An Internal Revenue Service announcement that it will not penalize independent sales organizations showing a “good faith” effort to supply the IRS with newly required merchant-transaction data for the 2011 tax year does not represent a total reprieve from the new regulations, a tax-compliance service provider says.
By incorporating the “good faith” measure, the IRS is providing additional guidance regarding its 1099-K reporting requirements and, in effect, is telling ISOs they understand mistakes could occur in trying to clean up merchant tax identities in databases and categorize transaction amounts under proper merchant codes, says Troy Thibodeau, executive vice president of Minneapolis-based Convey Compliance Systems Inc.
“You might say the IRS is not going to grade as tough on this first year of the test, but you still have to do the work, and you have to get A’s on the test in the future,” Thibodeau tells PaymentsSource. “If you get a C on the test the next year, you’ll be penalized.”
The new requirements call for ISOs to provide details on merchant transactions as part of a law enacted in 2008 to enable the IRS to more clearly view the dollar amounts of electronic payments and transfers. Earlier this year, the IRS released a document to help ISOs understand their new responsibilities (
In showing it understands there are many merchant accounts to process, the IRS also informed ISOs they would not have to withhold 28% of merchant funds for individual cases in which inaccurate or incomplete data are provided for the 2012 tax year, Thibodeau says.
However, the IRS also announced it will require ISOs to submit merchant classification codes for each merchant, which allows the IRS to more accurately compare the merchant with the transaction information being provided, Thibodeau adds.
In some cases, such as a golf course that also has a retail shop, the ISO may have to supply multiple classification codes and card-transaction amounts for each facet of the business, Thibodeau explains.
Some acquirers’ processing systems cannot accommodate a breakdown of several categories within one business. In those cases, the IRS says the ISO can report one classification code for the portion of the business generating the most dollars, but it must include the merchant’s entire transaction amount for all areas of the business, Thibodeau adds.
The definition of good faith remains a gray area when dealing with the IRS, but most cases come down to what an IRS agent discovers during an audit and how the ISO is able to explain the process used to compile the merchant information, Thibodeau says.
“Some organizations have things well-documented but may have let some manual errors slip by,” Thibodeau says.
Providing merchant classification codes will create even more work ISOs that already have a big task at hand ensuring the Tax Identification Number of the merchant matches the business name, Thibodeau suggests.
ISOs concerned about the time-consuming requirements have indicated they would outsource the IRS reporting tasks (
In addition, Thibodeau believes ISOs should stress efficiency in their IRS reporting system with merchants instead of charge fees for reporting transactions for tax purposes (
The biggest mistake an ISO could make would be to view the latest IRS guidance as “getting a pass” on following the regulations, Thibodeau says.
A much better approach is for an ISO to view it as a “breather” that gives more time to review the company reporting process and assure best practices are being applied, he suggests.
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