Beginning for sales made in 2011, payment settlement entities (e.g., merchant card processing companies like American Express, Visa and MasterCard merchant banks) will be required to report each business’s payment transactions to the IRS.
To facilitate this reporting, the IRS has developed Form 1099-K which will report a merchant’s credit and debit card income for the year and will be issued to the merchant in the early part of the subsequent year just like 1099s for interest, dividends, pensions, etc., are. Unlike other 1099 forms, the 1099-K will actually break the income down by the month. The first 1099-Ks will be issued in early 2012.
Individuals and merchants with Internet sales (e.g., eBay and their online sales) that utilize an internet payment system such as PayPal can expect to see those sales included in this new reporting requirement if their annual third-party transactions total more than $20,000 and the number of transactions is over 200.
This new reporting requirement provides the IRS with a far-reaching compliance tool. It will allow them to determine a business’s gross income from credit/debit card sales and make it easier to segregate those payment card sales from cash sales.
The IRS will then be in a position to see if the credit card dollar figure reported on the merchant’s tax return matches the bank’s information return. This also allows them to see if a business’s other sales from cash and check payments makes sense in the context of the firm’s overall business.
We can probably expect the IRS to develop statistics for various types of businesses related to the ratio of cash payments to credit payments, as a means of imputing cash payments for merchants that do not report a reasonable amount of income over and above that reported by the payment processors.
How Does This Affect You?
(1) You can expect your bank or other payment settlement services to be verifying your tax ID number and contact information in the next few months leading up 2011. Be sure that the information you provide them is correct and matches the information on file with the IRS.
(2) If you fail to provide the settlement entity with the information requested or the information does not match the information on file with the IRS, the settlement entity is authorized to withhold 28% of the payment as withholding. You will receive credit for the withholding when your tax return is filed, but, if the withholding is in excess of what you owe, you will have to wait until you file your return to get the excess back.
(3) Make sure that your business has an appropriate accounting system in place to properly record card payments so that they can be reconciled with the 1099-K.
Payment Cards – A payment card, as defined by the IRS regulations, includes, but is not limited to, credit cards, debit cards, and stored-value cards (e.g., gift cards or similar cards with a prepaid value). A payment card also includes the acceptance as payment of any account number or other indicia associated with a payment card. The use of a payment card to obtain a loan or cash advance does not constitute a payment card transaction. The same holds true for the withdrawal of cash from an automated teller machine—it is not considered a payment card transaction.
If you have questions related to how the new reporting requirement for credit and debit card sales will impact your business, or what steps you should take to prepare for this new requirement, please give this office a call.