IRS Expands Use of Electronic Payments, Discontinues Paper Coupons

The IRS has issued proposed regulations that would eliminate paper coupons for deposits of employment taxes, corporate income and estimated taxes, and many other taxes (REG-153340-09). The paper coupon payment system will be shut down at the end of this year.

With this change, taxpayers will be required to use the IRS’ Electronic Federal Tax Payment System (EFTPS) to make federal tax deposits of various withheld and estimated taxes. The preamble to the proposed regulations notes that over 97.5% of all federal tax deposits are already deposited electronically through EFTPS.

The proposed regulations do continue the exception under Temp. Treas. Reg. § 31.6302-1T(f)(4) for businesses that are depositing a minimal amount of withheld income and FICA taxes. Businesses that qualify can make their payments with their tax returns. Employers with a deposit liability of less than $2,500 for a return period can remit employment taxes with their quarterly or annual return.

The proposed regulations will require the following taxes to be deposited electronically:

1. Corporate income and corporate estimated taxes under Treas. Reg. § 1.6302-1;

2. Unrelated business income taxes of tax-exempt organizations under IRC § 511 under Treas. Reg. § 1.6302-1;

3. Private foundation excise taxes under IRC § 4940 under Treas. Reg. § 1.6302-1;

4. Taxes withheld on nonresident aliens and foreign corporations under Treas. Reg. § 1.6302-2;

5. Estimated taxes on certain trusts under Treas. Reg. § 1.6302-3;

6. FICA taxes and withheld income taxes under Treas. Reg. § 31.6302-1;

7. Railroad retirement taxes under Treas. Reg. § 31.6302-2;

8. Nonpayroll taxes, including backup withholding, under Treas. Reg. § 31.6302-4;

9. Federal Unemployment Tax Act (FUTA) taxes under Treas. Reg. § 31.6302(c)-3; and

10. Excise taxes reported on Form 720, Quarterly Federal Excise Tax Return, under Treas. Reg. § 40.6302(c)-1.

As proposed, the new rules would be effective for payments made on or after the date the final regulations are published in the Federal Register, but no earlier than Jan. 1, 2011, and the IRS says it expects to finalize the regulations before then.

The IRS has invited comments on the proposal, which can be submitted electronically at regulations.gov (IRS REG-153340-09). A public hearing will be held at the IRS Building in Washington on Sept. 21.