Two Years in Coming, an IRS Reporting Rule Takes Effect

While the payment card industry is bracing for debit card interchange and other regulations that will come next year from the Federal Reserve as a result of the new financial-reform law, merchant acquirers on Monday got a long-anticipated reporting rule. Beginning with the 2011 tax year, acquirers must report how much their merchants generate in annual charge volume.

The new rules originated with the federal government’s concern about finding unreported or under-reported taxable business revenues (Digital Transactions News, June 25, 2008). Congress passed the enabling legislation, which amended the Internal Revenue Code, in July 2008 as part of the Housing Assistance Tax Act of 2008. Since then the U.S. Treasury Department and its Internal Revenue Service have been devising regulations to implement the law. Officials held a hearing in March, and the IRS published final rules Monday in the Federal Register.

The rules require settlement entities such as bank card merchant acquirers or payment 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 are to list the receipts, along with the merchant’s taxpayer identification number (TIN) and legal name, on a new form, Form 1099-K.

Covered payments involve card transactions at networks of unrelated merchants. Thus, the affected transactions will come from general-purpose credit and debit cards and certain variants, such as mall cards or limited-use campus cards when such a card is used off campus at nearby merchants. Transactions on a private-label credit card good only at one retailer, or on a campus card when used on campus, are not reportable. Automated clearing house transactions are not reportable.

The extra reporting will surely elicit gripes, but doesn’t constitute a huge new burden, according to payments attorney Anita Boomstein, a partner at Hughes Hubbard & Reed LLP, New York. “I don’t anticipate that any of this will be a problem for anyone, particularly large merchants,” Boomstein tells Digital Transactions News. “It will be a nuisance.” But she adds that the rules “will be a problem for merchants that are trying to under-report sales.”

A card-accepting business, however, could encounter problems if the TIN and legal name on file with the acquirer do not match the ones the IRS has. A mismatch could trigger back-up withholding of 28% of payment card transactions, according to a backgrounder posted on merchant acquirer Heartland Payment Systems Inc.’s Web site.

Monday’s final rules clarified a number of issues generated by the draft rules, including how to handle foreign-currency payments, and accommodated a number of suggestions the IRS received from banks, networks, and others during the comment period regarding duplicate reporting and some other issues. The IRS, however, did not change the requirement that acquirers report a merchant’s gross sales. A number of commentators said reporting sales net of chargebacks and other adjustments was a better indicator of card volume, but the IRS said the language in the statute was clear in requiring that gross sales be reported.