Soon, perhaps within a month, the Internal Revenue Service is expected to give the green light to a long-awaited program that would dramatically change how corporations pay their taxes.

The bank companies that won lucrative government contracts two years ago to process corporate tax payments - NationsBank Corp. and an alliance between the former First Chicago Corp. and Mercantile Bancorp. - have been busy enrolling firms in the Electronic Federal Tax Payment System.

By the turn of the century, the banks are expected to be processing 90% of corporate tax payments electronically, amounting to more than $1 trillion a year. Eventually, an estimated 7 million businesses will pay taxes electronically.

"This is a big jump from the paper world into electronics, both for the government and for taxpayers," said Lawrence Buettner, senior vice president and general manager of First Chicago/Mercantile Services. "This is the largest outsource contract the IRS has let."

Businesses enrolled in the system will use telephones, PCs, or mainframe computers to order tax payments. Currently, most corporations must fill out a paper coupon to pay income, payroll, and other taxes. The government hopes automation will save $433 million by 1999.

The new system, which uses electronic data interchange and electronic funds transfer technologies, is big business for the banks, with each contract valued at about $400 million over seven years, officials said. But the program also deserves a closer look because it offers a rare opportunity to see how two very different approaches to technology can be applied to the same business proposition.

NationsBank has built a mainframe-based system, whereas First Chicago/Mercantile has deployed client-server technology.

The origins of those decisions can be traced to 1994, when the IRS and Financial Management Service, both U.S. Treasury bureaus, asked for bids. Banks had four months to design responses that could handle 160 million transactions a year.

It was immediately obvious to both NationsBank and First Chicago (a predecessor of today's First Chicago NBD Corp.) that they lacked in-house technology that could handle such volumes.

"If you are faced with one of those fundamental decision points," said Mr. Buettner, "there are ways to compete even if you don't have the resource and the complete expertise in-house. We relied on our historic supplier relationships; we relied on referrals."

First Chicago especially wanted the business because it would be a strong new revenue source for a company that had long provided lockbox services to the government.

"If we didn't win it," Mr. Buettner said, "we were going to be in a position that we were going to watch our paper process dry up with the IRS. There was a clear management directive that we had to try to respond to."

To improve its odds, the company joined forces with Mercantile, a St. Louis company that had been a pilot bank in the government's predecessor system, called TaxLink.

The banks decided to marshal the technology of numerous companies. AT&T was brought in to handle networks, IBM was made responsible for running the data centers, and Hewlett-Packard supplied hardware. Other, less-familiar companies also played key roles: Intranet provided the automated clearing house software, National Computer Systems was charged with handling the paper, and Informix Software supplied the data base.

"We decided we would break the solution up into pieces in which they could each demonstrate their expertise," said Mr. Buettner. "We got the advantage of using some of the latest technology in building our solution."

But First Chicago had one big fear about choosing a client-server system: that it might not be able to handle unexpectedly high volumes.

"One of the risks you are going to have to deal with is, Can it scale appropriately?" said Mr. Buettner.

That fear was a key reason NationsBank opted for a mainframe system in its bid.

"We felt that, if the capacity ended up being more than what the IRS had represented, they still would look to us to be able to handle that," said Paul R. Ferm, who heads the North Carolina company's federal government banking group in Atlanta.

Mr. Buettner conceded that a mainframe system would have been easier "in the sense that you can go to sleep every night assuming that if you need more power it's inherent in the design."

But he insisted that the flexibility of client-server technology offers advantages. "You've got desktop (graphical user interface) and relational data bases, which allowed us to be a lot more responsive to changes in direction and design as we moved forward," said Mr. Buettner.

In any case, First Chicago NBD says it is pleased with tests that show its system can handle expected volumes.

But NationsBank said concerns over capacity outweighed any flexibility gained through distributed computing.

"With our mainframe solution we can change protocol and programming as need be," said Mr. Ferm. "Yeah, it is a little more time-consuming to do that. We didn't want to be shortsighted on capacity."

NationsBank also opted to work with one major subcontractor rather than several. "We selected First Data Corp. because they have tremendous experience in doing tax payments electronically," said Mr. Ferm. The Hackensack, N.J., company will handle several key tasks, including enrollment of taxpayers in the system. When the system goes live, the company will get payment information and create an automated clearing house file.

"Then we will move the money based on the ACH file that they are creating through the system," said Mr. Ferm.

But these operational differences will not be visible to corporations. Both bank contractors are capable of accepting tax payments from any corporation. And corporate enrollment information is being recorded at both companies.

Still, their technological differences may have been a factor in helping the two companies win the bidding. The IRS had asked for proposals to handle 100% of corporate tax payments. But it had also made clear it might select two or even three bank companies.

Mr. Ferm suggested one reason why: "Both of us were, as much as possible, independent in our structure and independent in our use of subcontractors. It would be unlikely that both systems would ever be totally down on the same day."

The stakes are high for both companies, which are big players in the cash management business and have their sights set on more government contracts. NationsBank, for example, is processing credit and debit card transactions for the U.S. Postal Service.

The banks also are keeping an eye out for other federal government business. By 1999, all federal payments, including Social Security and veteran's benefits, are expected to be made electronically.

"We see a lot more of these things out there," said Mr. Ferm.

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