New Reporting Rules Take Effect in 2012

January 1, 2012 – 10:11 am

In our April newsletter, we discussed the effects of the tax gap on small businesses. Now that tax season is here, we will start to see how the IRS’ attempts to close the tax gap, such as instituting new reporting requirements, begin to pan out.

As a result of the Housing Assistance Tax Act of 2008 (IRC section 6050W), there are new requirements for reporting credit card and other card payments, as well as transactions through third-party settlement networks. Payments made between January 2011 and December 2011 by credit card or third-party merchants for goods and services will be reported to the IRS and payees on Form 1099-K, Merchant Card and Third Party Network Payments.

Both domestic and foreign merchant acquiring entities and third-party settlement organizations are required to issue reporting forms to their participating payees. The IRS defines a merchant acquiring entity as “an ‘acquiring’ or ‘merchant’ bank…or other organization that has the contractual obligation to pay the participating merchant/payee in settlement of payment card transactions.” Additionally, “a third-party settlement organization is a central organization that has the contractual obligation to make payments to participating payees (generally, a merchant) in a third-party payment network…The most common example of a third-party settlement organization is an online auction-payment facilitator, which operates merely as an intermediary between buyer and seller by transferring funds between accounts in settlement of an auction/purchase.” (http://www.irs.gov/newsroom/article/0,,id=249029,00.html)

While there is no minimum exception to the requirements for merchant acquiring entities, third-party settlement organizations are only required to file Form 1099-K if a seller has made at least 200 transactions totaling a gross amount of $20,000 within the calendar year. Beginning in January 2011, the organizations responsible for reporting the payments were required to track the transactions on a monthly basis. Form 1099-K contains fields to report each month’s gross transaction amount. Reporting both annual and monthly amounts is essential to reconciling any discrepancies between the data reported to the IRS on fiscal-year tax returns with the data on information-only returns.

Some may be concerned about the possibility of dual reporting of this information, perhaps because of the Form 1099-Misc reporting requirements. For example, ABC Tax Services (ABC) receives payments from clients through a third-party provider and meets both the 200 and $20,000 thresholds. Additionally, ABC has provided more than $600 in services to several clients, resulting in a requirement by those clients to issue Forms 1099-Misc to ABC. If said clients pay ABC with credit cards, at first glance, one could see that revenue may be reported to the IRS twice – once from the credit card provider (1099-K) and again by the clients issuing Forms 1099-Misc. However, the IRS has indicated that if transactions qualify to be reported under Form 1099-Misc rules as well as under Form 1099-K rules, the information should be reported only under section Form 1099-K rules. This will eliminate the potential of double reporting.

For 2011, the reporting of Form 1099-K information has been delayed somewhat. There are lines for Form 1099-K proceeds on various forms and schedules (e.g., Schedules C, E, and F). However, for 2011, the form instructions and even form line descriptions indicate to enter zero and instead report all proceeds on another line. RedGear software has an input for Form 1099-K similar to other informational reporting forms like Forms 1099-R and 1099-Misc. Rest assured that information entered on this new input screen carries to the correct place on the designated form(s). As the rules on reporting Form 1099-K amounts change, we will make sure that the software is updated to accommodate accordingly.

For frequently asked questions relating to Form 1099-K, see http://www.irs.gov/newsroom/article/0,,id=249029,00.html.

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