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The Green Sheet Online Edition

August 22, 2011 • Issue 11:08:02

Can new regulatory burdens become a competitive advantage?

Editor's Note: This article is the sidebar from the lead story in this issue. To see the whole article, please select the lead story from the TOC.

By Troy Thibodeau
Convey Compliance Systems Inc.

Since Jan. 1, 2011, companies processing credit card or wire payments for merchants have been required to take on new regulatory responsibilities thanks to IRC section 6050W, a set of tax information reporting rules created by Congress and the IRS. For some, this is another example of restrictive bureaucracy that hinders business; for others it's an opportunity to take advantage of a new climate of increased customer service.

Attacking the tax gap

The federal and state governments have been on a three-year mission to collect underreported taxes. It is estimated the federal government misses out on $345 billion in revenue each year. So Congress and the IRS have been enacting regulations to address this tax gap through more third-party tax information reporting. The objective is to gather a more complete picture of business and individual taxpayer income levels.

One area the IRS is focused on is better disclosure of merchant income by directing payment processors or merchant banks to report merchants' monthly payment card receipts to the federal government. Congress believes the collection of such information, through 1099-K forms filed by the processors and merchants, will encourage more complete disclosure.

New businesses under the microscope

Merchant banks and payment processors will be required to file a new form with the IRS and their merchant customers in January through March 2012 based on settlement transactions in 2011. For those who are unprepared, this will be an expensive, cumbersome process that will distract the business at best or hamper the business at worst.

For those who are ready, this is an opportunity to create new, positive merchant customer experiences and to take advantage of possible customer attrition from unprepared competitors.

This new reporting responsibility for the payments industry means millions of new forms need to be filed each year. This task will require new systems, changes to business processes and communications to merchant customers on what this new 1099-K form means.

A new reality

The problem is many payment processors have not woken up to this new reality yet. My colleagues and I have been talking to firms that are not ready for the reporting demands of Section 6050W - and we have been warning them that this is much more than just filing a few forms: it's a whole new set of business process and system changes. If firms aren't ready for this - if they have not implemented the most efficient technology systems and created an effective customer service support system - their costs to comply may be significant. They will also deal with disgruntled customers and possibly face significant IRS fines.

We have been working with some large merchant processors and merchant banks for two years to prepare them for tax year 2011 reporting. In this process, we have informed them that on top of making sure they get their 1099-Ks out on time, they need to be ready to correct forms, handle B Notices, amend data discrepancies and be ready for backup withholding, as required. This can't be done overnight.

Collecting information

One of the demands these new regulations require of payment processors is the need to have correct TINs and legal names on all forms filed. That means asking merchants for information and then validating that information, which can be a major task. For example, one of our clients found it had incomplete or inaccurate TIN information for over 40 percent of the merchants with whom it does business. This is significant when a company deals with millions of merchants.

Collecting correct TIN information has never been a concern for merchant acquiring businesses before, but now they must get it right or face fines. An incorrect TIN or legal name submission will incur a B Notice from the IRS, requiring the filer to address the error. If the business does not correct the B Notice information (even after time and money are spent tracking down the required information from a customer), the business must start backup withholding of 28 percent on future payments made to the merchant in question.

The scope of backup withholding can be large, not to mention the additional remitting and reporting responsibilities that go with backup withholding. And the costs for failing to backup withhold can be significant through the penalties and interest the IRS may assign. To put it into context, if the payment processing industry is missing significant amounts of data, it may be forced to withhold billions of dollars every day.

Sharing the regulatory pain

Some merchant processors see these new regulatory requirements as an opportunity to make additional profits from their customers. Some are planning to charge clients as much as $3.50 per merchant per month to handle the new regulatory burden. That's $50 each year for every merchant for 1099-K processing.

Such fees reflect profiteering, inefficient systems or both. Either way, they will only hurt acquirers, especially as this is such a competitive industry. With the right systems in place, it should cost processors only a tenth of what these firms are demanding through fees - as with all regulatory burdens, some due diligence and thoughtful planning upfront can mean significant savings down the line.

When the IRS gives you lemons

For merchant banks and processors to bemoan an impending business headache now is probably too late. This regulatory change wasn't just dropped on the industry. Congress passed the new Section 6050W legislation in 2008, and many payment processors have been preparing for its implementation for the past 18 to 24 months.

The IRS is under considerable pressure from Washington to reduce the tax gap and find ways to better collect revenues. The IRS has stated time and again that information reporting is the best way to do that, and it will be leaning harder on those who do not follow the rules.

Some payment processors will take the lemon that is 6050W and complain how sour it is. On Jan. 1, 2012, they will have a lot more forms to file and will field a lot more customer calls as they try to comply themselves. They will then find they lose customers as rivals provide a far superior merchant experience more cost effectively.

Those that offer a positive experience to their merchant customers, and do so at the most efficient cost, will be able to take a bigger market share. Section 6050W is not a regulatory burden; it's an opportunity for payment processors to make lemonade from the new rules by stepping up to become more rounded, helpful service providers for their merchant customers.


Troy Thibodeau, Executive Vice President of Convey Compliance Systems Inc., began his 20-plus year career as a CPA at Price Waterhouse and has spent the past 12 years helping organizations automate regulatory and financial processes. With Convey, he ensures the company provides its clients the best possible tax information reporting experience. For more information, visit www.convey.com, call 800-334-1099 or email Thibodeau at tthibodeau@convey.com

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end of article

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