Wednesday, August 24, 2011
IRS rule 6050W was mandated by The Housing and Economic Recovery Act of 2008. The new rule is designed to help the IRS locate fraud and track revenue streams in the payments system. It is expected to bring the government at least $9 billion in new revenue annually.
Rule 6050W requires payment providers (that is, merchant acquirers and processors) to annually report sales information for any seller who received more than $20,000 and 200 payments during the year. It requires payment providers to annually submit this information on IRS form 1099-K.
Every 1099-K form is required to have a correct taxpayer identification number (TIN) and business name. Any 1099-K submitted with an invalid TIN or business name will be rejected. When a 1099-K is rejected, the IRS will send out a notice informing the payment provider of backup withholding liability if the 1099 is not properly filed within 30 days.
Failure to properly submit a 1099-K on time can result in severe penalties for merchants: the IRS requires withholding of 28 percent of the merchant's gross receipts until the business is in compliance. Payment providers can be fined up to $1.5 million for incorrect information returns, up to $1.5 million for incorrect payee statements, and $250 per error – with no cap – for intentionally ignoring the filing requirement.
Payment providers can be fined for missing or incorrect TINs, late returns, and information delivered in the wrong format. "The IRS is becoming a lot less lenient in assessing penalties," Lefebvre said.
In theory, the 1099-K filing process is straightforward: validate the TIN, validate the business name and submit the form. In practice, the process is more difficult. To eliminate errors, Lefebvre recommended payment providers check TINs and business names through the IRS' TIN Matching service, a free service that checks submitted TIN numbers against IRS records.
When there are errors or missing information in a TIN match batch, the agency returns either a CP2100 or CP2100A notice to alert the payment provider it may be responsible for backup withholding. This notice includes a list of merchants with missing, incorrect or unknown TINs, but it doesn't tell the payment provider which error is the problem with the account.
The payment provider has 15 days to contact errant merchants with a request to document and verify the TIN and business name. The merchant has 15 days to respond. Failure to correct the error within 30 days results in a B notice.
Lefebvre advised that when a payment provider receives a first B notice, it should send the account a clear, easy to understand cover letter explaining the problem. The letter should include the IRS W-9 tax ID number form. It should also have the payment provider's phone number, website and/or a FAQ page address for answering questions.
Lefebvre believes including a return envelope in the solicitation is a good idea because it generates a higher response. He also noted that when a merchant responds with a correction, the payment processor needs only to correct its records; it does not have to file a corrected return.
When a second B notice is sent, the IRS requires a Social Security Administration printout of the taxpayer Social Security number or the filing of form 147C – a request to the IRS for a previously assigned TIN.
The payment provider is required to send out two requests a year for TIN and business name corrections when it receives a CP2100 or CP2100A. By sending these notices, the payment provider cannot be held liable for penalties if another incorrect TIN and business name pair associated with the CP2100 or CP2100A is filed that year.
If a TIN remains uncorrected, the IRS sends out a proposed penalty notice, form 972CG, to the payment provider. The payment provider is required to respond to 972CG within 45 days. The payment provider can avoid the 972CG penalty if it can show it responded to the B notices properly.
Documentation is the key to avoiding 972CG penalties, Lefebvre stressed. Every abatement step – from process and procedures, to year-to-year progress, to mailings and responses and W-9 returns – should be kept in digital records.
An abatement letter to the IRS should include a history of the filing with the correct TIN or business name, or it should include documentation that the payee either submitted incorrect information or didn't respond to the solicitation for information.
"The best way to eliminate B notices is not to get them at all," Lefebvre said, adding that eliminating incorrect or missing information is not an easy process. "IRS TIN matching takes time, and it requires Social Security numbers, adjusted gross income and the signature of an officer of the company at least at the vice president level," he said.
Lefebvre said payment providers need "proactive validation" of TIN and business names. This means when a payment provider gets a CP2100 or a CP2100A, it should immediately contact merchants on the error list with requests for TIN and business name information. This should be followed by continuous resubmission of TIN matching information to the IRS until the data is cleansed of errors.
He also recommended using many forms of solicitation to get TIN and business name information. This includes mailing IRS W-9 forms, sending emails, posting letters, making telephone calls and putting information on how to correct the information up on the payment provider's website.
"When you get a B notice, load the data into the spreadsheet as soon as possible," he said. "The timer starts at the notice date or the date you received the notice from the IRS."
Lefebvre also recommended payment providers automate their B notice response processes so they can update their systems immediately upon receipt of corrected information. "You should have a way or system to feed the information back to the source," he said. "Doing this manually can be … burdensome." He added that labor savings alone can pay for the automation.
IRS publication 2108A explains how to access the agency's TIN matching program.
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