The IRS Delays for a Year Withholding on Card Volume Arising From Data Discrepancies

The Internal Revenue Service is delaying for a year its planned withholding requirement for payment-card-accepting merchants whose names and taxpayer identification numbers (TINs) supplied by their merchant processor do not match the corresponding information the IRS has on file, the Electronic Transactions Association reported to its membership today.

The delay is at least the second related to operational issues stemming from an effort the IRS began several years ago to find unreported or underreported business income by monitoring sales on credit and debit cards.

Withholding was supposed to start this autumn for so-called 1099-K forms with incorrect names and TINs filed this year for calendar year 2012 tax payments. The IRS now says withholding will start in late 2014 for 1099-Ks covering payments for calendar year 2013.

The Washington, D.C.-based ETA, the national trade group for independent sales organizations and others in the acquiring industry, had lobbied for months for a delay, saying many small and mid-size merchants might not be able to comply on time. “We’ve been explaining to the IRS that it takes time to work this out,” Mary Bennett, the ETA’s director of government relations, tells Digital Transactions News.

The withholding provision is one part of a 2010 measure that included a new form, the 1099-K, that so-called payment-settlement entities—acquirers or card networks in some cases—are supposed to file annually listing the total monthly amount of a client merchant’s card-based sales. If the name and TIN for the business listed on the form is missing or does not match the name and TIN the IRS has in its database, that business could be subject to so-called backup withholding of 28% of its card volume until the issue is resolved.

According to Bennett, problems in matching names and TINs can originate with both the IRS and merchants, especially small and mid-size ones that may not be meticulous about record-keeping. “It could be as simple as a name change,” she says.

Other hassles arise from merchants not knowing about the 1099-K requirement, according to Bennett. While a small-business owner may know the sales person from their ISO, he or she may not recognize the processor with whom that ISO works. That can lead to merchants ignoring letters from processors trying to gather information for a 1099-K.

On the IRS side, “It’s been a problematic process because the IRS [computer] system is old and clunky,” says Bennett. For example, the system can process only a few TIN-confirmation requests from a processor in real time. Batch requests take longer, and if there is a problem with a particular number, the spreadsheet received by the processor doesn’t explain what it is, she says. “When you get a mismatch, you’ve got to go back to Square 1.”

An IRS spokesperson could not be reached for comment on Monday, but the agency’s letter to the ETA said the IRS plans to formally publish its decision about the delay in a Sept. 23 bulletin. In addition to putting off the withholding, the letter also says the IRS is “providing relief” from penalties for incorrect name and TIN combinations reported on 1099-Ks for payments in calendar years 2013 and 2012, and for missing or “obviously incorrect” TINs for payments in 2012.

The unsigned letter doesn’t explicitly state the IRS’s reason for the withholding delay, but it acknowledges the operational issues.

“We appreciate our partnership with your group and value your perspective,” the letter says. “We recognize the complexities associated with complying with these requirements and are particularly mindful of the related burdens on tax professionals, business and individual taxpayers. We continue to welcome your ideas for improvements, along with your feedback about how these requirements effect [sic] your organization and its members.”

The letter also says the IRS has developed a document to help payment-settlement entities obtain correct TINs and names from their customers.

Back in October 2011, the IRS announced delays in enforcing penalties and backup withholding involving 1099-Ks.