Some of the biggest payment processors in the United States are assessing new merchant fees related to compliance with section 6050W of the Internal Revenue Code (IRC). However, the Internal Revenue Service indicated charging merchants for production or verification of taxpayer identification numbers (TINs) and business names, or for processing and filing 1099-K forms, is not allowed.
The IRS seeks to collect as much as $9 billion in new revenue as a result of new reporting requirements contained in The Housing and Economic Recovery Act of 2008. The act is designed to help the IRS detect fraud and identify revenue. The IRS rule implementing section 6050W shifts the merchant income reporting burden to acquirers.
"Payment processors will need to integrate tax reporting into their customer facing applications," said The Fraud Practice, a risk management solutions consulting service in a December 2010 white paper. "They will have to change the way they collect and authenticate account holder data, they will have to set up customer service support for tax related inquiries and they will likely have to change the fundamental way they look at account holders."
Under section 6050W, payment processors and, by extension, ISOs must have valid TINs and business names for every merchant they service for processors to file the newly required 1099-K forms for their merchants in 2011.
The 1099-K is used to report the gross amount of payment card transactions to merchants and the IRS. If an invalid TIN or business name is submitted, the IRS will issue a backup withholding notice (B Notice) rejecting the 1099-K submission. If the B Notice isn't corrected in 30 days, the merchant is liable, and the processor must withhold up to 28 percent of the merchant's payments. Processors must also make certain the new information they are required to collect is secure.
"Merchants and consumers will ultimately pay for this," Security Metrics President Brad Caldwell said. "The problem is when you submit the DBA or TIN information, you don't know what is wrong until something is wrong. The forms are just rejected. They don't say why. The process is costly. ... This is going to cause a lot of grief to merchants."
The IRS seems clear the law does not allow processors to recover costs related to 6050W compliance. In a frequently asked questions publication issued on the topic in July 2011 (www.irs.gov/pub/irs-utl/irdm_section_6050w_faqs_7_23_11.pdf), the IRS posed the question, "Can the parties responsible for filing the return pass the costs of collecting and processing the information on to their clients?"
The answer: "No. Because federal law requires payment settlement entities or electronic payment facilitators to file information returns and to furnish payee statements, such entities are precluded from collecting fees for costs incurred in fulfilling these requirements."
An IRS agent stated on background the IRS believes this prohibition is contained in the broker requirements of IRC section 6045, a reporting rule covering real estate brokers. "The regulation makes really clear the broker can't shift the financial burden to people making the report," he said.
Some believe the IRS' position is not a formal ruling. "The IRS commented informally that you can't charge for TIN matching," Electronic Transactions Association Director of Government Relations Mary Bennett said. "There are a lot of other components that go into this outside TIN matching. There is the ISO's relationship with customers and other business costs associated with TIN matching."
Still, Paula Porpilia, a TIN compliance consultant and member of the IRS Information Reporting Program Advisory Committee, confirmed "the IRS doesn't believe processors will be allowed to charge for these services."
According to First Data Corp. spokesman Andy Payment, First Data has instituted a new fee for a Regulatory Product Bundle. "The fee is for a new suite of services related to IRS 6050W regulations, as well as proposed legislative changes, which encompass much more than processing the 1099 forms," Payment told The Green Sheet.
First Data pricing is tiered from $3.95 per merchant per month for acquirers with one to 2,500 merchants to $1 per merchant per month for clients working with more than 10,000 merchants.
Sage Payment Solutions President Greg Hammermaster said his company has an optional service to help merchant customers with 6050W compliance. "While we recognize that merchants can monitor their own usage, Sage is providing an optional service for those who prefer assistance," he said.
"The service monitors merchant activity monthly and confidentially reports to them their gross transactions so they can prepare their 1099 submission when needed. ... This service is available as an option for a fee of $9.25 per year plus $2.10 per month."
An acquiring executive at a bank in the western United States (who agreed to speak with The Green Sheet if he would not be identified) said he knows of one large ISO with 20,000 accounts and no TINs. "They are going to have to go back and manually get the data and fill it in," he said. "If we pass the costs on, the merchants complain, and they are right to complain. These are new fees not in their contract."
He added that ISOs are innocent bystanders getting hurt. "We're getting resistance from ISOs on these new fees, [which] may not sound like a lot, but added to other fees like PCI compliance and such, it's not competitive with others who are not imposing fees this year and are waiting until next year," he said. "It helps that First Data took the lead. ... They have half the market. If they are charging, it makes it easier for everybody getting out of the water."
Cynergy Data LLC Executive Vice President Sales Kevin Smith said ISOs are being cautious. "I don't think ISOs are prepared," he said. "The ramifications are not such that you want to be on the wrong side here. There are three ways to look at the impact: a revenue opportunity, a customer service opportunity or a sales opportunity. Every ISO is going to have to decide for themselves if this is a revenue opportunity."
Impact PaySystem President Dee Karawadra stated he will not charge merchants for 6050W compliance. He said he understood the need when PCI compliance fees were introduced, but in the last three years, additional fees have proliferated. "These are BS fees - Internet fees and cross-border fees - passed through to merchants," he said. "It's a short-term deal. Those who have a fee will see a big hike in residuals at first, but it won't be long before they see a big dip in them as the competition comes in with lower pricing."
About his clients, Karawadra added, "These are people I know and people my agents know. If we start changing merchant fees, we are going to lose these people."
Can new regulatory burdens become a competitive advantage?
By Troy Thibodeau
Convey Compliance Systems Inc.
Since Jan. 1, 2011, companies processing credit card or wire payments for merchants have been required to take on new regulatory responsibilities thanks to IRC section 6050W, a set of tax information reporting rules created by Congress and the IRS. For some, this is another example of restrictive bureaucracy that hinders business; for others it's an opportunity to take advantage of a new climate of increased customer service.
The federal and state governments have been on a three-year mission to collect underreported taxes. It is estimated the federal government misses out on $345 billion in revenue each year. So Congress and the IRS have been enacting regulations to address this tax gap through more third-party tax information reporting. The objective is to gather a more complete picture of business and individual taxpayer income levels.
One area the IRS is focused on is better disclosure of merchant income by directing payment processors or merchant banks to report merchants' monthly payment card receipts to the federal government. Congress believes the collection of such information, through 1099-K forms filed by the processors and merchants, will encourage more complete disclosure.
Merchant banks and payment processors will be required to file a new form with the IRS and their merchant customers in January through March 2012 based on settlement transactions in 2011. For those who are unprepared, this will be an expensive, cumbersome process that will distract the business at best or hamper the business at worst.
For those who are ready, this is an opportunity to create new, positive merchant customer experiences and to take advantage of possible customer attrition from unprepared competitors.
This new reporting responsibility for the payments industry means millions of new forms need to be filed each year. This task will require new systems, changes to business processes and communications to merchant customers on what this new 1099-K form means.
The problem is many payment processors have not woken up to this new reality yet. My colleagues and I have been talking to firms that are not ready for the reporting demands of Section 6050W - and we have been warning them that this is much more than just filing a few forms: it's a whole new set of business process and system changes. If firms aren't ready for this - if they have not implemented the most efficient technology systems and created an effective customer service support system - their costs to comply may be significant. They will also deal with disgruntled customers and possibly face significant IRS fines.
We have been working with some large merchant processors and merchant banks for two years to prepare them for tax year 2011 reporting. In this process, we have informed them that on top of making sure they get their 1099-Ks out on time, they need to be ready to correct forms, handle B Notices, amend data discrepancies and be ready for backup withholding, as required. This can't be done overnight.
One of the demands these new regulations require of payment processors is the need to have correct TINs and legal names on all forms filed. That means asking merchants for information and then validating that information, which can be a major task. For example, one of our clients found it had incomplete or inaccurate TIN information for over 40 percent of the merchants with whom it does business. This is significant when a company deals with millions of merchants.
Collecting correct TIN information has never been a concern for merchant acquiring businesses before, but now they must get it right or face fines. An incorrect TIN or legal name submission will incur a B Notice from the IRS, requiring the filer to address the error. If the business does not correct the B Notice information (even after time and money are spent tracking down the required information from a customer), the business must start backup withholding of 28 percent on future payments made to the merchant in question.
The scope of backup withholding can be large, not to mention the additional remitting and reporting responsibilities that go with backup withholding. And the costs for failing to backup withhold can be significant through the penalties and interest the IRS may assign. To put it into context, if the payment processing industry is missing significant amounts of data, it may be forced to withhold billions of dollars every day.
Some merchant processors see these new regulatory requirements as an opportunity to make additional profits from their customers. Some are planning to charge clients as much as $3.50 per merchant per month to handle the new regulatory burden. That's $50 each year for every merchant for 1099-K processing.
Such fees reflect profiteering, inefficient systems or both. Either way, they will only hurt acquirers, especially as this is such a competitive industry. With the right systems in place, it should cost processors only a tenth of what these firms are demanding through fees - as with all regulatory burdens, some due diligence and thoughtful planning upfront can mean significant savings down the line.
For merchant banks and processors to bemoan an impending business headache now is probably too late. This regulatory change wasn't just dropped on the industry. Congress passed the new Section 6050W legislation in 2008, and many payment processors have been preparing for its implementation for the past 18 to 24 months.
The IRS is under considerable pressure from Washington to reduce the tax gap and find ways to better collect revenues. The IRS has stated time and again that information reporting is the best way to do that, and it will be leaning harder on those who do not follow the rules.
Some payment processors will take the lemon that is 6050W and complain how sour it is. On Jan. 1, 2012, they will have a lot more forms to file and will field a lot more customer calls as they try to comply themselves. They will then find they lose customers as rivals provide a far superior merchant experience more cost effectively.
Those that offer a positive experience to their merchant customers, and do so at the most efficient cost, will be able to take a bigger market share. Section 6050W is not a regulatory burden; it's an opportunity for payment processors to make lemonade from the new rules by stepping up to become more rounded, helpful service providers for their merchant customers.
Troy Thibodeau, Executive Vice President of Convey Compliance Systems Inc., began his 20-plus year career as a CPA at Price Waterhouse and has spent the past 12 years helping organizations automate regulatory and financial processes. With Convey, he ensures the company provides its clients the best possible tax information reporting experience. For more information, visit www.convey.com, call 800-334-1099 or email Thibodeau at tthibodeau@convey.com
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