Typical acquirers -- including banks, processors and ISOs -- stand to lose up to 5% of their business next month because of problems with Internal Revenue Service 1099K reporting, a tax expert says.
The loss seems likely because even acquirers that have been working diligently the last two years still don’t have valid Taxpayer Identification Numbers, or TINs, for as many as 5% of their merchants, says Paul Banker, vice president of client management at Minneapolis-based Convey Compliance Systems Inc.
Beginning Jan. 1, the IRS requires acquirers to withhold 28% of credit card transaction volume from merchants when the acquirer doesn’t have a valid TIN, says Banker, whose company helps firms with tax reporting.
“Some say they will no longer do business with those folks instead of trying to withhold,” he says. “They’re really pushing away business.”
Acquirers may forsake accounts instead of enduring the bad publicity they might suffer by withholding, Banker notes.
“I’d rather keep our good name,” acquirers may decide, he says.
If acquirers do decide to withhold, merchants who find themselves subject to withholding seem likely to change acquirers when their contracts expire, Banker predicts.
“If you withhold on them, you’re not going to have their business for long,” Banker says.
The situation stems from an IRS requirement that acquirers report all of their merchants’ credit card transactions on 1099K forms to prevent merchants from understating their income to avoid paying all of the income tax they owe.
Acquirers filed the reports for the first time this year to report 2011 transactions, but the IRS did not expect perfect matches the first year for business names and TINs.
“This year was more of a test,” Banker says.
Next year, however, meaning 2013, the IRS does expect matches, he notes.
Some acquirers have been improving their databases of merchant names and TINs for as long as three and a half years, Banker says. Those acquirers tend to have valid TINs for more than 99% of their merchants, he notes.
The acquirers that have been working diligently to track down names and TINs for two years, a group that represents most of the firms Convey is helping, could easily lack valid TINS for up to 5% of their clients, he says.
“Anybody who’s just scratching the surface in the last six months is in major desperation mode,” Banker maintains.
The IRS gives the benefit of the doubt to acquirers that may have some gaps in their databases of names and TINs but have made a good-faith effort to complete their files or have shown improvement in their methods or results, Banker says.
Acquirers have been working to match the names and TINs they have for their clients with the versions in the IRS database.
If the business name or TIN that the acquirer has obtained from a merchant differs from what’s on file at the IRS, that constitute a mismatch. The acquirer then becomes responsible for reconciling the two versions.
Acquirers can check for matches with the IRS on a single merchant or large batches, Banker says. Problems arise, though, because if an acquirer supplies a name or number that does not match the IRS records, the IRS notifies the acquirer of a mismatch but does not provide the correct information.
That leaves acquirers with the job of tracking down the merchants with mismatches and gathering the right information.
After acquirers file 1099K forms next year, the IRS will check them and send acquirers a CP2100 form when a mismatch occurs.
Later, the IRS will issue penalty notices, form 972CG or “B-Notices,” to acquirers with mismatches, Banker says.
“It behooves folks in this industry to get in line,” he cautions. “They need to figure out a process if they want to stay in this business.”
Help is available for ISOs from companies that know how to take advantage of the IRS matching system, have the means to solicit correct information from merchants by driving them to portals and other means, Banker says.
Those third-party companies also can help acquirers track withholding, he notes.
Some states have instituted reporting requirements that parallel the federal income reporting, and third-party service providers keep up with frequent changes in those rules, too, Banker says.