The IRS Hears Merchants’ Pleas About Card Receipts, But Will Taxable Sales Go Unreported?

Responding to pressure from retailers, the Internal Revenue Service this month announced that it would give merchants a pass on what merchants feared would be a new hassle when filling out their tax returns. The change will reduce the compliance burden on merchants, but it also could undercut the government’s goal of accurately finding unreported or underreported taxable sales, according to a merchant-acquiring trade group.

In letters to various retail trade groups, the IRS said it would not require merchants to reconcile the amount they list on Form 1120 and other business income-tax returns regarding gross payment card sales with what their merchant acquirer or network reports to the IRS as card receipts on a new form, the 1099-K. The IRS had already given merchants a pass on such reconciliation for tax year 2011, but groups such as the National Federation of Independent Business, a small-business organization, and the Retail Industry Leaders Association representing large retailers had sent letters urging the IRS to remove the requirement for tax year 2012 and beyond.

“We appreciate that the IRS provided small-business taxpayers relief with respect to merchant-card reporting on their 2011 tax returns,” the NFIB said in its letter. “However, starting in the tax year 2012, small-business owners may be required to take an onerous and unnecessary extra step on their annual income-tax returns to comply with the merchant-card and third-party reporting law.”

The RILA’s letter noted that the 1099-Ks reflect “a host of other items that do not constitute gross receipts.” Such items include sales taxes remitted to governmental bodies, cash-back transactions, charitable contributions collected by a retailer and remitted to charities, and other items. Making reconciliation of 1099-Ks with receipts listed on income-tax forms even more complicated are returns made on gift cards for sales that originate as credit or debit card transactions, international operations, and accounting matters involving calendars, the RILA said.

In letters to both the NFIB and RILA last week, IRS deputy commissioner for services and enforcement Steven T. Miller said, “There will be no reconciliation required on the 2012 form, nor do we intend to require reconciliation in future years. Our intention is that the reporting of gross receipts and sales on the 2012 income-tax forms will be modeled on the 2010 income-tax forms. No other changes to these forms related to payment card reporting are contemplated.”

Controversial from the start, the 1099-K form originated with a section in a 2008 law that Congress passed in hopes of finding potentially $10 billion in underreported or unreported taxable revenues by helping the IRS match income from sales paid with payment cards to income claimed on business tax returns. The rule implementing the law requires so-called payment-settlement entities such as bank card merchant acquirers or card networks such as American Express Co. and Discover Financial Services 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 the new 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 28% of a merchant’s payment card transactions. Responding to complaints from acquirers, bankers, and others, the IRS in late October said it would delay penalty provisions and withholding requirements for a year, until Jan. 1, 2013. Acquirers still are required to file 1099-Ks for tax year 2011 by Feb. 28 of this year if filing by paper or by April 2 if filing electronically.

The new IRS stance on reconciling 1099-Ks with income-tax forms is all well and good for merchants, notes Mary Weaver Bennett, director of government and industry relations for the Electronic Transactions Association acquiring-industry trade group. She notes that acquirers had plenty of issues with the 2008 reporting law and the rule implementing it, but once the rule was in place acquirers set about getting their back-office systems ready for it, including the expected reconciliation provision. “It’s small comfort, at least you could console yourself that the government was going to get money back,” Bennett says.

But the latest change might undercut the law’s intent of finding taxable, underreported cash sales, she says. “It would seem they’ve weakened it. They will still get the gross transactions, but it’s not as accurate,” says Bennett.