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September, 2008 Tax Tip

Heads Up if You Are an Online Seller


Tucked away in the new Housing Assistance Act of 2008 is a provision that will require income received through credit and debit card transactions to be reported to the IRS starting in 2011.


Banks and other payment settlement services will need to report gross annual receipts for each merchant.  The income reporting will apply to any transaction in which a payment card is accepted as payment.  Therefore, banks and other financial service providers will be reporting the total amount of credit and debit card payments for the year for each merchant.  There is a de minimis exception from information reporting if the aggregate value of third party network transactions does not exceed $20,000 for the year or if the aggregate number of transaction does not exceed 200.  There is no indication yet on the format the information reports will take, but it is likely it will be on a 1099 form to be devised.


Why the provision?  There is currently no “paper trail” available to the IRS except on a case by case basis.  Expanded information reporting will assist the IRS in increasing the compliance rate for merchants.  The plan is to compare the merchant’s overall volume of payment card sales in relation to expenses claimed and cash transactions reported.   Many small businesses were opposed to the expanded reporting indicating that the high costs of credit and debit transactions are already driving many merchants away from these transactions.


There are issues the IRS will need to address, including how to handle charge-backs and transactions in which the customer receives cash back as well as merchandise (see next paragraph).  The law requires the reporting party to provide the IRS with the merchant’s Tax ID number.  If that cannot be provided, it would be required to withhold 28% of the payments to the merchant. 


If the provision does not go into effect until 2011, why be concerned about it now?  Small businesses will want to review their bookkeeping and accounting practices.  Once card payment begins, business owners will need to reconcile the information reports submitted by the various banks to their own books.  Discrepancies will need to be addressed so that accurate tax returns can be filed.  As mentioned in the foregoing paragraph, merchants often have charge-backs, issue refunds, or have debit card transactions where the customer receives cash back.  Businesses should have thorough accounting procedures to keep track of these items.  When a law is passed that doesn’t go into effect for a few years, it is quite likely due to the fact that it takes substantial time for both the IRS and the business to get their procedures implemented to comply with the provisions.


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