A new tax reporting requirement directed at payment processors and acquiring banks may pose significant compliance difficulties for some companies, as well as economic damages to merchants and processors - unless processors come up with a fast, effective and reliable way to ensure they have valid tax identification numbers (TINs) and business names for every account.
The payments industry has known about the requirement to annually file 1099-K forms for most accounts since Congress passed The Housing and Economic Recovery Act of 2008. This legislative requirement, which goes into effect Jan. 1, 2012, is designed to assist the Internal Revenue Service's fraud detection and tax collection. The Congressional Office of Management and Budget estimated the new rule could bring in more than $9 billion in additional tax revenue. The industry has also long known of the corresponding requirement that processors will face penalties unless they submit valid TINs and business names for each of the 1099-K forms filed.
Penalties for noncompliance - including failing to report and filing with incorrect TINs and/or incorrect business names - are severe. Noncompliance can result in backup withholding of up to 28 percent of the noncompliant merchant's gross receipts. Processors face penalties of up to $100 per error (up to a maximum $1.5 million) for information returns, $100 per error ($1.5 million maximum) for payee statements, and $250 per error (no maximum) for intentional disregard. IRPAC complaints
The Information Reporting Program Advisory Committee, a group of payments industry professionals who act as official advisers to the IRS on payment matters, urged the IRS to delay implementation of the new rules and relax compliance penalties until the difficulties of the reporting requirements are sorted out.
The new reporting rule "allows insufficient time for many reporting organizations to determine whether they, in fact, must report and, if so, whether they can establish the necessary procedures and systems to reasonably comply with the rules," IRPAC Chair Elizabeth Thomas Dodd wrote to the IRS in March 2011. "The fact is many reporting organizations simply cannot timely comply with these rules.
"IRPAC believes that the implementation of section 6050W reporting is so significant that it is unlikely that many of those subject to these rules, particularly in the context of third-party network transactions, will be able to timely comply by the current effective date.
"It is unlikely, if not impossible in many cases, for business software providers and the IT functions of reporting organizations to develop and test software that conforms to the rules in sufficient time to allow for reasonable compliance with the section 6050W rules."
IRPAC recommended postponing the effective reporting date for one year or making the reporting optional for 2011 and 2012. It also recommended "adoption of a much more lenient standard for penalty relief during the transition period to section 6050W reporting." The IRS ignored IRPAC's request for a delay.
SecurityMetrics Inc., an Internet security firm, estimates less than half of the acquiring banks in the United States have begun the compliance process.
"Given there are only five months until the deadline, this federal regulation is an extremely urgent issue for acquirers and ISOs," SecurityMetrics Chief Executive Officer Brad Caldwell, whose company sells a TIN matching service, said. "We've worked with acquirers whose merchant TIN validations are 15 to 90 percent complete. The law requires 100 percent. Most merchant businesses can't financially handle the federally mandated 28 percent withholding of all credit card revenues."
Payment processors and acquirers who are trying to comply with the new regulations also face technical problems. "There are some significant challenges for every business dealing with IRS TIN matching," Electronic Transactions Association Director of Government and Industry Relations Mary Bennett said.
Bennett listed three concerns she has as the industry attempts to interface with the IRS and come into compliance. The first is the age and size of the IRS TIN matching system. "The technology is not the latest and the greatest," Bennett said. "The system is a little bit dated. The system, I'm sure, gets overwhelmed with TIN information requests. You can't get a speedy match for a long list of TINs. You have to submit and wait, and then all you get back is the number of matching IDs and the number of mistakes, but there is no explanation of the mismatch."
The second problem Bennett pointed to with the IRS system is the "very mercurial TIN matching construction" and the "large possibilities for mismatched names" in the system. "Many business owners may not know themselves what name is registered with the IRS," she said. "This is a huge issue that these businesses need to be so precise." The difference between an ampersand and the word "and" in a name could throw off the TIN matching with the IRS, she said by way of example.
Finally, Bennett pointed out for many small merchants their TIN is the same as their Social Security number. Merchants may be understandably reluctant to share this information with processors they are not familiar with but who may have a legitimate need for the information.
There is a general feeling among those professionals surveyed by The Green Sheet that the largest acquirers are getting ready for the new rules and will be fully compliant by Jan. 1. Midsize to small acquirers, however, may be falling behind.
Wells Fargo & Co. Executive Vice President of Merchant Services Debra Rossi said her bank is ready. "Here's my view," she said. "We don't have a choice. It is a law. This is the new IRS mandate and at Wells Fargo we are ready." Convey Compliance Systems' Executive Vice President of Marketing Troy Thibodeau expects there will be "a lot of gnashing and wailing out there" when the new rule goes into effect. "The new reporting requirements are different than in times past," he said.
"In situations like these, you get waves of compliance. In the first wave are the early people who get into compliance early. The second wave says, 'holy cow, we are going to have to get into compliance soon or we are going to get penalized.' In wave three people are hoping the IRS is going to give lots of compliance time and leniency."
Thibodeau, whose company sells a TIN matching solution, said processors are not required to go verify that merchant TINs and IDs are properly matched before they submit their 1099-K data to the IRS; however, turning in 1099-K forms with nonmatching TINs or IDs can be costly. "At the end of the day there is still a lot of public debate about this legislation as it currently exists," he said.
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