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Credit Card Merchant Services Now Required to Report Credit Card Transactions
Small business, restaurant servers and consumers to bear the burden.
| According to the IRS, "The provision was enacted as part of the Housing Assistance Tax Act of 2008 and is designed to improve voluntary tax compliance by business taxpayers and help the IRS determine whether their tax returns are correct and complete." |
As part of the Housing Assistance Tax Act of 2008 Congress passed yet another new information reporting requirement that will cost small businesses money at a time when cash flow is critical to survival. Beginning in 2011 banks and credit card merchant services companies will be required to prepare and file Form 1099 K reporting a variety of different merchant transactions, despite objections raised by the financial services industry.
Merchants who presently pay transaction bank and merchant service charges presently charged for the privilege of accepting customer credit cards, presently ranging between 2.75% and 3.5%, will see their rates increased as a result of this new requirement as they pass the cost of complying with the new law to their customers. Small businesses already reeling from the recession will be hurt hardest by these increases and will be forced to increase their prices for goods and services to compensate for the additional costs.
Waiters and waitresses who are paid a reduced minimum wage and depend on their tips to make ends meet will be hammered by this new law as most restaurant customers pay by credit card, including tips. Restaurant owners have little choice but to reduce the server's tips by the credit card merchant fees, and so the servers will see less at the end of the shift. For those servers who have already seen a decline in business resulting from the recession as well as a dramatic reduction in tips received as a percentage of the tab, these new merchant fees will hurt them even more.
Many small businesses, especially retailers, will find it difficult to increase prices to pass on the added cost and remain competitive will see their margins shrink as well.
Although it has long been acknowledged that the Tax Gap primarily results from the underground cash economy, according to IRS Commissioner Doug Shulman, “Time and time again, we have seen that better information reporting helps the tax system work better by ensuring that everyone pays what they owe.” “The new law gives us an important new tool for closing the tax gap and also provides business taxpayers better documentation to compute and report their income and expenses. The IRS will work closely with stakeholder groups to ensure a smooth implementation of this new program."
This new law, in my opinion, only creates a secondary layer of information as all merchant service payments are already recorded by banks and reported on bank statements, and as credit card purchases are only a percentage of total sales, it will be of little benefit to the IRS in flagging unreported sales and in fact will only increase the burden of an already overworked and understaffed IRS which will ultimately result in increased taxpayer costs to fund the additional IRS workload.
Similar to recent actions by many banks who were quick to increase credit card rates and decreased credit limits after it was announced that such actions would be prohibited IN THE FUTURE, although the reporting requirement does not go into effect until tax year 2011 banks and credit card merchants are expected to begin their fee increases long in advance in order to prepare for the new tax compliance burden.
One can't help but wonder what goes into the thought process of our representatives, supposedly elected to serve our best interests, when enacting laws that ultimately serve to hurt our economy more than help it.
Below is the official IRS notice IR-2009-106 dated November 23, 2009:
Issue Number: IR-2009-106IRS Issues Proposed Regulations on Reporting Requirement for Payment Card and Third-Party Payment Transactions WASHINGTON — The Internal Revenue Service today issued proposed regulations under a new statute requiring that, starting with transactions in calendar year 2011, the gross amount of payment card and third-party network transactions be reported annually to participating merchants and the IRS. The provision was enacted as part of the Housing Assistance Tax Act of 2008 and is designed to improve voluntary tax compliance by business taxpayers and help the IRS determine whether their tax returns are correct and complete. “Time and time again, we have seen that better information reporting helps the tax system work better by ensuring that everyone pays what they owe,” said IRS Commissioner Doug Shulman. “The new law gives us an important new tool for closing the tax gap and also provides business taxpayers better documentation to compute and report their income and expenses. The IRS will work closely with stakeholder groups to ensure a smooth implementation of this new program." These proposed regulations, posted today on IRS.gov, propose rules to implement reporting of credit card, debit card and similar transactions, as well as transactions settled through third-party payment networks, such as third-party organizations that settle online transactions. The IRS also released for comment a draft version of new Form 1099K, Merchant Card and Third-Party Payments, which will be used to make these reports. The new law requires banks and other payment settlement entities to report payment card and third-party network transactions with their participating merchants. The IRS emphasized that individual cardholders are unaffected by this requirement, and none of the cardholder’s personal information will be shared with the IRS. The IRS has created Form 1099-K, which is similar to the existing Forms 1099 used to report interest, dividends and other payments. The first information return covering calendar year 2011 must be filed with the IRS and furnished to participating merchants in early 2012. Among other things, the proposed regulations describe who is required to file a return and which payment card and third-party network transactions are subject to the reporting requirement. The proposed regulations also provide numerous examples. The IRS welcomes comments on these proposed regulations and the draft Form 1099-K. Comments must be received by Jan. 25, 2010, and may be submitted electronically, by mail or hand delivered to the IRS. A public hearing is scheduled for Feb. 10, 2010, in Washington, D.C. The proposed regulations provide details on submitting comments or participating in the public hearing. The IRS continues to work closely with stakeholders to ensure the smooth
implementation of this new information reporting program, including the
mitigation of penalties in the early stages of implementation for all but
particularly egregious cases. |