San Diego CardSmart Merchant Services Blog

Turbulence expected for 1099-K reporting, be prepared

The Internal Revenue Service recently announced a one-year delay in the penalty provisions of newly mandated requirements for yearly reporting of merchant credit and debit card receipts by acquirers and processors. That’s good news for companies that have been struggling to provide more processes and systems for collecting that information. Those companies also need to be ready to support backup withholding when TIN matching discrepancies arise and are not resolved in accordance with the new IRS procedures.

In a statement released in late October 2011, the IRS also said it would delay by a year the start of penalty assessments for filing incorrect TINs and related information, provided “good faith efforts” are made by acquirers and other covered organizations to file required information correctly. Backup withholding requirements are delayed, as well, until January 2013.

The reporting requirements set forth under IRS Code Section 6050W have been the source of much consternation for an industry still reeling from the financial sting of Payment Card Industry (PCI) Data Security Standard (DSS) compliance and backlash from the Durbin Amendment to the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act.

Section 6050W established a new annual reporting document - Form 1099-K - that processors and acquirers must generate yearly, just as they now complete 1099 forms for contract workers. The 1099-K reporting requirement, which was passed into law as part of the Housing and Economic Recovery Act of 2008, goes into effect in Jan. 1, 2012, when the first 1099-K reports need to be generated and filed. The reports can be filed with the IRS electronically or as paper documents.

Meanwhile, at least three states (California, New York and Hawaii) plan to follow the IRS lead with new information reports for state tax filing purposes; so far, only California has called for backup withholding. “On its face, perhaps, it seems easy,” said Jeff Fortney, Vice President, ISO Channel Management at Clearent LLC, a Missouri-based processor. But it takes a lot of time, money and effort to comply with the new IRS rules, he added.

Aite Group LLC, a consultancy headquartered in Boston, estimated that 35 percent of U.S. merchants were not in compliance with IRS 6050W, and that as many as 560,000 merchants (8 percent of the total) could still be at risk for mandatory withholding at the end of January 2012. For example, the IRS noted in a statement about its decision to delay implementation of the penalty and withholding requirements that it “does not apply to a payor who erroneously fails to file an information return or payee statement.”

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If you receive the following letter or email, do not disregard. It is critical you follow the instructions or your merchant processing funds may be subject to 28% IRS withholding as well as additional monthly fees.  Please contact us if we can be of assistance.

Dear Valued Merchant:

CardSmart Merchant Services, Inc. is notifying you of new IRS reporting mandates that impact your merchant account and immediate action is required. The information for your merchant account Taxpayer Identification Number  (TIN) and/or Tax Filing Name (TFN) is either missing or does not match the IRS database. If not corrected immediately backup withholding from your payment deposits may occur.

Important IRS Requirements for 2011

The federal Housing Assistance Tax Act of 2008 included the enactment of of new Section 6050W of the Internal Revenue Code that requires reporting entities too annually report payments in settlement of payment card and third party network transactions to the IRS for all merchants.Reporting entities will be required to file an annual information return with the IRS and provide each merchant with a corresponding Form 1099-K, reporting monthly and annual gross sales. The first such information return and Form 1099-K will be due in January 2012 for 2011 calendar year transaction activity.

Section 6050W also requires reporting entities to perform backup withholding from merchant funding by deducting and withholding Federal income tax (Federal withholding is currently 28%) from the gross sales amount or reportable transactions if (a) the merchant fails to provide the merchant’s TIN to the reporting entity (withholding begins January 1, 2012), or b) the IRS reports the notifying entity that the TIN (when matched with the name) is incorrect (withholding begins after notification from the IRS). Merchants subject to Federal income tax backup withholding may also be subject to backup withholding for specific states as applicable.  To avoid backup withholding, it is very important that merchants provide the correct name and TIN that is used when filing their tax return that includes the transactions for their business. In addition, in the near future, we will begin charging you a monthly “TIN/TFN Blank or Invalid Fee” until you provide us with this critical information.

ACTION REQUIRED

We are unable to match your data in our file with the information contained in the IRS TIN match database. To correct this issue, you will need to update the TIN and/or tax filing name that we currently have on file using one of the following options:

TIN Validation Web Site is a secure web site that has been created for your use to allow updates to be made quickly and on your schedule. You may access the web site 24 hours a day.

• Enter the following web site address www.myclientline.net.
• Click on the “Tax Information Update” link.
• Enter your COMMUNICATION ID , referenced above on the top right side.
• View the “Welcome to the Tax Information Update Web Site” page. Click “Next” to continue.
• On the “Merchant Search” page, you will be requested to verify your COMMUNICATION ID, and to complete additional verification.
• Then follow Steps 1 through 5on the remaining pages on the Web Site to view and update the TIN and Tax Filing Name. The updates provided are compared to the IRS database. You can return to the Web Site in 48 hours to view the status or provide phone/email to receive validation confirmation.

Interactive Voice Response (IVR)  is a toll free number that has been created for your use to allow updates to be made quickly and on your schedule. You may access the IVR 24 hours a day.

• Dial 866-753-9971
• Using your phone keypad, please enter the 10 digit COMMUNICATION ID referenced above on the top right side.
• Then follow the remaining prompts to update the TIN and Tax Filing Name. The updates provided are compared to the IRS database.

If you would like to receive an automated response regarding the status of your verification, please enter the 10-digit phone number where you would like to receive this information. You will then receive a message from the IVR when the status is available.

In order to avoid the fees referenced above and the withholding of your future daily merchant deposits, we urge you to perform the validation within 10 days if this letter. If we do not have a valid TIN on file that matches the tax filing name, we may be required to begin backup withholding in 2012 and submit the amounts to the IRS and state agencies, if applicable, on a regular basis.  You will only be able to recoup the withheld funds when you file your tax return for the applicable tax year. We will not be able to refund withheld amounts to you once backup withholding begins.

CardSmart Merchant Services Inc. values your business and encourages you to call the Customer Service Phone number on your merchant processing statement if you have any questions.

Sincerely,

CardSmart Merchant Services Inc.