Certain definitions within new Internal Revenue Service rules requiring payment processors and merchant acquirers to track merchants’ transactions and report them to the IRS beginning next year are creating additional hassles, some industry observers say.
The Internal Revenue Service on Aug. 16 published in the Federal Register its rules for how acquirers and processors should report their merchants’ credit, debit and gift card transactions to the agency. The rule goes into effect Jan 1, 2011.
Signed into law in 2008, the IRS reporting measure is meant to ensure that merchants report all of their sales to ensure proper tax collection. Credit, debit, gift card and automated clearinghouse transactions are covered by the legislation.
The rule covers companies that settle payment transactions with merchants. Merchants will receive an IRS 1099-K document that contains the gross amount of transactions made to them.
Overall, the final rules clarify some issues for acquirers and processors, but they contain potentially confusing and problematic definitions in some instances, says Paula D. Porpilia, principal at TIN Compliance Consultants, a Berkeley Springs, W.Va.-based firm.
Particular problems surround the IRS’ definition of the “gross amount” that is reported to the tax agency.
The rule states that the total dollar amount of payment transactions regardless of adjustments, discounts, fees, refund or other deductions has to be reported.
“It should be payments,” not total transactions, Porpilia tells PaymentsSource. Reporting total transaction amounts will not reflect the actual revenue collected by the merchant, as would be the case if the IRS said acquirers had to report payments to merchants, she says.
The distinction is important because credits or fees will not offset the total transaction amount, Porpilia says. “It’s just straight sales.”
In some instances an acquirer has to withhold settlement funds—at 28% of the total—because of merchant noncompliance with the IRS rule. When that happens, the acquirer has to use the transaction amount, and not the actual payment amount, to settle or process the transaction, she says. “The effective rate will be way more than 28%,” Porpilia says.
A third complication is that the company processing a merchant’s transactions may not be the entity making the settlement to the merchant’s account. These two companies will have to communicate with one other to ensure the merchant’s 1099-K is properly issued with the correct amount, she says.
“If [the IRS] had just said ‘payments,’ everyone would know what that was and you wouldn’t have to call anyone,” Porpilia says.
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