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IRS 1099-K Regulations and Your Merchant Services Account

Updated on January 16, 2012
Tax Frustrations with 1099-K!
Tax Frustrations with 1099-K!

The new IRS 1099-K regulations could have a huge impact on your business

If you accept credit cards and your merchant services have not informed you then you need to know about this! The IRS being the much loved bunch they are is putting another step in the process of reporting business. Starting in January 2012 all businesses who accept credit cards are required to have their credit card sales volume reported by their payment card networks, otherwise known as your merchant services provider or independent payment network like American Express and Discover card. Just because you are not responsible for reporting them does not mean that you should not care!

This new law serves to compare your total credit card sales information, from form 1099-K with your reported income claimed on tax returns. It is estimated that the new law could generate $10 billion in additional government revenue over a 10 year period from under reported or unreported earnings.

The deadline is quickly approaching

and many of the regulations are still unclear or changing which is proving to be a huge if not poorly planned new law. So plain terms here it is. If you accept credit cards your merchant services provider is now required by law to report your credit card sales on a form 1099-K but there is one BIG catch you need to know! If the TIN (taxpayer identification number) and legal name on your merchant services account do not match what is on file with the IRS then your merchant services provider is now bound by law to withhold 28% of your payment card transactions for the IRS!!!!

The problems with the new law are numerous and complex

but most lead back to antiquated IRS data bases and limitations on the number of account inquires that are allowed over given time periods. There are over 7 million merchants who accept credit cards in the US and as merchant service providers continue to try and verify that their clients’ accounts exactly match what the IRS has on file is where the problems begin. There is now a huge backlog of inquires trying to validate the information which has led to an industry wide concern that merchants are going to be unfairly levied with the 28% withholding penalty because the IRS can’t validate existing accounts prior to the deadline. Of course if this happens customer service and businesses suffer alike.

The payment card industry is scrambling to meet its end of the bargain; however, the IRS continues to revise the regulations associated with the law as problems are uncovered! This often means that entire frameworks and programs need to be completely rebuilt.

So, how do you make sure that your merchant service account is validated and avoid this severe penalty?

Essentially this is your credit card processor’s responsibility; however, if you have not already been notified on your monthly statement or via a phone call then you should call your account representative and see if your merchant account to accept credit cards has been cleared or if you are in line to be. One of the many challenges for payment processors is that when they send in for verification it can take 1-2 weeks to get a report back from the IRS. This report only tells them if you match or not. Do to concerns over sensitive information being leaked the report gives no indication as to what the IRS does have on file so it starts a guessing game and the process starts all over again. So trying to “guess” what the problem is – can take a long time!

So why should your merchant services account not match what the IRS has on file? Part of the problem starts with the fact that most business owners are unaware of what the IRS has on file as a legal business name associated with their taxpayer identification number. This is partly because many businesses are inconsistent with the business name on their tax returns from year to year. The difference can be as simple as using the “&” symbol instead of spelling out the word “and” or any other of a thousand abbreviations and minor changes. The IRS’s computer system, however, simply notes if there is a difference but does not provide what they have on file so it could be a transposed number, the use of a symbol, mis-spelled word, word reversal, or one of many potential problems.

1099-K has devastating penalties!
1099-K has devastating penalties!

Merchant service providers all across the country are doing everything they can to make sure that accounts are all 1099-K verified prior to the deadline.

For most small businesses a 28% withholding would be devastating so make sure to pay attention to your statements, mailings, or phone calls for notices of information that needs to be clarified or that does not match. If you accept credit cards any data you can provide to your credit card processor like business licenses, tax returns, or any other information can greatly expedite the process and help your business avoid the severe 28% withholding penalty.

I am pretty sure that there is not a single merchant services provider wants to be responsible for enforcing this new law by being forced to withhold funds. If that was the case they would have chosen a different career. There are over 7 million merchant accounts in the US making this a massive undertaking especially when you consider that the processors are faced with antiquated IRS systems, political hurdles, different objectives, and government agendas!

If you have any questions or comments about the new 1099-K regulations or if you accept credit cards and would like more information on any other merchant services subject please leave them below and the Merchant Doctor will answer them right away. Otherwise come on over to the Merchant Doctor on FaceBook and give us a like for the latest information that will save your business money!

1099 K and your Merchant Services Account

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    • merchantdoctor profile image

      merchantdoctor 5 years ago from Reno

      The IRS just announced that they will delay penalty provisions and withholding requirements for a year, until Jan. 1, 2013. All acquirers still are required to file the 1099-K reporting form by year-end.

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