New information reporting requirements for payment card and third-party network transactions.

• Author: Gill, D. Joe

Convincing taxpayers to notice newly enacted tax legislation that does not affect the current year is difficult. Getting them to address ministerial requirements that will not be effective for two to three years is next to impossible. One piece of legislation passed in mid-2008 that has not received a lot of attention could end up biting some that have placed it at the bottom of their to-do list or, worse, failed to notice it altogether.

A provision in the Housing and Economic Recovery Act of 2008, P.L. 110-289, which was signed by President Bush on July 30, 2008, contains new information return reporting requirements related to the settlement of reportable transactions involving payment card (e.g., credit and debit cards) and third-party network transactions, including the settlement of any credit or debit card sales and internet transactions through a third-party network (Sec. 6050W).

The provision is part of Congress's latest attempts to close the tax gap. The new reporting requirements are expected to reduce noncompliance related to income underreporting by taxpayers with gross income from payment card and/ or third-party network transactions. In practice, settlement of these transactions involves many steps that are performed by different participants. The new requirements target two of them:

* Payment settlement entity (the payor): The merchant acquiring entity or acquirer (for payment card transactions) or the third-party settlement organization (for third-party network transactions). A merchant acquiring entity is the bank or other organization that is contractually obligated to make payment in settlement of payment card transactions.

* Participating payee: The party that accepts a payment card as payment or establishes an account with a third-party settlement organization in order to settle transactions. In a payment card transaction, the payee may also be referred to as the merchant or seller.

Beginning with calendar year 2011, payment settlement entities for traditional and online merchants will be required to report to a payee, as well as to the IRS, the gross amount of the payee's reportable payment transactions within a calendar year. Failure-to-file penalties will apply. While a substantial majority of the new reporting burdens will fall on financial institutions and other large businesses that provide merchant acquiring bank services or offer online payment settlement, these services are not restricted to these types of...