Purpose of the TT&L Program
Taking Part in the TT&L Program
As of April 2, 2007, 8,950 depository institutions throughout the United States maintained TT & L accounts for the Treasury Department, taking in an estimated $2.0 trillion in tax revenue in 2006. These funds came directly from employee income tax withholding, Social Security/Medicare taxes (FICA), and corporate income taxes that are paid on a quarterly basis. However, not all funds in TT&L accounts are placed there directly. About one-third of all funds in the accounts come indirectly from other sources, such a individual income tax payments.
Remit Option Depositories
Under one such program, collector depositories transfer some payments to a Treasury account at the Federal Reserve the same day they receive them, and transfer all other payments to the Treasury's account a day later. An increasing share of all payments received by collector depositories have been transferred electronically. Companies with annual tax payments of more than $200,000 each are required by law to transfer their tax payments electronically. Under the collector option program, all funds transferred into TT&L accounts electronically must move the same day from the depository institutions at which they were deposited to the Treasury's Federal Reserve accounts.
Electronic payments accomplish three objectives. First, the Internal Revenue Service has much less paperwork to process. Second, the Treasury is able to obtain data more quickly on the amounts of funds transferred to its accounts at the Federal Reserve Banks. Third, since electronic tax payments arrive in the Treasury's Federal Reserve accounts the same day they are deposited, the Treasury is able to earn interest on these funds by immediately placing them in "note option" depositories.
Individual income tax payments do not go directly to collector option depositories. Rather, these tax payments go from individuals to the Internal Revenue Service, which forwards the payments to about 160 "lockbox" commercial banks nationwide. The lockbox banks process the checks and forward the payments to the Federal Reserve Bank of New York. If the Treasury does not need the funds immediately, they are transferred to the TT&L program and placed, when possible, in note option depositories.
Under the collector option program, depository institutions are classified according to the amount of funds in their TT&L accounts. Class 1 depositories are those that receive more than $10 million in their TT&L accounts annually; depositories that receive less than $10 million in their TT&L accounts annually are designated Class 2 depositories.
Note Option Depositories
Unlike collector depositories, note option depositories may hold TT&L balances for an extended time period. As a result, note option banks have use of the Treasury's funds for loans and investments and are required to pay interest to the Treasury. The interest rate is determined by subtracting twenty-five basis points (one-quarter of a percentage point) from the average federal funds rate for the week during which the balances are held.
Note option depositories establish a balance limit that they are willing to hold in their TT&L accounts, usually based upon their anticipated flow of tax deposits and their ability to maintain adequate collateral to secure a given level of deposits. All tax deposits received in excess of the lesser of the balance limit or collateral value are transferred automatically to the Treasury. During most of the year, TT&L capacity, defined as the sum of the lesser of the balances limit or the collateral value of the 1,282 note option depositories, exceeds the supply of tax payments. The regular exception is a two-week period around April 15, when the Treasury receives a large influx of individual income tax payments. During this time, the potential flow of tax payments into TT&L accounts exceeds the supply of maximum balances, and the Treasury must hold balances in its Federal Reserve accounts involuntarily. April 2007