In the Wake of Reporting Complaints, IRS Says It Will Delay Penalties, Withholding

Responding to complaints about problems in implementing a new federal law requiring acquirers to report merchants’ electronic payment transactions, the Internal Revenue Service announced on Wednesday it will delay penalty provisions and withholding requirements for a year, until Jan. 1, 2013. Acquirers still are required to file the new 1099-K reporting form for tax year 2011 by Feb. 28, 2012, if filing by paper or by April 2, 2012, if filing electronically.

“We certainly heard the concerns expressed by a number of people, a number of stakeholders and interested parties,” an IRS spokesperson says. The IRS announced its decision during a meeting of the industry group advising the agency on the federal law.

The 1099-K regulation originated with the federal government’s concern about finding unreported or under-reported taxable business revenues. The law is designed to help the IRS match income from sales paid with payment cards to income claimed on tax returns.

The rules require so-called payment-settlement entities such as bank card merchant acquirers or payment card networks such as American Express Co. and Discover Financial Services that have direct relationships with merchants to file annual reports for each merchant listing that merchant’s monthly gross receipts from electronic payment transactions. Acquirers must list the receipts, along with the merchant’s taxpayer identification number (TIN) and legal name, on a new form, Form 1099-K.

A card-accepting business encounters problems if the TIN and legal name on file with the acquirer do not match the ones in the IRS’s files. If the mismatch can’t be resolved, it triggers back-up withholding of 28% of a merchant’s payment card transactions.

If acquirers don’t withhold the payment amount when required, they are then held responsible for the amount. The law is effective for tax returns with calendar years that began Dec. 31, 2010, with first reports due in early 2012.

Because acquirers are complaining about continuing changes in the 1099-K form and reporting slow response times and other problems while attempting to validate TINs and business names with the IRS’s data base, the IRS will provide penalty relief for 2011, the spokesman says.

“They still need to file, they need to make a good-faith effort,” he says. “But if they make errors in that process, there are not going to be penalties associated with that requirement.”

The IRS also is postponing the 28% withholding requirement until Jan. 1, 2013, and will provide “some relief in terms of reporting gross proceeds,” the spokesman says, adding that details will be released in a notice in the near future.

Industry groups, acquirers, and government agencies have been reporting problems in implementing the law for months, saying constant changes in the reporting form and other problems are making it difficult to meet the compliance deadline. Most recently, the Electronic Transactions Association, the trade group for independent sales organizations and acquirers, and the American Bankers Association asked for a delay in implementation of portions of the law.

The IRS is working closely with industry groups to be sure the law “is implemented in a way that’s meaningful to everybody and carries out the intent of the law but still responds to the concerns of those involved with complying with it,” the spokesman says.