By Troy Thibodeau
Convey Compliance Systems Inc.
At the end of October 2011, the Internal Revenue Service disclosed changes to Internal Revenue Code Section 6050W, which regulates the reporting of payment card and third-party network transactions. The IRS realized many organizations were not ready to fully comply for tax year 2011, so it is allowing a 12-month, good-faith-effort relief on penalties and withholding.
This is a bold move by the IRS, but it underlines the agency's belief in tax information reporting as a major tool in combating what it perceives as the $345 billion gap between actual earnings and reported earnings by U.S. taxpayers. The IRS wants this regulation to work, so it's giving firms a year to perfect their systems, learn from their mistakes and be fully ready by 2013.
The IRS has stated many times that tax information reporting regulation is central to accessing more revenue without creating new taxes. It will continue to force through more 1099 regulation and, as time goes on, will offer businesses less leniency for noncompliance.
The problem is that some firms will see this as a 12-month holiday from preparing for Section 6050W compliance. This transitional relief for Form 1099-K reporting is not a vacation from, or repeal of, the new tax law.
The 1099-K reporting requirement set forth in Section 6050W was passed into law as part of the Housing and Economic Recovery Act of 2008. It was an attempt to increase transparency in relation to electronic payments and transfers, and was forecasted to raise $9.5 billion in extra revenue over 10 years, taking American taxpayers a step closer to closing the tax gap. But this law and its side effects, such as more frequent requests for tax information forms, led to confusion among merchant banks, processors and ISOs, as well as among merchants themselves.
Some acquirers may have assumed they could wait it out until the law was repealed, much like the recent 1099 reporting requirement that was attached to the Patient Protection and Affordable Care Act of 2010. Some also may have underestimated the work that has to go into checking all their clients' taxpayer identification numbers and implementing new administrative, electronic and customer service processes.
Several trade associations representing both merchants and acquirers called on the IRS to be lenient for the first year. The IRS listened to their requests and announced plans not to assess penalties on those who make good-faith efforts for tax year 2011 reporting, the first year of the reporting process.
Good faith will be determined by the IRS in the aftermath - my experience suggests this will involve the IRS evaluating the documentation of a firm's processes and systems. Those that are seen to have tried to comply will not be fined for missing information or incorrect filing. That's not to say the IRS will not grade them - many firms may receive a "must try harder" from the IRS in the wake of their examination, and necessary changes should be implemented ahead of 2013.
Firms that show no attempt at complying with Section 6050W will risk fines for noncompliance. Again, this is transitional relief for one year, not a scrapping of the rules. Businesses that treat this opportunity as a tax reporting holiday - or think that this is signaling 1099-K reporting being repealed - may face a harsh reality.
This temporary relief the IRS has granted to merchant acquirers is about more than just immediate penalties. How businesses handle the transition in the long run will determine if they are recognized as purveyors of best practices or known as characters in cautionary tales. Those who efficiently manage the process will create competitive advantages such as not having to pass along related costs to their 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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