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Thanks to new housing bill, credit-card transactions to be reported to IRS
SAN FRANCISCO (MarketWatch) -- What do the housing crisis, IRS and your credit-card charges have in common? More than they used to, thanks to the recently-passed housing bill.
Lawmakers decided that closing some of the oft-bemoaned tax gap (the money that taxpayers owe but never pay, estimated by the IRS to be $290 billion in 2001) would help offset the cost of aiding struggling homeowners. See full story on housing bill.
Congress' plan to narrow the tax gap, in this instance, was to require more reporting of business receipts. Specifically, lawmakers decided that starting in 2011, merchants' credit-card transactions must be reported to the IRS.
This has caused plenty of upset among small businesses, which fear higher costs will result, and plenty of confusion among consumers. Many bloggers are warning about the new rule, with statements such as: "Every credit card transaction will now be reported to the IRS."
In a sense, that's true -- but the new law requires reporting only of the "gross amount of reportable transactions" per merchant, once per year. That is, the total dollar amount not the details of every transaction.
The payment-card processors who have to generate these reports are unlikely to choose to increase their costs by sending along vast reams of information that are not required. While the IRS has yet to issue more detailed regulations regarding the new law, it's likely consumers don't need to worry about the IRS knowing every intimate detail of their purchasing habits.
"It is geared at the transactions between the merchants and the credit-card company and not looking at any one individual consumer," said Bob Scharin, a New York-based senior tax analyst with RIA, a tax-publication unit of Thomson Reuters.
While the new rule may bring more IRS audits, it's also aimed at encouraging business owners to report income accurately. "It's probably designed to lead to increased compliance," said Mark Luscombe, a principal analyst with CCH Inc., a Riverwoods, Ill., tax publisher.
"If the IRS, through this system, gets information on a merchant that shows X amount of credit-card sales and their statistics show that type of merchant probably has 80% of their business done on credit-card sales, and total reported revenue doesn't seem to mesh up, it probably will result in audits," Luscombe said.
"Merchants anticipating this may ensure their reporting is complying with what the credit-card issuers are reporting to the IRS," he added. The required reports will be sent to the IRS and to the business owners.
The new law requires reporting on credit- and debit-card transactions, as well as third-party network transactions such as through PayPal and Google Checkout, according to an analysis by the Electronic Transactions Association.
Reporting is not required for merchants who collect less than $20,000 in such receipts and had fewer than 200 reportable transactions in a given year.
The steep cost of mistakes
Small-business owners are worried about higher costs under the new rule. "The credit-card companies or the banks are going to have to build this [reporting] system out. That cost is likely to be passed on to the small-business owner," said Bill Rys, tax counsel for the National Federation of Independent Business, a trade group in Washington.
They're also worried about mistakes because any mismatch or problem related to a business owner's taxpayer identification number on the report means the payment processor creating the report must withhold 28% of the total sales. That's a 28% hit to gross sales, not taxable income.
Depending on the circumstances, the business owner may get the withholding back later, but that's a big hit in the short term. "This is gross earnings," said Keith Ashmus, first vice chairman of the National Small Business Association, and partner in a Cleveland-based law firm. "It's not any relationship to what the tax would be. They pay 28% tax on their net income, not on their gross."
Rys agreed. "If there's a snafu or mistake, that's a big hit to cash flow, and cash flow is a big issue for small-business owners, especially right now," he said.
Payment-card processors don't like the new rule either -- they will now have to generate an annual report for each company for which they process payments as well as deal with withholding requirements should an inconsistent taxpayer identification number arise.
But some observers note that the data required in the reports is information such firms collect already. Still, payment processors say costs will rise.
In a letter to lawmakers in April, the American Bankers Association and other groups wrote that: "This burdensome unfunded mandate would impose hundreds of millions of dollars in costs on the business community. In order to comply with this mandate, the payment card industry and its third-party processors would be required to fundamentally redesign card processing systems that were developed to accommodate the efficient and reliable processing and settlement of transactions between consumers and merchants." 
Andrea Coombes is an assistant personal finance editor for MarketWatch, based in San Francisco.
www.marketwatch.com/news/story/firms-fume-over-new-irs/story.aspx