By: Javi Calderon
on Wednesday, December 28, 2011
IRS Hopes New Credit and Debit Reporting Law Helps Reduce Tax Gap
According to Doug Shulman, commissioner of the Internal Revenue Service, better information reporting in the tax system would help ensure that everyone pays the full amount that they owe in taxes. With Congress scrambling for any plausible solutions for reducing the obese, $15 million national debt, it becomes even more vital that the IRS implement policies to ensure that it receives every dollar it is owed.
In 2005 (before the depression began) the IRS estimated that the tax gap, the amount of money owed to them that goes unpaid, was between $290 and $375 billion. The IRS believes that underreporting on the part of individuals and businesses has created the disparity.
For this reason, a provision included in the Housing Assistance Tax Act of 2008 established increased reporting requirements for credit card and debit card transactions, starting in 2011.
The new reporting requirements do not affect the cardholder i.e. the customer, but do place quite a burden on payment processors. These firms are now required to provide annual reports, using a new form called the 1099K, for all merchants who conduct more than 200 transactions that year, or conduct transactions exceeding $20,000. One copy of the form must be sent to the merchant, another to the IRS.
At the end of the year, a merchant will see a separate line for total profits from credit and debit card transactions on their business tax return. With the help of the 1099K, the IRS will be able to match the merchant’s reported total to those recorded by the payment processor.
Third-party networks like Paypal and Ebay.com are also required to participate.
The IRS believes this new requirement will help them determine if both companies’ tax returns are correct and complete.
The increased reporting requirements place a heavy burden on debit and credit card processing companies and merchants. In short, both parties now have to be much more precise and thorough in their accounting and record keeping.
For example, in the past payment processors were not always certain that the business name and tax ID for a customer match what the IRS has on file for that company. Now, merchants will have make sure to provide the processor with their full legal name, address, and Employer Identification Number to be certain that the processor and the IRS have matching information.
Typically, merchants only keep track of net deposits. With the new requirements, they have to be able to identify profits, as well as all fees, refunds, cash back requests, and charge backs, incase a discrepancy comes up with the IRS. Accounting experts suggest tracking all these types of losses separately. Discrepancies with the IRS could lead to a payment processor being forced to hold off on payment for a merchant for the purpose of backup withholding, which could put some merchants in a bind financially.
Processors, who serve hundreds if not tens of thousands of small businesses, are now required to administer thousands of extra forms, one for every merchant that they serve. This requires extra staff and support in order to handle the increased responsibilities, and certainly increases the amount of data that they must collect and process in order to file.
The increased accounting requirements kicked in at the beginning of 2011, so merchants can expect their first 1099K in early 2012.
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