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.