The Internal Revenue Service has issued a set of proposed regulations for reporting on credit and debit card transactions starting in 2011.

Doug Shulman

A provision that was enacted as part of the Housing Assistance Tax Act of 2008 requires that the gross amount of payment card and third-party network transactions be reported annually to participating merchants and the IRS starting with transactions in calendar year 2011. The provision is designed to improve voluntary tax compliance by business taxpayers and help the IRS determine whether their tax returns are correct and complete.

“Time and time again, we have seen that better information reporting helps the tax system work better by ensuring that everyone pays what they owe,” said IRS Commissioner Doug Shulman in a statement. “The new law gives us an important new tool for closing the tax gap and also provides business taxpayers better documentation to compute and report their income and expenses. The IRS will work closely with stakeholder groups to ensure a smooth implementation of this new program."

The new regulations propose rules to implement reporting of credit card, debit card and similar transactions, as well as transactions settled through third-party payment networks, such as third-party organizations that settle online transactions. The IRS also released for comment a draft version of a new Form 1099-K, “Merchant Card and Third-Party Payments,” which will be used to make these reports. Form 1099-K is similar to the existing Forms 1099 used to report interest, dividends and other payments. The first information return covering calendar year 2011 must be filed with the IRS and furnished to participating merchants in early 2012.

The new law requires banks and other payment settlement entities to report payment card and third-party network transactions with their participating merchants. Individual cardholders are unaffected by this requirement, and none of the cardholder’s personal information will be shared with the IRS.

Among other things, the proposed regulations describe who is required to file a return and which payment card and third-party network transactions are subject to the reporting requirement. The proposed regulations also provide numerous examples.

Comments on the new regulations and form should be sent to the IRS by Jan. 25, 2010. A public hearing is scheduled for Feb. 10, 2010, in Washington, D.C. The proposed regulations provide details on submitting comments or participating in the public hearing.

The IRS said it would work closely with stakeholders to ensure the smooth implementation of the new information reporting program, including the mitigation of penalties in the early stages of implementation for all but particularly egregious cases.