IRS Reverses Course on Credit and Debit Card Receipt Reporting

Interesting article from Tax Analysts:

In an apparent change of course, the IRS will not require reconciliation of gross receipts and merchant card transactions on Forms 1120, "U.S. Corporate Income Tax Return," and other business income tax forms, according to a February 9 letter sent to the National Federation of Independent Business (NFIB).

In the letter, Steven Miller, IRS deputy commissioner for services and enforcement, confirms remarks he made to the trade group in a recent meeting that reconciliation would not be required on the 2012 form. "Nor do we intend to require reconciliation in future years," Miller wrote. (For the letter, see Doc 2012-2714  . For an NFIB release, see Doc 2012-2717  .)

Perhaps most important to retailers is the IRS's intention that "the reporting of gross receipts and sales on the 2012 income tax forms will be modeled on the 2010 income tax forms." No other changes to those forms related to payment card reporting are contemplated, Miller wrote.

Section 6050W, which was added to the code by the Housing Assistance Tax Act of 2008, requires information returns (Forms 1099-K) to be provided to some payers regarding payments made in settlement of payment card transactions and third-party network transactions. Section 3406(a)(1) requires some payers to perform backup withholding by deducting and withholding income tax from a reportable payment if a payee fails to furnish the payee's correct taxpayer identification number to the payer.

Regulations under section 3406 require that backup withholding apply to section 6050W payments made after December 31, 2011. That effective date was pushed back one year by the IRS in October 2011 in Notice 2011-88. Business groups decried the reporting provisions as onerous. (For Notice 2011-88, 2011-46 IRB 748, see Doc 2011-22669  or 2011 TNT 209-10 .)

The IRS recently added Line 1a-e on business tax returns requiring businesses that use third-party payers to reconcile their gross receipts with those reported by the third-party payers on their tax returns. However, on February 1, House Ways and Means Committee member Aaron Schock, R-Ill., introduced H.R. 3877, the 1099K Overreach Prevention Act, which would prevent Treasury from requiring taxpayers to reconcile reporting of payment transactions with amounts related to gross receipts or sales. (For the text of the bill, see Doc 2012-2253 or 2012 TNT 24-57 .)

In a January letter to the IRS and Treasury, Susan Eckerly, NFIB's senior vice president for public policy, wrote that the reporting requirement would increase compliance costs for small businesses and "could lead to a variety of transactions and payment plans that would make it harder to reconcile their actual gross sales with the gross receipts from the Form 1099-K."

Those transactions include cash-back transactions at the point of sale, returned merchandise reimbursing a customer with cash, charitable contributions made by a customer at the point of sale, and sales tax remittances to state and local governments, Eckerly wrote.

In a December 22 letter to the IRS and Treasury, Bill Hughes, senior vice president, government affairs, for the Retail Industry Leaders Association (RILA), expressed similar sentiments about problems related to reconciliation, especially for cash payments and reimbursements. (For the letter, see Doc 2012-27104  or 2011 TNT 249-11 .)

In an e-mail to Tax Analysts, Brian A. Dodge, RILA senior vice president, communications and state affairs, said that his group has been working behind the scenes with the IRS since last September to change the rule and that RILA received word today that the Service has "changed their policy and will no longer require merchants to track and report debit and credit card receipts."

In a statement, Dan Danner, NFIB's CEO, said, "This is a small, but important victory for small business and we appreciate the IRS working to alleviate the concerns of small business owners on this issue."