Information Reporting of Payments Made in Settlement of Payment Card and Third Party Network Transactions

The new reporting requirements are in section 6050W of the Internal Revenue Code (the Code), which was added by section 3091 of the Housing Assistance Tax Act of 2008, Div. C of Pub. L. No. 110-289, 122 Stat. 2653 (the Act). Section 6050W requires information returns to be made for each calendar year by merchant acquiring entities and third party settlement organizations with respect to payments made in settlement of payment card transactions and third party payment network transactions occurring in that calendar year. This requirement to make information returns applies to returns for calendar years beginning after December 31, 2010.

IRS OFFICIAL BULLETIN Links

December 2009

Proposed Regulations on Payment Card Transactions

May 2009

Information Reporting of Payments Made in Settlement of Payment Card and Third Party Network Transactions

Taxpayer Identification Number (“TIN”) Matching Program Is Available to Persons Required to Make Returns Under New Section 6050W of the Internal Revenue Code

EXCERPTS: Announcement 2009-6

Table of Contents

The US Patriot Act created new regulations for the finance industry regarding customer identification. As a result, when you complete a merchant application, the officer signing must also provide identifying information, in many cases, that application requests your social security number. The act itself does not specifically require a social security number.

What it requires:
The rule requires that financial institutions develop a Customer Identification Program (CIP) that implements reasonable procedures to:
1)    Collect identifying information about customers opening an account
2)    Verify that the customers are who they say they are
3)    Maintain records of the information used to verify their identity
4)    Determine whether the customer appears on any list of suspected terrorists or terrorist organizations

Collecting information:
As part of a Customer Identification Program (CIP), financial institutions will be required to develop procedures to collect relevant identifying information including a customer’s name, address, date of birth, and a taxpayer identification number – for individuals, this will likely be a Social Security number.  Foreign nationals without a U.S. taxpayer identification number could provide a similar government-issued identification number, such as a passport number.

Verifying identity:
A CIP is also required to include procedures to verify the identity of customers opening accounts.  Most financial institutions will use traditional documentation such as a driver’s license or passport.  However, the final rule recognizes that in some instances institutions cannot readily verify identity through more traditional means, and allows them the flexibility to utilize alternate methods to effectively verify the identity of customers.

Final Regulations Implementing Customer Identity Verification Requirements under Section 326 of the USA PATRIOT Act (PDF download)

Original press release is below:

April 30, 2003
JS-335

Treasury and Federal Financial Regulators Issue Final
Patriot Act Regulations on Customer Identification

The Department of the Treasury, the Financial Crimes Enforcement Network, and the seven federal financial regulators today issued final rules that require certain financial institutions to establish procedures to verify the identity of new accountholders.

The rules announced today were developed jointly by the Treasury Department, Treasury’s Financial Crimes Enforcement Network, and the seven federal functional regulators, including the Board of Governors of the Federal Reserve System, the Commodity Futures Trading Commission, the Federal Deposit Insurance Corporation, the National Credit Union Administration, the Office of the Comptroller of the Currency, the Office of Thrift Supervision, and the Securities and Exchange Commission.

These regulations are part of the Administration’s continuing work to implement the USA Patriot Act and prevent money laundering, terrorist financing, identity theft, and other forms of fraud while also providing financial institutions the flexibility they need to effectively implement the rules.

These final regulations implement section 326 of the USA PATRIOT Act, which directs that regulations be issued requiring that financial institutions implement reasonable procedures to (1) verify the identity of any person opening an account; (2) maintain records of the information used to verify the person’s identity; and (3) determine whether the person appears on any list of known or suspected terrorists or terrorist organizations.

The regulations apply to banks and trust companies, savings associations, credit unions, securities brokers and dealers, mutual funds, futures commission merchants, and futures introducing brokers.

Institutions subject to the final rules will be required to establish a program for obtaining identifying information from customers opening new accounts.  The regulations will require that institutions implement procedures for collecting standard information such as a customer’s name, address, date of birth and a taxpayer identification number (for U.S. persons, typically a social security number and for non-U.S. persons, a similar number from a government-issued document).

A financial institution’s program is also required, among other things, to contain procedures to verify the identity of customers within a reasonable period of time.  Many financial institutions may rely on examining standard identification such as a driver’s license or passport. However, the final rule gives financial institutions the flexibility to implement procedures to verify identity in other ways appropriate to their individual circumstances.

Financial institutions will have until October 1, 2003, to come into full compliance.  Publication of the final rules in the Federal Register is expected to occur later this week.

The Credit Card Accountability Responsibility and Disclosure Act of 2009, or the Credit CARD Act of 2009 was passed by Congress and signed into law by President Obama May 22, 2009. While most recognize it for consumer protections, TITLE V–MISCELLANEOUS PROVISIONS has several topics that relate to interchange fees and merchants:
Sec. 501. Study and report on interchange fees.
Sec. 503. Stored value.
Sec. 507. Small business information security task force.

SEC. 501. STUDY AND REPORT ON INTERCHANGE FEES.

(a) Study Required- The Comptroller General of the United States (in this section referred to as the ‘Comptroller’) shall conduct a study on use of credit by consumers, interchange fees, and their effects on consumers and merchants.

(b) Subjects for Review- In conducting the study required by this section, the Comptroller shall review–

(1) the extent to which interchange fees are required to be disclosed to consumers and merchants, whether merchants are restricted from disclosing interchange or merchant discount fees, and how such fees are overseen by the Federal banking agencies or other regulators;

(2) the ways in which the interchange system affects the ability of merchants of varying size to negotiate pricing with card associations and banks;

(3) the costs and factors incorporated into interchange fees, such as advertising, bonus miles, and rewards, how such costs and factors vary among cards;

(4) the consequences of the undisclosed nature of interchange fees on merchants and consumers with regard to prices charged for goods and services;

(5) how merchant discount fees compare to the credit losses and other costs that merchants incur to operate their own credit networks or store cards;

(6) the extent to which the rules of payment card networks and their policies regarding interchange fees are accessible to merchants;

(7) other jurisdictions where the central bank has regulated interchange fees and the impact on retail prices to consumers in such jurisdictions;

(8) whether and to what extent merchants are permitted to discount for cash; and

(9) the extent to which interchange fees allow smaller financial institutions and credit unions to offer payment cards and compete against larger financial institutions.

(c) Report Required- Not later than 180 days after the date of enactment of this Act, the Comptroller shall submit a report to the Committee on Banking, Housing, and Urban Affairs of the Senate and the Committee on Financial Services of the House of Representatives containing a detailed summary of the findings and conclusions of the study required by this section, together with such recommendations for legislative or administrative actions as may be appropriate.

EDITORS NOTE: I can only hope that the federal government will refer to prior reports including the Federal Reserve 2008 Payment Trends research project and the interchange fees report by federal reserve of Kansas City in 2005

SEC. 503. STORED VALUE. I will address this in a future blog post as it doesn’t affect merchant accounts in general.

SEC. 507. SMALL BUSINESS INFORMATION SECURITY TASK FORCE.

EDITORS NOTE: This section addresses a variety of security actions for small businesses, including storing credit card data. All businesses are required to be PCI Compliant to accept credit cards, but this business segment has been slow to comply. Recently, First Data enacted a new PCI Compliance fee for all level 4 merchants (small businesses) because most companies continue to fail when their compliance is checked.

Read the full Text of H.R. 627: Credit Card Accountability Responsibility and Disclosure Act of 2009, or the Credit CARD Act of 2009.