IRS Wants Payment Information

Posted by Mark Brousseau

An interesting article from the Washington Business Journal:

IRS may get reports on credit card payments
Kent Hoover, Washington Bureau Chief

Congress is on the verge of requiring payment card processors to tell the Internal Revenue Service how much money merchants receive through credit card and debit card transactions.

The Bush administration thinks this kind of third-party reporting of revenue would encourage more businesses to report their income accurately.

This could help close the tax gap -- the difference between what the government is owed in taxes and what it actually collects.

Congress views the requirement as an easy way of raising revenue to pay for other tax cuts or additional government spending. It estimates the proposal could raise nearly $10 billion over 10 years.

Under pending legislation:

... Financial institutions that reimburse merchants for credit card or debit card purchases would report annual payments for each merchant to the IRS

... These payment processors would be required to validate the Taxpayer Identification Number (TIN) for each merchant

... If the TIN couldn't be validated, the payment processors would be required to withhold taxes from the merchant

... These requirements also would apply to third-party organizations, such as PayPal, that serve as intermediaries for purchases. In this case, reports would not have to filed for merchants who have $10,000 or less in transactions or 200 or fewer transactions.

Both the House and the Senate included the reporting requirement as a revenue raiser in separate bills that appear headed for passage: House legislation to shield 21 million taxpayers from the alternative minimum tax (H.R. 6275) and Senate legislation to help homeowners and the housing industry (H.R. 3221).

The new requirement, however, couldn't help fund both bills, so the House and Senate would have to resolve this issue before the reporting rule could become law.

This gives small business groups and credit card processors more time to fight the requirement. They contend the proposal would be costly to implement and lead to unfair audits of small businesses that report their income accurately.

It may be too late to stop the requirement, however.

"This becomes very difficult to defeat because of the fact it's become an item that's accepted as a valid revenue raiser that can be used," said Giovanni Coratolo, director of small business policy for the U.S. Chamber of Commerce.

The appeal of the reporting requirement was summed up by Sen. Max Baucus, D-Mont.

"This proposal does not raise taxes on anyone," said Baucus, who chairs the Senate Finance Committee. "These information reports would just cause people to file more accurate returns."

Proposal costly for businesses
Opponents of the proposal doubt it would raise much revenue, however. Credit card receipts already show up on a merchant's bank statement, so tax cheats aren't likely to underreport this income, said Kristie Darien, executive director of the National Association of the Self-Employed.

The legislation, however, would require credit card processors to withhold taxes on payments to a merchant whose taxpayer identification number (TIN) couldn't be verified. But there are bound to be errors in the TIN verification process, Darien said, meaning some small businesses could have 28 percent of their credit card reimbursements withheld until the errors are corrected.

That could "put a severe strain on millions of American families counting on a self-employed breadwinner," she said.

Credit card processors said the proposal would cost them millions of dollars as well.

"Our systems do not currently track merchant payment transaction to TINs, and it will be extremely expensive and time-consuming to reprogram our systems to comply with the new mandates," said Kim Stubna, director of public policy for First Data Corp., a Denver-based processor of electronic payment transactions.

Small businesses fear these costs would be passed on to them through higher fees.

Donald Boeding, general manager of merchant services for Fifth Third Processing Services in Cincinnati, said the requirement "will likely strain the relationship between payment processors and merchant customers." Some merchants might decide that accepting credit cards is no longer worth the hassle. A move to cash would make it "less likely that the IRS will be able to track taxable income," he said.

IRS to profile businesses?
Small business lobbyists fear the IRS would use the reports to create industry profiles and audit small businesses whose credit card usage deviated from the norm.

That is "enormously concerning to us" because of "the great diversity" among small businesses, said Todd McCracken, president of the National Small Business Association. A difference in credit card usage "doesn't mean anything funny is going on," he said.

Plus, a company's actual revenue from credit card transactions would differ from what is reported because of chargebacks, returns, refunds, deposits and cash back on debit card purchases.

Yet small businesses could be audited "for no good reason" on the basis of these reports, McCracken said.

Coratolo said Congress would reject this type of profiling if individuals, not businesses, were being targeted.

"This is the camel's nose under the tent," he said.

Treasury Department spokesman Andrew DeSouza said he "wouldn't speculate" on what the IRS would do with this credit card data. But he said businesses also would get a copy of the reports, which would help them file accurate tax returns.