Digital Transactions Authoritative, insightful and timely information for payments professionals
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Merchant acquirers already struggling to comply with a new federal mandate to report merchants’ electronic-payment transactions to the Internal Revenue Service are being blindsided once again by the IRS. The agency recently issued yet another version of the new 1099-K reporting form that includes a new box for each merchant’s IRS category code, a move that requires acquirers to rebuild computer programs used for data gathering.
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To make matters worse, the IRS issued a new set of merchant category codes (MCCs) rather than using existing ones from MasterCard Inc., Visa Inc., American Express Co., and Discover Financial Services that acquirers already have in their systems, says Mary Weaver Bennett, director of government and industry relations for the Electronic Transactions Association, the Washington, D.C.-based industry trade group for independent sales organizations and acquirers.
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The 1099-K regulation originated with the deficit-ridden federal government’s concern about finding unreported or under-reported taxable business revenues. A law Congress passed in 2008 contained a provision designed to help the IRS match income from sales paid with payment cards to income businesses claimed on tax returns.
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Rules implementing the law require so-called payment-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 must list the receipts, along with the merchant’s taxpayer identification number (TIN) and legal name, on a new form, Form 1099-K.
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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.
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The data gathering required to comply with the law already had created problems for acquirers, who report slow response times and other problems while attempting to validate TINs and business names with those in the IRS’s database. Acquirers also have complained about ongoing revisions in Form 1099-K that require reprogramming of computer platforms.
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Under the law, acquirers began gathering data on merchant card transactions on Jan. 1, Bennett says. “The IRS has come out with a new form in September 2011, nine months into the reporting year,” she says. “They’re still making changes to the reporting form nine months after the reporting has already started.”
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To comply with the Jan. 1 starting date for reporting, acquirers programmed the original data-collection requirements into their systems, Bennett says. “Now the systems they have built don’t include a new requirement so they’ve got to go back and rebuild or adjust what they’re collecting now,” she says, including retroactively collecting the MCC data from Jan. 1.
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The IRS compounded the problem by publishing new MCCs rather than using the standard MCCs already in acquirers’ systems, Bennett says. “So you have to go into your existing customer base and back-fill all your customer database to add a new field and … back fill for all your existing customers with the IRS code,” she says. “Then you’re responsible for reporting with those codes from Jan. 1. It’s a mess.”
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An IRS spokesperson was not immediately available for comment.
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The ETA is drafting a letter to the IRS to explain how the revised reporting form with the new MCC box will create a hardship for acquirers, Bennett says. “It’s just one more example of how the implementation of this requirement has been less than ideal,” she says.
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