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1099-K Update and How It Affects Merchants and Credit Card Processors

Fri, 20 Jul 2012 11:09:51 GMT

The Housing Assistance Tax Act of 2008 contained a section requiring those who process credit cards to report gross sales for every merchant account in January 2012 for the preceding year. This requirement calls for yearly filing on form 1099-K, and processors are asked to compare the merchant’s federal tax identification number (TIN) and company name with the Internal Revenue Service’s (IRS’s) database for verification.


What Must Be Done


When there is no match, processors have to contact merchants via letters, phone calls, emails or a notice on their monthly statement, and it is essential for their merchant accounts to respond? If they fail to do so, the IRS requires processors to withhold 28 percent of all deposits. The funds will be held by the IRS and sent to the merchants when they submit their tax forms. The merchants may also have to pay a fine of $150 per TIN if they fail to comply with this requirement.

Effect on Processors

To meet these new e-commerce requirements, processors will be investing a significant amount of time, money and effort. What the industry will do in general is still unknown, but at his point, some major processors are already assessing a $99 annual fee.

Why Plans Have Changed

The IRS has set aside a plan requiring companies that accept credit cards to reconcile the total receipts reported when they file their income taxes with the totals that various third parties report paying to merchants related to credit card transactions.

In February, the National Retailers Association (NRA), along with other groups representing small businesses, met with IRS representatives to express their concerns with this proposed legislation. They explained that the pending reconciliation mandate would generate huge amounts of paperwork for businesses. In October, the IRS decided to delay the requirement for a year, and now it seems to have rejected the idea altogether.

Where Things Stand Today

Third-party payers will continue to send 1099-k forms to restaurants and other businesses, but the reconciliation requirement has been officially withdrawn. To ensure that the IRS won’t attempt to revive the proposed reconciliation mandate, members from both the House and Senate have introduced various bills with this as their objective. On Feb. 10, members of the Senate Finance Committee, Maria Cantwell (D-Wash.) and John Thune (R-S.D.) introduced a Senate bill after Bobby Schilling (R-Ill.) and Aaron Schock (R-Ill.) introduced that legislation in the House.

Dangerous Side Effects

Some small business owners feel that the 1099-K form and all that goes with it will cause them to accept all payments in cash or by check from now on, rather than deal with credit card users. This form could also prevent people from selling merchandise on E-bay because they will have to complete the 1099-K form if they sell things on the internet and are paid by PayPal or some other third party.


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