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The recently enacted housing legislation contained a tax reporting provision that would require financial institutions that processes electronic payment transactions to report to the IRS the annual gross receipts of those transactions for each customer merchant beginning in 2010.

Analysis of Tax Provision:

Under the tax reporting provision, payment settlement entities (defined to include merchant acquiring banks, third party settlement organizations, or third party payment facilitators acting on their behalf) would be required to report to the IRS and to the merchants the gross amount of reportable transactions. The requirement would apply to merchants that make more than $20,000 annually and have more than 200 transactions per year (which would likely be almost every FIS/Client merchant). "Reportable transactions" include any payment card transaction and any third party network transaction.

Additionally, payment settlement entities would be required to obtain taxpayer IDs for each merchant to enable them to track, aggregate, and report the amount of transactions. If the taxpayer ID could not be verified, the payment settlement entity would have to withhold 28% of a small business's cash flow until the taxpayer ID number could be verified. Although payment settlement entities often obtain the taxpayer ID when accounts are opened, alternative numbers are often assigned for subsequent use and identification purposes to avoid having to store the taxpayer ID and increase the potential risk of identity theft.

The effective date for the reporting requirement is 2010, the effective date for the 28% withholding is 2011.

Background:

The tax reporting proposal was first made in the President's budget in February 2006 as a revenue raiser under the theory that additional reporting will enable the IRS to recover currently unpaid tax obligations that would be identified by increased reporting. The provision subsequently gained support from both Republican and Democratic legislators, including Senate Finance Committee Chairman Baucus (D-MT) and Ranking Member Grassley (R-IA). Because of its bipartisan nature, it was seen as a relatively easy pay-for for the housing bill, which was subject to requirements that any new spending be offset by corresponding revenue raising provisions. The provision is estimated to raise $9.8 billion over ten years.

The proposal was strongly opposed by the banking industry merchants (particularly smaller entities), which argued that the requirements would be costly, burdensome, and would not raise the revenue required. Privacy groups and merchants argued that smaller merchants, many of which use the proprietor's Social Security number as a taxpayer ID, would have to submit their family to the credit card companies to enable them to track the transactions, creating privacy concerns.

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