The Housing and Economic Recovery Act of 2008 is a 700-page law that includes a new requirement that “merchant acquiring entities” report the gross amounts of their merchant customers’ payment card transactions to the Internal Revenue Service. A “merchant acquiring entity” is defined in the Act as the bank or other organization that makes payments to merchants for payment card transactions accepted by the merchant.
The new payment card transaction reporting is intended to help the IRS identify underreported sales. At the end of each year, the merchant acquiring entity will file an information return with the IRS reporting the gross amount of the merchant’s transactions to the IRS. A corresponding written statement will be mailed to the merchant, but can be sent electronically if the merchant opts-in for electronic delivery. This reporting applies to transactions beginning on January 1, 2011–the first information returns will be filed in January 2012 with the gross amounts of transactions from 2011.
In support of information reporting, the law also requires the merchant acquiring entity to collect and verify the tax identification number (TIN) and legal name associated with that number for each merchant customer. If there is a discrepancy between the merchant’s TIN and associated legal name in the acquirer’s records and the IRS records, or if the merchant does not provide its TIN, the IRS will require the merchant acquiring entity to withhold 28 percent of the merchant’s future payment card transactions until the issue is resolved. The “backup withholding” provision of the law goes into effect for transactions on and after January 1, 2012.
All merchants in the United States are required by law to have a Tax Identification Number (TIN) and to provide it to their merchant acquiring entity. There are two types of TINs: Social Security Number (SSN) and Employer Identification Number (EIN). Generally speaking, merchants that are established as sole proprietorships or partnerships will use an SSN as their TIN, and corporations and all other merchant types will use an EIN as their TIN.
A merchant providing an incorrect TIN (or an incorrect name with the TIN) can cause the merchant acquiring entity records to not match the IRS records, and will result in backup withholding of 28 percent of the merchant’s transactions in 2012.
January 1, 2012: Payment card transactions on or after this date can be subject to backup withholding if merchant information on file with merchant acquiring entity does not match IRS records.
January 2012: Merchant acquiring entities will begin submitting information returns to the IRS for payment card transactions processed in 2011. A copy of IRS Form 1099 K will be provided to each merchant by mail (or by electronic means if the merchant opts-in).
