneous ACH tax payments.

Procedures for reversing erroneous ACH payments should follow time-tested NACHA rules, which are clearly defined, do not require prior approval, and contain indemnification provisions. In TMA's view, such procedures would not be detrimental to the interests of the Treasury in protecting public funds.  The FMS states in Sec. 203.16 of 31 CFR Part 203, its proposed EFTPS rule, that it has "instituted operational safeguards to scrutinize all debit entries sent to the Treasury."  Procedures are in place, therefore, to monitor and return illegitimate reversals and guard against unauthorized access to government accounts.

Adjust penalty rules for six months following the effective date of the mandate to use EFTPS.

Adjust penalties against newly mandated taxpayers in the following circumstances:

1. Format or data errors in a timely payment. 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 Financial Agents should work with taxpayers and their financial institutions to identify and correct the errors during this period.

2. Late payments. During the first six months of the mandate's effective date, taxpayers may be confused or uncertain about ACH requirements and procedures.  As a result, their tax payments may be delayed.  During this six-month period, a newly mandated taxpayer whose electronic tax payment is late and who thereby retains use of tax funds should pay compensation to the government based on the time value of those funds, rather than on a percentage of the tax amount as specified in the IRS penalty rule.  Traditional compensation rules use a formula involving the amount of the payment and the number of days the payment was late, with the overnight federal funds rate determining the value of the funds.

3. Failure to deposit by EFT.

1. Enrolled taxpayers who fail to deposit by EFT. A taxpayer who has enrolled in EFTPS on a timely basis but continues to pay taxes with a paper coupon instead of depositing by EFT should be granted a 90-day waiver of failure-to-deposit penalties, effective from the date of the mandate.
    
2. Unenrolled taxpayers who fail to deposit by EFT. A taxpayer who fails to enroll in EFTPS by the mandate date should be granted a 60-day waiver of failure-to-deposit penalties, effective from the date of the IRS notice of non-compliance.  The taxpayer thereby is given about 30 days to complete the enrollment process and 30 days to become familiar with the EFTPS system.

Other EFTPS Recommendations

TMA made recommendations regarding other EFTPS procedures in comments to FMS on 31 CFR Part 203, the proposed rule for financial institutions and Federal Reserve Banks that use electronic funds transfer mechanisms to process Federal tax payments through EFTPS.  TMA's January 13, 1997, comment letter to FMS is included as an attachment to this testimony.

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We appreciate the opportunity to present the views of the Treasury Management Association on this important transition to electronic tax payments.