Some payments organizations want the U.S. Department of the Treasury and the Internal Revenue Service to clarify aspects of a law that takes effect next January requiring acquirers to report merchant credit and debit card transactions to the IRS, and they want penalty fees mitigated in the early stages of enforcement, according to comments submitted to the government agencies.
Merchant acquirers will have to report their retailers’ credit and debit card transactions to the IRS effective Jan. 1, 2011, under the Housing and Economic Recovery Act President George W. Bush signed into law in July 2008.
The Electronic Transactions Association, Elavon Inc., American Express Co. and First Data Corp. were among the organizations to submit comments on the proposed rules for the law. The agencies issued a draft of the proposed regulations Nov. 23 and closed the comment period Jan. 25. They intend to discuss the topics outlined in the comments during a public hearing on Feb. 10.
“The [Electronic Transactions Association] and a lot of businesses sent in comments to the proposed bill,” says Mary Bennett, director of government and industry relations for the Washington, D.C.-based association.
The regulations have the potential to affect many organizations, including independent sales organizations and processors, she says. “Everyone will have a different role to play, but some are more prepared than others,” says Bennett.
The association filed multiple comments with the agencies, including a recommendation that the IRS set a minimum reporting threshold that would exempt merchants processing fewer than $20,000 in transactions annually from the reporting requirement and a request that the agency waive penalties related to compliance failure for a two-year period. The association also suggested that the agency improve its system for matching taxpayer identification numbers to merchants in anticipation of an increased volume of verification requests.
AmEx similarly requested a minimum reporting threshold and a penalty waiver, among additional recommendations.
Multiple companies provided recommendations and requested clarification regarding the proposal’s treatment of non-U.S. merchant-service providers.
“The non-U.S. payer part of the proposed regulation is a major concern,” says Bennett. Under the proposed regulation, a foreign payment-service entity would not be required to report to the IRS payments made to merchants that do not have a U.S. address if that entity neither knows nor has reason to know that the merchant is U.S.-based, says Bennet. However, service providers in the U.S. must verify that a merchant is a foreign entity.
The difficulty in obtaining timely and valid documentation “from foreign payees, who have no U.S. presence and lack a U.S. [taxpayer identification number], will result in backup withholding on payments to foreign merchants,” the association wrote in its comment.
U.S.-based service providers “will be subject to the administrative burden of collecting documentation on a huge number of merchants for whom it already has foreign addresses on file in order to establish foreign status” while foreign entities “will not be subject to this burdensome and costly exercise,” says Bennett.
As drafted, the proposed regulations are “burdensome” to U.S.-based service providers, placing them at a disadvantage when competing with non-U.S. entities in foreign-merchant acquiring because non-U.S. entities are not subject to the same requirements, First Data noted in its comments to the agencies.
Elavon and AmEx similarly discussed concerns surrounding the foreign-based merchants aspect of the regulations in their comments.
Merchant-service providers today should be verifying their clients’ taxpayer identification numbers with the IRS. They “need to get their current clients done as quickly as they can,” says Bennett. As the deadline draws near, more verifications will flood the agency and slow the process, she notes.
“The IRS system is not state of the art,” she says. “It’s not built to take the volume of this.”
