I.R.S.Eases Electronic Tax Deposit Rules

Congress gradually phased doctors into the electronic tax deposit filing system through the end of 1999. Doctors with more than $50,000 in employment tax deposits during calendar years 1995, 1996 and 1997 were required under tax laws to begin depositing these funds electronically beginning Jan. 1, 1999. Doctors who failed to comply with the electronic tax deposit rules faced a penalty equal to 10% of the taxes deposited.

Reacting to strong criticism from doctors and other small business owners, Congress and the Internal Revenue Service (IRS) extended the period of time they would waive penalties for failure to electronically deposit through June 30, 1999. Recently, the IRS announced it will continue to waive these penalties through Dec. 31, 1999.

In addition, the IRS recently issued proposed regulations that would allow thousands of doctors to continue to deposit employment taxes with their bank using paper coupons, as in the past, without penalty. Under the new rules, the annual tax deposit threshold required to trigger the switch to electronic tax depositing would increase from $50,000 to $200,000, effective Jan. 1, 2000. This new threshold would apply initially to 1998 tax deposits. Doctors who exceeded the $200,000 deposit threshold in 1998 would have to begin depositing electronically in 2000. Doctors who first exceeded the threshold in 1999 or a later year would be required to deposit electronically after a one-year grace period.

A doctor who exceeds the threshold once would not be permitted to resume making paper coupon deposits at his or her bank, if deposits fell below $200,000 in a later year. More importantly, doctors currently required to deposit electronically would get a fresh start under the new rules, and thus would not have to use the electronic tax deposit unless they exceeded the $200,000 threshold in 1998 or a later year.

The IRS estimates only 9% of doctors who make federal tax deposits would be required to deposit electronically under the new rules. In addition, the IRS says “fresh start rules” would allow 65% of doctors currently subject to electronic filing to resume making paper coupon deposits with their bank beginning in 2000. However, IRS spokespeople say they are confident most doctors will continue to deposit electronically on a voluntary basis.