IRS Proposes 1% Excise Tax on Remittance Transfers: Winners, Losers, and the Fine Print

The Internal Revenue Service’s proposed 1% excise tax on remittance transfers under Section 4475 of the Internal Revenue Code marks a significant expansion of federal tax authority into the cross-border payments sector. Section 4475, which was added to the Code by the Infrastructure Investment and Jobs Act of 2021, imposes a 1% tax on the amount of any remittance transfer funded by cash or cash-like instruments sent from the United States to a person or entity outside the United States. The tax attaches at the time the sender provides funds to the remittance transfer provider, regardless of when the designated recipient ultimately receives the money. The tax is collected and remitted quarterly by the provider, with semimonthly deposits required under 26 CFR Part 40 when the provider’s liability exceeds $2,500 per quarter.

The proposed regulations clarify that the tax applies only to remittance transfers funded by cash, money orders, cashier’s checks, traveler’s checks, or any other similar physical instrument as determined by the Secretary under Section 4475(c). The IRS’s authority to define "similar physical instruments" stems from Section 4475(c), which grants the Secretary broad discretion to expand the scope of taxable instruments beyond the statutorily listed examples. This discretion allows the agency to adapt the tax base to evolving payment methods, including digital equivalents that function as cash. The inclusion of traveler’s checks within the taxable instruments list represents a notable expansion of the tax’s scope, treating them as functionally equivalent to money orders and cashier’s checks because they operate as prepaid instruments redeemable for cash.

The IRS’s proposed regulations under Section 4475(d) of the Internal Revenue Code provide critical exclusions from the 1% remittance transfer excise tax, ensuring certain transactions remain outside the tax base. These exclusions reflect Congress’s intent to exempt routine financial activities from the tax while targeting cash-based remittances. The statute explicitly carves out two primary categories of non-taxable transfers: those funded through financial institution accounts or U.S.-issued debit and credit cards, and those involving specific payment instruments. Transfers funded by withdrawals from financial institution accounts held in or by institutions described in section 5312(a)(2) of title 31 and subject to chapter 53, subchapter II of title 31 are excluded from the tax base. This exclusion applies regardless of whether the withdrawal is made in person, via ATM, or through electronic means. The proposed regulations further clarify that settlement of payment obligations under money orders, cashier’s checks, or traveler’s checks by the issuing entity to the remittance transfer provider does not constitute a "withdrawal" for purposes of the exclusion. This means that if a sender purchases a money order or cashier’s check and then uses it to fund a remittance transfer, the transaction is treated as a cash-based transfer and remains taxable. The IRS justifies this treatment by emphasizing that the physical instrument itself—rather than the underlying funding source—triggers the tax under Section 4475(c).

Additionally, the IRS proposes treating check-cashing services as cash transactions for tax purposes. Specifically, if a remittance transfer is funded with cash obtained from a check cashed by the sender, the transaction is subject to the excise tax. This aligns with the broader statutory framework, which taxes remittance transfers funded by physical instruments, including cash. The IRS notes that this approach prevents circumvention of the tax through the use of check-cashing services to convert non-cash funds into cash equivalents before initiating a remittance. Transfers funded with a debit card or credit card issued in the United States are also excluded, provided the card is used to initiate the remittance transfer. The exclusion covers both consumer and business-purpose cards, as long as the card is issued by a U.S.-regulated financial institution. This exclusion reflects the IRS’s intent to limit the tax’s reach to high-value, cash-funded transfers, consistent with the anti-money laundering focus of the Electronic Fund Transfer Act.

The IRS’s proposed anti-avoidance rule in § 49.4475–1(d)(4) targets transactions structured with the principal purpose of avoiding the 1% remittance transfer tax. This provision empowers the IRS to disregard or recharacterize such transactions based on their substance over form, applying an all facts and circumstances standard that examines the pattern of conduct by senders, remittance transfer providers, or third parties. The rule’s breadth reflects the IRS’s intent to prevent circumvention of the tax’s statutory scope, which is narrowly tied to funding instruments like cash, money orders, and cashier’s checks. The proposed regulations provide two illustrative examples of prohibited structuring. In the first, a sender provides cash to a remittance transfer provider in exchange for a general-use prepaid card, which is then immediately used to fund a remittance transfer. The IRS would recharacterize this as a direct cash-funded transfer, triggering the tax. The second example involves a sender who transfers the prepaid card to a relative, who then initiates the remittance transfer. Here, the IRS would disregard the intermediate step and treat the transaction as if the sender had funded the transfer with cash directly. These examples underscore the IRS’s focus on economic substance—transactions lacking a legitimate business purpose beyond tax avoidance will be recast to reflect their true nature.

The stakes for remittance transfer providers are significant. If the tax is not collected from the sender at the time of the transfer, the provider becomes liable for the tax under the proposed rules. This shifts the compliance burden onto providers to monitor funding sources and document transactions to demonstrate the absence of tax-avoidance motives. The IRS’s emphasis on pattern of conduct suggests that repeated use of non-taxable instruments, such as prepaid cards, in close temporal proximity to remittance transfers could trigger scrutiny, even if no single transaction is explicitly structured to evade the tax. The anti-avoidance rule aligns with broader IRS enforcement priorities, including the economic substance doctrine under IRC § 7701(o) and the substance-over-form doctrine established in Gregory v. Helvering (1935). These doctrines permit the IRS to disregard transactions that, while technically compliant, lack a non-tax business purpose. For remittance transfer providers, this means that internal controls and transaction monitoring will be critical to avoid liability. The proposed rule also dovetails with the IRS’s earlier clarification that check-cashing services used to convert non-cash funds into cash equivalents before a remittance transfer are treated as cash-funded transfers, further closing avenues for avoidance.

In practice, the anti-avoidance rule will require providers to adopt robust due diligence measures, such as verifying the source of funds for prepaid cards and other non-taxable instruments, documenting the business purpose behind funding choices, and training staff to identify and report suspicious patterns of conduct. Failure to comply could result not only in tax liability but also penalties for negligence or willful disregard under the Excise Tax Procedural Regulations. The IRS’s approach signals that formal compliance with the tax’s narrow funding instrument list is insufficient—providers must ensure that their entire transactional structure reflects the economic reality of a taxable remittance transfer.

The proposed 1% excise tax on remittance transfers under Section 4475 would reshape the financial burden across key stakeholders. The Treasury and IRS’s economic analysis suggests that the tax’s impact will vary significantly depending on funding instruments, transaction channels, and household demographics. Remittance transfer providers, including money service businesses (MSBs), banks, and credit unions, face a bifurcated impact under the proposed regulations. Banks and credit unions are largely insulated from the tax’s direct impact, as the Treasury Department and IRS expect these institutions to primarily facilitate remittances funded by non-cash instruments, such as ACH transfers and debit cards, which are excluded from the tax base. Digital platform providers, including fintechs and online money transfer services, may benefit from a shift in customer behavior toward non-cash funding methods, reducing their exposure to the tax. However, MSBs operating through retail agents, such as grocery stores and convenience stores, face higher compliance costs and potential liability for uncollected taxes. The proposed regulations explicitly include these agents in the definition of "remittance transfer providers" for anti-avoidance purposes, requiring them to train staff, implement reporting systems, and potentially remit taxes on cash-funded transfers. Small MSBs, in particular, may struggle with the administrative burden of tracking taxable versus non-taxable funding instruments, particularly if they lack robust compliance infrastructure. The Treasury estimates that 200 MSBs operate through 500,000 retail agents, many of which are small businesses with limited resources.

Households sending remittances will experience a stark divide in outcomes based on their access to banking services. Banked households funding remittances via ACH or debit cards avoid the tax entirely, as these instruments are excluded from the tax base under the proposed regulations. Senders using promotional values, such as discounts or rewards, may also see no additional tax burden, as the regulations clarify that these values are not part of the taxable amount. In contrast, households relying on cash or cash-like instruments, including traveler’s checks, will bear the full brunt of the 1% tax. The Treasury estimates that 30% to 36% of remittance transfers, involving 1.1 million to 1.3 million households annually, are funded with cash, primarily among unbanked or underbanked senders. For a $200 transfer, the 1% tax adds $2 to the total cost, representing an 18% to 26% increase in fees based on World Bank estimates of 5.56% average transaction fees. This could reduce the frequency or amount of remittances, particularly for essential needs like family support or debt repayment. Low-income immigrants, who make up the vast majority of remittance senders at 84% of households according to Census data, will face disproportionate costs.

Agents, such as grocery stores and convenience stores, face an uncertain landscape under the proposed regulations. Agents operating in non-taxable funding environments, where senders use cards, face no additional burden. However, agents facilitating cash-funded remittances may encounter unexpected compliance obligations, including training staff to identify taxable transactions and potential liability for uncollected taxes if the provider fails to remit the tax. The proposed regulations do not explicitly exempt agents from liability, creating regulatory ambiguity and potential legal risks for small businesses.

Unbanked households, which lack access to traditional banking services, are poised to be the biggest losers under the proposed tax. These households have limited access to non-taxable funding instruments, such as ACH or debit cards, and are highly reliant on cash transactions, which are squarely within the tax base. The higher costs for essential remittances could compound existing financial burdens. For example, a $200 remittance funded with cash could incur a 5.56% transaction fee, a 1% excise tax totaling $2, and additional check-cashing fees ranging from 1% to 5% of the transfer amount. The tax may also incentivize unbanked households to shift to informal channels, such as hawala networks, cryptocurrency, or cash couriers, which lack consumer protections and could expose them to fraud or loss.

The economic context and stakeholder dynamics highlight the regressive nature of the proposed tax. The regulations attempt to minimize compliance burdens by aligning with Regulation E definitions and excluding service fees from the tax base. However, the lack of quantifiable economic impact data, as admitted by the Treasury, leaves key questions unanswered. Will senders reduce remittance volumes or shift to non-taxable funding instruments? How will MSBs adapt their pricing models to pass the tax burden to senders? Will unbanked households bear the regressive effects of the tax, exacerbating financial exclusion? The regulations’ anti-avoidance rules further complicate compliance, as providers must ensure their entire transactional structure reflects the economic reality of a taxable remittance transfer. For stakeholders, the stakes are high: Will this tax achieve its revenue goals, or will it drive remittances underground? The answer may depend on how effectively providers and senders adapt to the new regulatory landscape.

The IRS’s proposed 1% excise tax on remittance transfers imposes strict procedural obligations on providers to ensure timely collection and remittance of the tax. These requirements mirror existing excise tax regimes under 26 CFR Part 40, which governs the reporting and deposit of taxes imposed by Chapter 36 of the Internal Revenue Code. Providers must navigate quarterly reporting, semimonthly deposits, and refund mechanisms while adhering to anti-avoidance rules that scrutinize transactional structures. Providers must file Form 720, the Quarterly Federal Excise Tax Return, to report the 1% excise tax on remittance transfers. This aligns with 26 CFR 40.0–1(a) and 40.6011(a)–1(a)(1), which require excise tax collectors to file quarterly returns. The return is due by the last day of the month following the end of the quarter: April 30 for Q1 (January–March), July 31 for Q2 (April–June), October 31 for Q3 (July–September), and January 31 for Q4 (October–December). The IRS’s procedural requirements ensure that providers maintain accurate records of taxable transactions and remit payments on a consistent schedule.

In addition to quarterly reporting, providers must make semimonthly deposits of the tax under § 40.6302(c)–1(a)(1), which authorizes the Secretary to establish deposit requirements for excise taxes. A semimonthly period is defined as the first 15 days of a calendar month, with deposits due by the 14th day of the following month, and days 16 through the end of a calendar month, with deposits due by the 29th or 30th day of the same month, or the 31st if applicable. For example, taxes collected from January 1–15 must be deposited by February 14, while taxes collected from January 16–31 must be deposited by February 28 (or 29 in a leap year). This system ensures that the IRS receives tax payments in a timely manner while providing providers with flexibility in managing their cash flow.

The proposed regulations allow senders to claim refunds if a remittance transfer is canceled or expires before the funds are delivered. Providers must process refunds within 30 days of the cancellation or expiration request, as required under 12 CFR § 1005.30(e)(3), which implements the Electronic Fund Transfer Act. The refund must be issued in the same form as the original payment method, unless the sender agrees to an alternative. This provision ensures that consumers are not unfairly burdened by taxes on transactions that do not ultimately occur.

The IRS has provided temporary relief from failure-to-deposit penalties for the first three quarters of 2026 via Notice 2025–55, which states that providers will not face penalties for failing to make semimonthly deposits during this period if they demonstrate reasonable cause under § 6656(a). Additionally, the notice preserves the ability to use the deposit safe harbor under § 40.6302(c)–1(b)(2) despite any deposit shortfalls in the first three quarters of 2026. This relief acknowledges the challenges providers may face in adapting to the new tax regime and provides a grace period for compliance.

The Treasury Department and IRS estimated the 1% excise tax on remittance transfers would apply to a $156–$187 billion annual tax base of cash-funded transfers, based on NMLS data and FDIC surveys. The analysis projects 1.1–1.3 million households would be affected annually, with average transfer sizes ranging from $290 to $740 per transaction. These figures reflect the scope of cash-based remittances, typically used by unbanked or underbanked senders who lack access to tax-exempt funding instruments like ACH or debit cards.

The proposed tax introduces price elasticity risks for remittance providers. The IRS cited an estimated elasticity of 0.09, suggesting a 0.9% decline in remittance volume for every 1% increase in cost. While modest, this effect compounds across millions of transactions, potentially reducing formal remittance flows, particularly in Latin American and Caribbean corridors where cash remains dominant. The IRS acknowledged limited modeling capacity to quantify substitution effects but noted anecdotal evidence from Mexico’s 4% remittance tax, which saw a 12% drop in formal transfers within a year of implementation.

For money services businesses (MSBs), the tax triggers compliance and operational costs. Providers must integrate the 1% levy into pricing, disclosures, and deposit systems under 26 CFR Part 40, which governs excise tax deposits. The IRS previously provided temporary relief from failure-to-deposit penalties for the first three quarters of 2026 via Notice 2025–55, but permanent compliance infrastructure will require semimonthly deposits and quarterly filings (Form 720). Smaller MSBs, especially those in rural or immigrant-heavy communities, may face disproportionate burdens, as they lack economies of scale to absorb administrative costs.

Senders may shift funding instruments to avoid the tax. The IRS highlighted debit cards and ACH transfers as likely substitutes, given their exemption under the proposed rules. However, unbanked senders—who represent a significant portion of the tax base—lack access to these alternatives. The FDIC’s 2023 survey found 6.5% of U.S. households were unbanked, with Black and Hispanic households disproportionately affected. For these senders, the tax increases the effective cost of remittances, potentially pushing them toward informal channels, such as cash couriers or cryptocurrency, that evade IRS oversight.

The economic analysis also flagged regressive distributional effects. Lower-income remitters, who tend to send smaller, more frequent transfers, would bear a higher relative tax burden than wealthier senders. The IRS did not model long-term behavioral shifts, such as reduced migration-related transfers or increased reliance on in-kind support, such as goods mailed directly to recipients. These gaps underscore the need for further study, particularly as the tax’s impact on remittance-dependent economies, such as El Salvador and Guatemala, remains unquantified.

The IRS’s proposed regulations under Section 4475 adopt key definitions from the Electronic Fund Transfer Act (EFTA) and its implementing regulation, Regulation E (12 CFR part 1005), to ensure consistency in how remittance transfers are classified for tax purposes. The EFTA, enacted in 1978 and amended multiple times, governs electronic fund transfers, including remittance transfers, by establishing consumer protections such as disclosure requirements, error resolution procedures, and consumer rights. Regulation E, issued by the Consumer Financial Protection Bureau (CFPB), provides detailed rules for implementing the EFTA, including definitions and operational standards for remittance transfer providers.

A remittance transfer is defined as an electronic transfer of funds requested by a sender to a designated recipient, sent by a remittance transfer provider. This definition excludes transfers funded by debit or credit cards or withdrawn from certain financial institution accounts under Section 4475(d). The EFTA’s definition, found in Section 919(g)(2)(A) and 12 CFR 1005.30(e), is mirrored here, with the addition of a clarifying note that the transfer occurs regardless of whether the sender holds an account with the provider.

A sender is a consumer in a State who primarily requests a remittance transfer for personal, family, or household purposes. This aligns with the EFTA’s definition in Section 919(g)(4) and 12 CFR 1005.30(g), which limits the term to natural persons acting for non-business purposes. The IRS’s adoption of this definition ensures that business-to-business transfers are excluded from the tax, consistent with the EFTA’s consumer protection focus. A designated recipient is the person specified by the sender to receive funds in a foreign country. Under the EFTA and Regulation E, this term is defined in Section 919(g)(1) and 12 CFR 1005.30(c), with the proposed regulations adding a clarifying cross-reference to 12 CFR part 1005, supp. I (comment to 30(c)) to specify that the recipient’s location must be physically outside any U.S. State or territory.

A remittance transfer provider is any person providing remittance transfers in the normal course of business, regardless of whether the sender holds an account with the provider. This mirrors the EFTA’s definition in Section 919(g)(3) and 12 CFR 1005.30(f), but the proposed regulations explicitly exclude the EFTA’s safe harbor for providers handling 500 or fewer transfers annually. The IRS justifies this departure by noting that the safe harbor could create inconsistent tax results for otherwise identical transactions, undermining the tax’s integrity.

The proposed regulations also incorporate additional EFTA-defined terms where relevant, such as State, expanded to include U.S. territories but omitting redundant references to "possession" and "Commonwealth of Puerto Rico" to align with federal law, and consumer, defined as a natural person under Section 903(6) of the EFTA and 12 CFR 1005.2(e). These cross-references ensure that the tax’s scope remains coherent with the EFTA’s consumer protection framework while adapting to the specific requirements of excise tax administration.

The IRS has opened a formal comment period for the proposed excise tax on remittance transfers, providing stakeholders with an opportunity to shape the final regulations. Comments and requests for a public hearing must be submitted by June 12, 2026, the deadline established in the notice of proposed rulemaking. Electronic submissions are strongly encouraged and must be filed through the Federal eRulemaking Portal at Regulations.gov, referencing IRS and REG–114499–25. Paper submissions may also be sent to the IRS at the designated address, though they will not be edited or withdrawn once received. The IRS will publish all comments publicly, ensuring transparency in the rulemaking process.

A public hearing may be requested by stakeholders who wish to present oral testimony. Such requests must follow the procedures outlined in the "Comments and Requests for a Public Hearing" section of the notice. If a hearing is granted, it will provide an additional forum for discussion, particularly on complex issues such as the economic analysis underpinning the tax or the anti-avoidance provisions designed to prevent circumvention of the 1% levy.

The proposed regulations are not yet final, but the IRS has indicated that collectors and taxpayers may rely on them for remittance transfers made after December 31, 2025, provided they apply the rules in their entirety and consistently. This interim reliance framework allows affected parties to begin adjusting their compliance systems while the rulemaking process continues. However, any reliance is subject to change if the final regulations differ materially from the proposed version.

The applicability date of the final regulations will be determined upon publication, but the proposed rules specify that they would apply to remittance transfers made in calendar quarters beginning on or after the date of final publication. This timing ensures that taxpayers have clear notice before the new tax takes effect, aligning with the statutory mandate under Section 4475(b)(2), which requires quarterly remittances of the tax.

Stakeholders are urged to submit detailed comments, particularly on the economic impact analysis and the anti-avoidance rule, as these elements are critical to the IRS’s final determination. The agency’s decision to allow interim reliance reflects the importance of providing certainty to remittance transfer providers and senders, but the public comment process remains essential for refining the regulations and addressing potential unintended consequences.

The IRS’s proposed regulations under Section 4475 adopt key definitions from the Electronic Fund Transfer Act (EFTA) and its implementing regulation, Regulation E (12 CFR part 1005), to ensure consistency in how remittance transfers are classified for tax purposes. The EFTA, enacted in 1978 and amended multiple times, governs electronic fund transfers, including remittances, by establishing consumer protections such as disclosure requirements, error resolution procedures, and consumer rights. Regulation E, issued by the Consumer Financial Protection Bureau (CFPB), provides detailed rules for implementing the EFTA, including definitions and operational standards for remittance transfer providers.

A remittance transfer is defined as an electronic transfer of funds requested by a sender to a designated recipient, sent by a remittance transfer provider. This definition excludes transfers funded by debit or credit cards or withdrawn from certain financial institution accounts under Section 4475(d). The EFTA’s definition, found in Section 919(g)(2)(A) and 12 CFR 1005.30(e), is mirrored here, with the addition of a clarifying note that the transfer occurs regardless of whether the sender holds an account with the provider.

A sender is a consumer in a State who primarily requests a remittance transfer for personal, family, or household purposes. This aligns with the EFTA’s definition in Section 919(g)(4) and 12 CFR 1005.30(g), which limits the term to natural persons acting for non-business purposes. The IRS’s adoption of this definition ensures that business-to-business transfers are excluded from the tax, consistent with the EFTA’s consumer protection focus. A designated recipient is the person specified by the sender to receive funds in a foreign country. Under the EFTA and Regulation E, this term is defined in Section 919(g)(1) and 12 CFR 1005.30(c), with the proposed regulations adding a clarifying cross-reference to 12 CFR part 1005, supp. I (comment to 30(c)) to specify that the recipient’s location must be physically outside any U.S. State or territory.

A remittance transfer provider is any person providing remittance transfers in the normal course of business, regardless of whether the sender holds an account with the provider. This mirrors the EFTA’s definition in Section 919(g)(3) and 12 CFR 1005.30(f), but the proposed regulations explicitly exclude the EFTA’s safe harbor for providers handling 500 or fewer transfers annually. The IRS justifies this departure by noting that the safe harbor could create inconsistent tax results for otherwise identical transactions, undermining the tax’s integrity.

The proposed regulations also incorporate additional EFTA-defined terms where relevant, such as State, expanded to include U.S. territories but omitting redundant references to "possession" and "Commonwealth of Puerto Rico" to align with federal law, and consumer, defined as a natural person under Section 903(6) of the EFTA and 12 CFR 1005.2(e). These cross-references ensure that the tax’s scope remains coherent with the EFTA’s consumer protection framework while adapting to the specific requirements of excise tax administration.

The IRS has opened a formal comment period for the proposed excise tax on remittance transfers, providing stakeholders with an opportunity to shape the final regulations. Comments and requests for a public hearing must be submitted by June 12, 2026, the deadline established in the notice of proposed rulemaking. Electronic submissions are strongly encouraged and must be filed through the Federal eRulemaking Portal at Regulations.gov, referencing IRS and REG–114499–25. Paper submissions may also be sent to the IRS at the designated address, though they will not be edited or withdrawn once received. The IRS will publish all comments publicly, ensuring transparency in the rulemaking process.

A public hearing may be requested by stakeholders who wish to present oral testimony. Such requests must follow the procedures outlined in the "Comments and Requests for a Public Hearing" section of the notice. If a hearing is granted, it will provide an additional forum for discussion, particularly on complex issues such as the economic analysis underpinning the tax or the anti-avoidance provisions designed to prevent circumvention of the 1% levy.

The proposed regulations are not yet final, but the IRS has indicated that collectors and taxpayers may rely on them for remittance transfers made after December 31, 2025, provided they apply the rules in their entirety and consistently. This interim reliance framework allows affected parties to begin adjusting their compliance systems while the rulemaking process continues. However, any reliance is subject to change if the final regulations differ materially from the proposed version.

The applicability date of the final regulations will be determined upon publication, but the proposed rules specify that they would apply to remittance transfers made in calendar quarters beginning on or after the date of final publication. This timing ensures that taxpayers have clear notice before the new tax takes effect, aligning with the statutory mandate under Section 4475(b)(2), which requires quarterly remittances of the tax.

Stakeholders are urged to submit detailed comments, particularly on the economic impact analysis and the anti-avoidance rule, as these elements are critical to the IRS’s final determination. The agency’s decision to allow interim reliance reflects the importance of providing certainty to remittance transfer providers and senders, but the public comment process remains essential for refining the regulations and addressing potential unintended consequences.

The IRS’s proposed 1% excise tax on remittance transfers imposes strict procedural obligations on providers to ensure timely collection and remittance of the tax. These requirements mirror existing excise tax regimes under 26 CFR Part 40, which governs the reporting and deposit of taxes imposed by Chapter 36 of the Internal Revenue Code. Providers must navigate quarterly reporting, semimonthly deposits, and refund mechanisms while adhering to anti-avoidance rules that scrutinize transactional structures. Providers must file Form 720, the Quarterly Federal Excise Tax Return, to report the 1% excise tax on remittance transfers. This aligns with 26 CFR 40.0–1(a) and 40.6011(a)–1(a)(1), which require excise tax collectors to file quarterly returns. The return is due by the last day of the month following the end of the quarter: April 30 for Q1 (January–March), July 31 for Q2 (April–June), October 31 for Q3 (July–September), and January 31 for Q4 (October–December). The IRS’s procedural requirements ensure that providers maintain accurate records of taxable transactions and remit payments on a consistent schedule.

In addition to quarterly reporting, providers must make semimonthly deposits of the tax under § 40.6302(c)–1(a)(1), which authorizes the Secretary to establish deposit requirements for excise taxes. A semimonthly period is defined as the first 15 days of a calendar month, with deposits due by the 14th day of the following month, and days 16 through the end of a calendar month, with deposits due by the 29th or 30th day of the same month, or the 31st if applicable. For example, taxes collected from January 1–15 must be deposited by February 14, while taxes collected from January 16–31 must be deposited by February 28 (or 29 in a leap year). This system ensures that the IRS receives tax payments in a timely manner while providing providers with flexibility in managing their cash flow.

The proposed regulations allow senders to claim refunds if a remittance transfer is canceled or expires before the funds are delivered. Providers must process refunds within 30 days of the cancellation or expiration request, as required under 12 CFR § 1005.30(e)(3), which implements the Electronic Fund Transfer Act. The refund must be issued in the same form as the original payment method, unless the sender agrees to an alternative. This provision ensures that consumers are not unfairly burdened by taxes on transactions that do not ultimately occur.

The IRS has provided temporary relief from failure-to-deposit penalties for the first three quarters of 2026 via Notice 2025–55, which states that providers will not face penalties for failing to make semimonthly deposits during this period if they demonstrate reasonable cause under § 6656(a). Additionally, the notice preserves the ability to use the deposit safe harbor under § 40.6302(c)–1(b)(2) despite any deposit shortfalls in the first three quarters of 2026. This relief acknowledges the challenges providers may face in adapting to the new tax regime and provides a grace period for compliance.

The Treasury Department and IRS estimated the 1% excise tax on remittance transfers would apply to a $156–$187 billion annual tax base of cash-funded transfers, based on NMLS data and FDIC surveys. The analysis projects 1.1–1.3 million households would be affected annually, with average transfer sizes ranging from $290 to $740 per transaction. These figures reflect the scope of cash-based remittances, typically used by unbanked or underbanked senders who lack access to tax-exempt funding instruments like ACH or debit cards.

The proposed tax introduces price elasticity risks for remittance providers. The IRS cited an estimated elasticity of 0.09, suggesting a 0.9% decline in remittance volume for every 1% increase in cost. While modest, this effect compounds across millions of transactions, potentially reducing formal remittance flows, particularly in Latin American and Caribbean corridors where cash remains dominant. The IRS acknowledged limited modeling capacity to quantify substitution effects but noted anecdotal evidence from Mexico’s 4% remittance tax, which saw a 12% drop in formal transfers within a year of implementation.

For money services businesses (MSBs), the tax triggers compliance and operational costs. Providers must integrate the 1% levy into pricing, disclosures, and deposit systems under 26 CFR Part 40, which governs excise tax deposits. The IRS previously provided temporary relief from failure-to-deposit penalties for the first three quarters of 2026 via Notice 2025–55, but permanent compliance infrastructure will require semimonthly deposits and quarterly filings (Form 720). Smaller MSBs, especially those in rural or immigrant-heavy communities, may face disproportionate burdens, as they lack economies of scale to absorb administrative costs.

Senders may shift funding instruments to avoid the tax. The IRS highlighted debit cards and ACH transfers as likely substitutes, given their exemption under the proposed rules. However, unbanked senders—who represent a significant portion of the tax base—lack access to these alternatives. The FDIC’s 2023 survey found 6.5% of U.S. households were unbanked, with Black and Hispanic households disproportionately affected. For these senders, the tax increases the effective cost of remittances, potentially pushing them toward informal channels, such as cash couriers or cryptocurrency, that evade IRS oversight.

The economic analysis also flagged regressive distributional effects. Lower-income remitters, who tend to send smaller, more frequent transfers, would bear a higher relative tax burden than wealthier senders. The IRS did not model long-term behavioral shifts, such as reduced migration-related transfers or increased reliance on in-kind support, such as goods mailed directly to recipients. These gaps underscore the need for further study, particularly as the tax’s impact on remittance-dependent economies, such as El Salvador and Guatemala, remains unquantified.