Citing New IRS Rules, the ETA And the ABA Ask to Delay Part of Federal Reporting Law

Two industry trade groups are asking for a delay in implementation of portions of the new federal law requiring acquirers to report merchants’ electronic payment transactions to the Internal Revenue Service, saying constant changes in the reporting form and other problems are making it difficult to meet the reporting deadline.

In an Oct. 20 letter, the Electronic Transactions Association asked for a year’s extension for implementing new merchant category code requirements (MCC) recently added to the 1099-K reporting form, noting that the IRS issued the change nine months into the reporting year. The addition of the MCC box to the form requires merchant acquirers to build and implement completely new fields of data collection for merchant clients.

“Because the MCC reporting was just given to us last month, we’re saying we just don’t have time to implement it in the next 12 weeks,” says Mary Weaver Bennett, director of government and industry relations for the ETA, the Washington, D.C.-based trade group for independent sales organizations and acquirers. “This is just one more example of how this hasn’t been rolled out in the best of fashion.”

Originally, the IRS had issued a new set of MCCs rather than using existing ones from MasterCard Inc., Visa Inc., American Express Co., and Discover Financial, compounding the problem, the ETA said. But the IRS later said it will accept the MCCs already in use by the industry.

A Sept. 20 ABA letter also cited the late addition of the MCC requirement in addition to other problems in asking for a waiver of penalties during the first year in regard to reporting and withholding of funds for merchants that fail to comply with the law. “Because this requirement was not included in the earlier version (of the 1099-K form), it is very likely that neither banks nor their third-party processors are capturing this information in the systems they have designed to begin filing 2011 Forms 1099Ks beginning in 2012,” Fran Mordi, ABA vice president and senior tax counsel, said in the letter.

The IRS did not return a calll from Digital Transactions News seeking comment on the trade groups\' requests.

The 1099-K regulation originated with the deficit-ridden federal government’s concern about finding unreported or under-reported taxable business revenues. The law is designed to help the IRS match income from sales paid with payment cards to income claimed on tax returns.

The rules require so-called payment-settlement entities such as bank card merchant acquirers or payment card networks such as AmEx and Discover that have direct relationships with merchants to file annual reports for each merchant listing that merchant’s monthly gross receipts from electronic payment transactions. Acquirers must list the receipts, along with the merchant’s taxpayer identification number (TIN) and legal name, on a new form, Form 1099-K.

A card-accepting business encounters problems if the TIN and legal name on file with the acquirer do not match the ones in the IRS’s files. If the mismatch can’t be resolved, it triggers back-up withholding of up to 28% of a merchant’s payment card transactions.

If acquirers don’t withhold the payment amount when required, they are then held responsible for the amount. The law is effective for tax returns with calendar years that began Dec. 31, 2010, with first reports due in early 2012.

The ABA echoed the concerns of the ETA and other industry players about slow response times and other problems while attempting to validate TINs and business names with the IRS’s TIN business-name data base. Acquirers also have complained about ongoing revisions in the 1099-K reporting form that require reprogramming of computer platforms, a major undertaking for large processors such as Atlanta-based First Data Corp.

The ABA is asking that the IRS provide a penalty waiver for the 2012 tax year for persons who made good faith efforts to implement and comply with the reporting and backup withholding requirements. The association also asked for a one-year delay in implementation of the related backup withholding rules “in light of the risk of a significant number of TIN mismatches in the early stages of operation.”

“At a time when many small businesses are struggling to rebound from the recent economic crisis, having 28% withheld from merchant and third-party gross payments could cause permanent damage, including a situation where some merchants are forced to cease operations,” Mordi said in the letter.