DEPARTMENT OF THE TREASURY
Bureau of Alcohol, Tobacco and Firearms

Industry Circular

Number: 99-3
Date: August 19, 1999

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Year 2000 Advisory for Payment of Taxes

Proprietors of Distilled Spirits Plants, Bonded Wineries, Breweries, Tobacco Product Manufacturers, Cigarette Papers and Tubes Manufacturers, Firearms and Ammunition Manufacturers and others concerned:

PURPOSE: The purpose of this circular is to alert all persons who pay excise tax that they are subject to penalties and interest for any late payment of such taxes, and that the year 2000 (Y2K) may present obstacles that could cause tax payments to be late unless precautions are taken.

BACKGROUND: Around January 1, 2000, most computer software and hardware is at risk for error or failure, due to inherent inability to calculate dates or to perform date-related functions. Some computer operating systems and software applications were originally programmed to recognize only the last two digits of a year. As a result, some systems may fail or provide inaccurate calculations if they interpret 00 as 1900 instead of 2000. The failure of systems could have a devastating impact on the ability to conduct business. This is the single largest problem to affect the information technology industry. There are several other dates related to or near the start of year 2000 that may also cause problems. Some known examples of other dates that may cause computer problems are 9/9/99, 12/31/99 and 2/29/2000.

Taxpayers who pay by any type of electronic funds transfer are particularly at risk of incurring a late tax payment because of Y2K errors.

ADVISORY: The Bureau of Alcohol, Tobacco and Firearms (ATF) is emphasizing that reasonable business care and prudence should be exercised to assure that tax due is paid on time. All taxpayers should make a reasonable effort to determine if their tax payments will transfer timely and properly. If the payment is not on time, 26 U.S.C. 6651(a)(2) provides for a penalty for failure to pay the amount shown as tax on a return on or before the date prescribed for payment of such tax. Section 6656(a) provides a penalty for failure to make timely deposits of taxes. Both of these sections specifically provide that penalties shall be imposed, unless it is shown that the failure to make a timely deposit or payment of tax is due to reasonable cause and not due to willful neglect.

Taxpayers who are required to pay electronically: Taxpayers who are liable during any calendar year for $5 million or more in excise taxes imposed on distilled spirits, wines, beer, or tobacco products are required to pay such taxes during the following year by electronic funds transfer (EFT). The taxpayer’s financial institution, either directly or through a correspondent bank, must use either the Fedwire Deposit System (FDS) or the Automated Clearing House (ACH) system. These systems require that the financial institution transmit the EFT payment to a district Federal Reserve Bank (FRB). The industry member is responsible for ensuring that the deposit was made to the FRB.

Industry members who are required to pay by EFT are responsible for ensuring that their banks are Y2K compliant with the FRB, and for determining alternate backups to insure payment by EFT. Industry members should make sure they receive notification from the bank that the funds transfer has gone through on time, or verify the transfer with the bank prior to the close of the day that the tax payment was due. The industry member must exercise ordinary business care and prudence in making contingency plans that include arrangements for the timely tax payment to be made through an alternate system, in the event of a computer that obstructs a particular transfer by EFT.

An industry member who is required to pay by EFT but discovers that it will not be able to pay by EFT may consider paying by check. This will avoid the penalties and interest incurred for late payment if the check is postmarked or received on or before the due date. However, the penalties for failure to timely deposit will still be applicable.

Penalties will be assessed for failure to deposit if payments are made through the lockbox (i.e. by paper check), unless the industry member can demonstrate that it exercised ordinary business care and prudence in making contingency plans to pay by either FedWire or ACH. Interest will be assessed for late payments.

Taxpayers who are not required to pay by EFT: Taxpayers may pay their excise taxes by check or money order, or may voluntarily pay by EFT.

Any taxpayer that pays by EFT would be subject to the penalties and interest for late payment if the payment was late due to Y2K problems. However, if they are not required to pay by EFT they would not be subject to the failure to deposit penalties.

Taxpayers who pay by check or money order are responsible for sending their tax payment (e.g., paper check) and tax return to ATF’s lockbox address. The industry member must have the mail postmarked or the payment received on or before the due date. The industry member may obtain proof of mailing from the U.S. Post Office to assure that the payment was on time.

Industry Contingency Planning for Internal Systems: Industry members are responsible for ensuring that their internal systems for calculating the amount of excise tax owed are Y2K compliant. Industry members are responsible for developing contingency plans for calculating the amount of excise tax owed if their internal systems fail to be Y2K compliant.

If an industry member’s internal system fails because of Y2K problems and the amount of tax can not be calculated, an estimated payment may be made to minimize interest on the late payment. Interest will be owed on estimated payments that are less than the full tax owed. Abatement of penalties will be based on the ordinary business care and prudence exhibited by the industry member in ensuring that its internal systems are Y2K compliant.

The industry member should also be aware that provisions must be made for maintaining all other required records beyond those of the tax records.

Interest and Penalties: There is no provision in the law for forgiving interest when a payment is not timely paid. Unless specific emergency provisions are activated by law interest will be due regardless of the reason for the late payment or underpayment (in the case of estimated tax payment).

Failure to pay and failure to make timely deposit penalties can be waived if reasonable cause can be shown to explain why the payments were late. Reasonable cause will be found only if the taxpayer exercised ordinary business care and prudence in providing for payment, and was nevertheless unable to pay the tax on the due date. Reasonable cause determinations will be made on a case by case basis in light of the facts of the particular situation.

For example, an industry member may be found to have reasonable cause if: (1) it took all precautions such as obtaining a written confirmation from the bank that it was fully Y2k compliant, or Y2K ready, and tests had been done to confirm the readiness; (2) both primary and backup systems failed; (3) internal systems failed despite proven efforts previously made to make it compliant; and (4) the industry member did not wait until the last moment to attempt to make the payment arrangements.

Emergency Provisions: If the President declares a national or local emergency due to Y2K failures, ATF will abate penalties and interest on late payments, within the parameters of the emergency situation.

If there are widespread failures that cause another authority (e.g., Governor, Mayor) to declare a state or local emergency, ATF will take that fact into consideration and may abate the penalties, within the parameters of the emergency situation. An example of an emergency that would be declared locally is if an entire town’s electrical power failed due to Y2K problems.

Intervening Laws: To the extent that any laws pertaining to failures arising from Y2K problems apply and differ from this Industry Circular, ATF will abide by such laws. ATF considers compliance with the procedures in this Industry Circular to be consistent with the Y2K Act, Public Law 106-37.

Dates that have a higher risk of interrupting timely Payment: Industry members may wish to pay particular attention to these dates in their Y2K planning efforts.

The first excise tax payment in year 2000 is due January 14, 2000. This payment is for taxable removals made during the period of December 16 through 31, 1999.

The tax payment for removals during the period of January 1 through 15, 2000 is due January 28, 2000.

The tax payment for removals made during any part of September, 1999, or any tax payment due in the later part of September, 1999, is at risk. The Y2K problem is further complicated by 26 U.S.C. 5061(d)(4), "Special rule for tax due in September" which specifies different periods and payment dates in September.

The tax payment for removals during the period of February 1 through 15, 2000 is due February 29, 2000, a leap year.

The dates above are not all inclusive. The Y2K problems and risks have already been encountered and are expected to continue through the year 2001.

ATF's Y2K Efforts: The Bureau of Alcohol, Tobacco & Firearms (ATF) relies heavily on automated systems to accomplish its regulatory and enforcement business processes. Consequently, a Year 2000 (Y2K) Program was established to ensure a smooth transition into the new millennium. ATF’s Y2K Program is a series of Automated Data Processing (ADP) support services and hardware and software repair and replacement actions. The program is designed to insure that our Information Technology (IT) and Non-Information Technology systems are compliant prior to January 1, 2000. It will also provide executable Continuity of Operations Plans in the event that compliance is not possible.

We have established an initiative to maintain communication called Outreach. Our intent is to reach out to our revenue and data exchange partners to get an understanding of their Y2K activities, concerns and ability to meet their regulatory obligations. As part of the Outreach program ATF has already talked with industry groups about the Y2K problems.

Point of Contact: The point of contact for Y2K problems concerning tax return and payment is the Revenue Division, Phone 202 927-8200. Taxpayers who will not be able to timely file or pay taxes should contact ATF as soon as they know there is a problem so that ATF can work with the taxpayer to minimize the impact.

INQUIRIES: Inquiries concerning this circular should refer to its number and be addressed to the Assistant Director (Alcohol and Tobacco), Bureau of Alcohol, Tobacco and Firearms, Washington DC, 20226.