The Treasury Management Association has alerted several federal agencies to potential pitfalls it sees in the new Electronic Federal Tax Payment System.
In a letter sent to the Internal Revenue Service, the U.S. Treasury's Financial Management Service, and the Federal Reserve Board, association officials said certain features of the system will cause "administrative burdens on corporate taxpayers, impede the practice of cash management, and add risk to the payment system."
The new electronic system, due to become operational in April, is expected handle about 90% of tax payments from U.S. businesses within five years.
About 1,600 of the largest companies are now required to pay electronically, and that number gradually will be increased until 1999, when any business paying more than $20,000 in taxes will be covered under the electronic filing mandate.
About 15,000 corporations now voluntarily pay federal taxes electronically.
Corporations can send their payments over either the automated clearing house network or Fed Wire, the Federal Reserve's high-speed electronic funds transfer network.
However, trade group officials said there are indications that Fed Wire may not be suited for the volume of transactions that could eventually come its way as more corporations are required to file.
That would leave the clearing house network as the main option for many corporations, leading to another problem. Many of the clearing house credit transactions used by corporations cannot be accompanied by electronic acknowledgement of tax payment, according to Frank Curran, vice president of the Treasury Management Association.
Corporations face a penalty of 10% of their taxes for filing late or neglecting to file electronically, and the association fears that a lack of electronic notification could expose more corporations to such fees.
"If you make a $10 million tax payment and you get hit with 10% penalty, you are talking severe and punitive measures," Mr. Curran said.
In addition, Mr. Curran explained that companies often do not know the amount of their tax obligations until the tax due date. He said companies need the "flexibility" of Fed Wire's real-time funds transfer system in order to pay promptly.
The clearing house network is a batch-based system. Filing taxes over these systems could result in delays and lead to penalties for some corporation, Mr. Curran said.
To address the first problem, the IRS has a plan in place for phone-in acknowledgement, but the treasury association called that system "cumbersome," and "counter to the goals of the government's tax modernization program."
Given the current notification systems and limitations of the clearing house network for these payments, the treasury association recommends lowering the penalty to 2%.
Lillie McCracken, IRS project manager for the electronic federal tax payment system, could not say whether the 2% request would be approved.
"It's a revenue ruling from the IRS," she said, adding that the IRS is primarily concerned now with making sure "people clearly understand what their responsibility is."
According to Ms. McCracken, the Fed recently began a study about the implications of expanded usage of Fed Wire for corporate taxes.
