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Housing relief act lets IRS see merchants’ credit, debit card sales

Daniel Ray

Business owners, if you have a merchant account that lets you accept credit or debit cards, Uncle Sam just stuck his nose further into your business.

A little-noticed provision in the housing relief bill signed into law this week by President Bush will require institutions involved in merchant accounts to file a new form with the IRS, beginning in 2011. The form will report how much a business got in credit or debit card transactions.

The increased-reporting requirement has rattled privacy advocates, has credit card payment processors warning of increased costs and has angered at least one former presidential candidate.

The measure was “slipped in” the housing bill, says former Republican presidential candidate Ron Paul in a video on his Campaign for Liberty Web site. The result, he says, is “All credit card transactions will be reported to the IRS. And more regulation, more reporting, more surveillance, and they’re hoping to collect more money in this effort. They’re always coming up short, so this is more surveillance of every single thing you do in life, everything you buy and sell on your credit card, every transaction will be reported to the IRS.

“The trend is not good,” he says.

How merchant accounts work
To understand what has the Texas congressman and others riled, you need a little background.

Whenever a consumer buys something using a payment card, several parties are involved behind the scenes. On the consumer’s side, there’s the bank that issued the card. Then there’s the acquiring bank that the merchant signed up with (every merchant that accepts credit cards has to be “sponsored” into the credit card processing system by a bank). The consumer’s bank and the merchant’s bank pass information about transactions back and forth through a processing system run by Visa, MasterCard, Discover or American Express. Finally, the consumer’s card-issuing bank, or the merchant’s acquiring bank, or both, may hire private, third-party companies to perform the chore of processing.

The new law requires the parties involved — whether banks or third-party processors — to aggregate and report the total payment card transaction volumes to the IRS.

It’s similar to the way that businesses are required to obtain W9 forms from contractors when total payments exceed $600 a year, and then report the total paid to a contractor to the IRS.

Although the language of the bill is convoluted, it appears to exempt the smallest businesses by creating a trigger point: Below $20,000 in annual payment card sales, or 200 payments, no report required. (If anyone has a different reading of the text, please let me know.)

According to the Treasury Department, “Payment cards (both credit cards and debit cards) are an increasingly common form of payment to merchants for property and services rendered. Some merchants fail to report accurately their gross income, including income derived from payment card transactions. Generally, compliance increases significantly for amounts that a third party reports to the IRS.”

$10 billion in new tax revenue?
Having that aggregate report will cause more businesses to accurately report their credit card income, the Treasury believes, boosting compliance and tax revenue. It’s estimated to raise $9.8 billion over 10 years.

The measure had been part of the president’s 2007 budget proposal and, before it was tacked onto the housing bill, was a stand-alone bill. That bill got a hearing in June before the House of Representatives’ Committee on Small Business, where it was roundly panned by small-business advocates, payment processors and privacy advocates.

Fifth Third Processing Solutions’ Senior Vice President Donald Boeding said in written testimony the measure would be costly and “could create tensions between acquirers/processors and their merchant customers who don’t understand how the information is going to be used and/or disagree with the methodology by which processors have created the reporting. This will result in a tremendous amount of concern and confusion among merchant customers. Additionally, fear of audit could make merchants less likely to accept electronic payments.”

Fifth Third is a large regional bank based in Cincinnati. Boeding added that “(I)t should be expected that the noncompliant taxpayers this proposal targets will ultimately find and develop schemes to avoid recognition through this type of reporting. Some may simply stop accepting cards altogether thereby making it less likely that the IRS will be able to track taxable income, others may simply work to find loopholes in the reporting mechanisms that are ultimately established. The benefits expected to arise from this initiative may ultimately result in increased costs to the compliant payment card participants (consumers, acquirers, processors, issuers, merchants) with no real benefit to those same participants.”

IRS camel’s nose in the tent
David Sohn, senior policy counsel for the Center for Democracy and Technology, a nonprofit group advocating digital privacy, called the measure “highly objectionable” in his written testimony in June, saying it would create new, hackable databases full of business owners’ data. Small business owners often use their Social Security numbers as Taxpayer Identification Numbers — the number that the new law requires merchant processors to track.

I spoke to him late this week, and his objections remain: “Our concerns from a privacy angle were that right now, most banks that issue credit card merchant accounts have adopted what we consider to be a good and recommendable security practice, that is, they don’t keep individual numbers around. If there’s a lot of data lying around they don’t need, it creates a security risk.”

He also predicts the measure will suffer from “mission creep” because simple payment aggregation numbers won’t be enough. Suppose, he says, that three dentists share an office, and a single credit card merchant account. The card processor won’t be able to match the amount processed to any individual — not without further credit prying into each dentist’s information.

“It’s a purely governmental function, tax collection is,” he says. But now, merchant processing companies are getting into the act. “We think it’s tricky, going down that road.”

Hat tip: Kay Bell from Don’t Mess With Taxes

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  • Francis Bierman

    I think when using a Debit Card there isn’t enough information reported, Example I used a debit card to buy drugs from Wal Greens, and I also used my helth card only to find out later I didn’t have insurrance, later on I paid the balance and wasn’t given a receipt because the receipt was already given when the drugs were first given to me even though the amounts are not equal. I later about a year and a half, the insurrance company sent me a bill for a balance that I paid, when I went to the bank to get a copy of transation it only states wal Green and not what it was for unless I need to go some where further to get this info. the Debit card was thru VISA/Commerce Bank any help on getting more info not being release and how to get.