Within the 700-page Housing and Economic Recovery Act of 2008 is an important new measure that requires “merchant acquiring entities” to report the gross amounts of their merchant customers’ payment card transactions to the IRS. A “merchant acquiring entity” is defined as the bank or other organization contractually obligated to make payment to merchants in settlement of payment card transactions. These new requirements apply to transactions beginning on January 1, 2011 (with required reporting and tax withholding to begin in 2012).
In order to identify under-reported sales, the IRS will collect information via third-party corroboration of the
amount of a merchant’s credit card, debit card, gift card (open loop only) and eCommerce (such as PayPal or Bill Me Later) transactions. The IRS also requires the reporting entity to collect and verify the tax identification number (TIN) and the information (legal name and address) associated with that number for its merchant customers. If a merchant fails to provide its TIN or if there is a discrepancy between the merchant’s TIN and the associated information in the reporting entity’s records and the IRS’ records, the reporting entity will be required to withhold 28 percent of the merchant‘s future payment card transactions until the issue is resolved.
This withholding provision goes into effect for transactions starting in 2012 (unlike the reporting provisions of the legislation which apply to transactions beginning on January 1, 2011).
Resulting Requirements for Reporting Entities and Merchants
– Reporting entities must collect and verify the TINs and associated legal names and addresses of their
– Beginning with the 2011 tax year, reporting entities are responsible for filing individual information returns (presumably a Form 1099) reporting the total annual dollar amount of payment card transactions for each of their merchant customers. In January 2012, reporting entities will file the information return with the IRS and distribute a corresponding statement for the 2011 tax year to each merchant.
– Beginning in 2012, reporting entities must withhold 28 percent of payment card transactions for any merchant whose TIN/name combination used by the reporting entity does not match the merchant’s information on file with the IRS.
– Merchants must ensure that their TIN/name combination on file with the IRS matches the information held by the reporting entity for their payment card transactions.
– When merchants receive copies of the information returns filed by their reporting entities each year, merchants should compare that information with their own records to validate the accuracy of the information.
EDITORS NOTE: Institutions now usually require a W9 with any contractual paperwork for merchant services to ensure accuracy for IRS reporting requirements. The penalties are high for a mismatch and it is strongly recommended merchants review prior IRS filings for accuracy.