The merchant card reporting program, in place since January of this year, may pose some problems that were unanticipated by Congress when it was passed as part of the Housing and Economic Recovery Act of 2008.
The law requires banks and other payment-settlement services to report gross annual receipts to the IRS of their merchant customers’ payment card transactions. The reporting will be done on Form 1099-K, copies of which will be sent to the IRS and to the merchant.
The goal of the program is to assist the IRS in matching income from sales to income reported on tax returns. The law requires backup withholding, in the case of merchants who do not provide a valid Taxpayer Identification Number and name that match IRS records.
There is an exception for smaller merchants. No reports will be required where total payments to a merchant are $20,000 or less, and the total number transactions are not greater than 200.
While the original estimate was that the program would result in an additional $10 billion in revenue over 10 years, other estimates have varied widely.
“The problem that many small businesses will face is that their gross transactions are being reported and most small businesses just report the net sales on their tax returns, so by definition we have a mismatch,” said Roger Harris, president of Padgett Business Services.
“Anybody that takes credit or debit cards will get a Form 1099-K that will have reported the gross amount of their credit or debit card transactions. The gross amount is the sticking point,” he indicated.
“For example, you sell something for $100 and collect $7 in sales tax. It’s the $107 amount that gets reported to the IRS and the business owner, but most business owners will only report the $100 on their tax return, so they’ll be off by $7. But the tax forms have been changed to require that the same amount on the Form 1099-K be shown on the tax forms to allow a match to take place. What’s new this year is now I must report $107 on the tax form, and I have to account for the $7 difference on that same form.
“If it were only the sales tax, it wouldn’t be a problem,” he observed. “The IRS recognizes there will be mismatches and has asked that numbers that cause the mismatch be reported on the tax form as an adjustment. The sales tax is an obvious adjustment, but there are others – tips in a restaurant, refunds, and cash back in the case of debit cards are just a few.”
“Most people don’t have those records right now,” Harris continued. “Every day when they account for cash back, tips, etc, they will now have to create permanent records to record those transactions. And the only reason they need that information is to put numbers on a tax form.”
The result, according to Harris, could be one of three problems: “A bad match, an audit problem, or an increased burden on small business owners to avoid problems one and two.”
Of course, the matching program isn’t the fault of the IRS – it’s just using the tools that congress mandated. There may be a lack of understanding of the extent of the program, which includes the requirement for a direct match and the records needed to reconcile that match. While there’s no huge outcry yet for a change in the law, congress has been persuaded to lighten the burdens it has imposed in the past. The repeal of the expanded 1099 reporting requirement for payments to vendors of $600 or more comes to mind.
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