As part of an effort by Congress to close the tax gap, the 2008 Housing Assistance Tax Act added new section 6050W to the Internal Revenue Code (“IRC”). This new IRC section requires “merchant acquiring entities” to file information returns (Form 1099-K) with the Internal Revenue Service (“IRS”) and payees reporting the aggregate gross amount of transactions from credit cards, debit cards and gift cards as well as third party transactions such as PayPal. There is a de minimis reporting threshold contained in the new law that says third party transactions must exceed 200 in number and aggregate more than $20,000 for the year before reporting is triggered. This requirement takes effect for the 2011 tax year (for 1099-K’s filed in 2012).
The "merchant acquiring entity" is defined as the bank or other organization with the contractual obligation to make payment to participating payees (“merchants”) in settlement of payment card transactions. Note that in many cases, the bank that issues a credit card does not have a relationship with the merchant that is paid. Rather, it is the merchant’s bank (the merchant acquiring bank) that solicits merchants to accept credit card payments and facilitates the authorization for card transactions to be accepted at merchant locations. These functions are often contracted out to third parties, who become the merchant acquiring entity for purposes of the reporting requirement under Code Sec. 6050W. If two or more persons qualify as a merchant acquiring entity with respect to a reportable transaction, then only the person that in fact makes the payment (i.e., submits the instructions to transfer funds in settlement of the transaction) must file Form 1099-K. A sample Form 1099-K can be found here.
In order to prevent duplicative Form 1099 reporting, the Internal Revenue Service (“IRS”) amended the regulations under IRC Section 6041 to provide that any payment card or third-party network transaction that otherwise would be reportable under both IRC Sections 6041 and 6050W should be reported under Code Sec. 6050W (and not Code Sec. 6041). In other words, a taxpayer who purchases services in excess of $600 during a tax year normally would be required to file Form 1099-MISC with the IRS and the (non-corporate) service provider. However, if the service provider accepts a debit card as payment, the taxpayer would have no reporting requirement to the IRS or the service provider on Form 1099-MISC. Instead, the service provider’s bank (merchant acquiring entity) would issue a 1099-K to the IRS and the service provider reporting the gross amount of transactions for the year. The 1099 exception for corporations under IRC section 6041 does not apply to the 6050W rules, so corporations that would not receive a 1099-MISC if a cash transaction occurred would receive a 1099-K if the same transaction occurred using a purchasing card instead.
The Treasury Inspector General for Tax Administration’s (“TIGTA”) Report dated July 26, 2011 found that the IRS’s redesigning of tax year 2011 income tax forms may not facilitate a direct match between sales reported on Form 1099-K and amounts reported on tax returns. For example, when a customer requests cash back as part of a retail transaction, the amount of cash back gets reported on the 1099-K, even though it is not income to the merchant. TIGTA recommended the following change for Schedule C of IRS Form 1040:
TIGTA made similar recommendations for changes to Form 1065, Form 1120 and Form 1120S.
Failure to obtain a merchant’s taxpayer identification number (“TIN”) or reporting a name/TIN combination on Form 1099-K that does not match IRS records can cause a "reportable payment" to be subject to a 28% backup withholding. An important component to these rules is the manner in which a TIN must be furnished by a payee. The person responsible to file Form 1099-K is permitted to accept an uncertified TIN from the participating payee. This eliminates the need to obtain a Form W-9, Request for Taxpayer Identification Number and Certification, from the merchant and instead allows the merchant to furnish a TIN either orally or in writing. The IRS’s TIN Matching Program can be used by filers to check the accuracy of name/TIN combinations furnished by merchants against the IRS database. Utilizing the program can help minimize the number of incorrect TINs reported on Forms 1099-K and, in turn, minimize the possibility of backup withholding from the merchant’s payments.
These new reporting requirements apply to transactions entered into after December 31, 2010 (i.e., 2011 calendar year reporting due in 2012). Also in keeping with the statute, the amendments to the backup withholding provisions apply to amounts paid after December 31, 2011 (a one-year delay). Merchants should be sure their accounting records will provide the necessary information to complete the newly designed tax forms and to reconcile the amounts reported on multiple Forms 1099-K. In addition, taxpayers should review their 1099-MISC reporting procedures to be certain payments made with purchasing cards are properly excluded from 1099-MISC reporting. For more information, please contact your Schneider Downs representative.
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