The acquiring industry is outsourcing some of the work involved with a new requirement to report merchants’ transactions to the Internal Revenue Service, a task some have characterized as worse than a bad dream.
“This is a nightmare,” Greg Cohen, president of U.S. operations at Toronto-based Moneris Solutions, said of the requirement earlier this month during a panel discussion at the Western States Acquirers Association 8th Annual Conference in Burlingame, Calif. “There is a lot to do here.”
For the first time, the IRS is compelling the acquiring industry to report every merchant’s transactions. The requirement grew out of the Housing and Economic Recovery Act of 2008 and is intended to prevent merchants from filing fraudulent or erroneous federal income tax returns.
The biggest challenge the regulation presents arises with matching merchants’ legal company names and their tax identification numbers as they appear in an independent sales organization’s database with the versions listed in IRS records, Cohen told attendees at the association gathering. Unless every letter of the name and every identification number matches exactly, the acquirer cannot report the transactions, he noted.
Frustrated with unsuccessful attempts to pin down merchants to reconcile those mismatches, some ISOs are outsourcing the task, says Henry Helgeson, co-CEO of Merchant Warehouse Inc., a Boston-based ISO.
Merchant Warehouse is not using third-party help, but many ISOs are obtaining it from vendors that help the industry comply with Payment Card Industry data-security standards, Helgeson says.
One such vendor, Orem, Utah-based SecurityMetrics Inc., in June began offering ISOs help with IRS reporting mismatches. Six ISOs were using the service by Oct. 14, and more were to get under way this week, Jake Young, the company’s manager of business development, tells PaymentsSource.
The ISOs typically have mismatched information for 25% to 50% of their merchant accounts when they turn to SecurityMetrics for help, Young says.
Larger ISOs seem to require help more often than smaller ISOs, Young says. ISOs or agents with 400 or fewer accounts know many of their merchants personally and could persuade them to help reconcile the names and identification numbers, he notes.
SecurityMetrics contacts merchants to work on matching by email, fax or phone, Young says. ISOs typically rely only on direct-mail requests, he suggests.
The vendor tries to drive merchants to an automated site or to the company call center, Young says.
On the site, prompts direct the merchant to enter the company name and identification number. A response from the IRS indicates whether the merchant has entered information that matches the information in the government database in less than five seconds, he says.
“Our average is two attempts to get a match,” Young says. Sometimes, however, merchants enter information 13 or 14 times before achieving a match, he notes.
With such a quick response, however, the merchant can remain in front of the computer screen and keep entering numbers or letters until the data match, Young says.
Most ISOs working on their own tend to submit batches of merchant responses and receive notification of mismatches from four to 48 hours later, he says.
SecurityMetrics also maintains a call center with 350 representatives trained in IRS reporting and ready to field calls from merchants, Young says.
If merchants have not responded to pleas for help in reconciling the numbers and names by Dec. 1, Security Metrics intends to begin making outbound call-center calls to them. The company’s representatives are trained to allay the fears of merchants reluctant to provide names and Social Security numbers over the phone, Young says.
Time to put the data in order is running out, notes Young. All merchants are required to have a valid identification number on file with the IRS by Jan. 1. If the number has nine digits with no letters and no repeated numbers, the IRS will accept them until acquirers file 1099-K reporting forms at the end of March, he says.
If the identification number or company name on the 1099K does not match with the IRS records, acquirers then have two weeks to reconcile the numbers and names before the law compels them to begin withholding 28% of the funds from a merchant’s transactions, Young says.
Processors are responsible for placing the withheld funds in an IRS depository, Young says.
States also are beginning to tack on a similar withholding requirement. California is requiring 7% withholding, and Maine is calling for 5%, Young says. Five or six other states may adopt similar requirements by the end of the year, he says.
“This is going to be crippling for a lot of businesses,” Young says of the withholding requirement. Many may switch processors or stop accepting cards as a result, he predicts.
The requirement represents an opportunity, however, for third-party providers of assistance, says Gil B. Luria, senior vice president at Los Angeles-based Wedbush Securities LLC.
“The best way to sell a product is if there is a regulatory need,” Luria says.
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