is estimated there are more than 10,000 credit card transactions made every
second around the world. This astonishing number results in more than $7.5
trillion in credit card payments per year (American Bankers Association). If you
are one of the lucky businesses processing these transactions, you are now
subject to the newest IRS requirement—Section 6050W.
What is 6050W?
Section 3091(a) of the Housing Assistance Tax Act of
2008 added Section 6050W to the Code requiring merchant acquiring entities and
third party settlement organizations to file an information return for each
calendar year reporting all payment card transactions and third party network
transactions with participating payees occurring in that calendar year. It was
created in an effort to further reduce the estimated $345 billion tax gap from
the business sector by providing additional information to the IRS on aggregate
credit card transactions. Effective January 2012, all credit card processors
(i.e., LawPay, First Data, TSYS, etc.) and third
party payment aggregators (PayPal and Square) will be required to report gross
card transactions to the IRS. This means the gross dollar amount of all
transactions will be reported on a special 1099-K, regardless of returns or any
processing fee deductions.
The amount to be reported to the IRS with respect to each lawyer is the total
gross amount of all of the transaction made for that lawyer in the calendar
year. The preamble to the final regulations under section 6050W makes clear that
the amount reported is to be the total gross amount "without regard to any
adjustments for credits, cash equivalents, discount amounts, fees, refunded
amounts, or any other amounts." 75 FR 49821-01, 2010 WL 3207681 (Aug. 16, 2010).
Commentators on the final regulations had suggested "defining ‘gross amount’
as net sales, taking into account credit transactions, chargebacks and other
adjustments, on the ground that gross amount is not a true indicator of
revenue." Id. The Treasury rejected these suggestions because "[t]he information
reported on the return required under these regulations is not intended to be an
exact match of the net, taxable, or even the gross income of a payee." Id
What about my IOLTA?
In the case of attorneys, Section 6050W does not
make a distinction between credit card transaction deposits made to a trust or
IOLTA bank account and an attorney’s operating bank account. This has many
attorneys concerned the IRS will view these transactions incorrectly as income.
However, there are two important items to note: (1) the new 1099-K is only
intended to be "informational"; and (2) your processor should include a merchant
industry code on your 1099-K identifying you as a law firm or provider or legal
services. The reporting requirements under section 6050W require credit card
processors to report to the IRS on Form 1099-K the total gross amount of payment
card transactions processes for each client over the calendar year, without
reduction to account for amounts deposited into IOLTAs. Although there are few
instructions from the IRS informing taxpayers on how to account for
discrepancies between 1099-Ks issued to them and amounts reported on the
taxpayer’s return, it is clear that the IRS does not intend the Form 1099-K to
match net, taxable or even gross income. Thus, the amount shown on the Form
1099-K will not in all instances be required to be reported as income.
Match or mis-match?
In addition to the gross volume reporting, Section
6050W also requires processors to verify and match your federal tax ID and legal
name to IRS records. 6050W requires an exact match on both items to file your
1099-K correctly. Due to technology limitations with most Visa and MasterCard
processors, merchant statements are usually limited to only 25-35 characters. As
such, many law firms merchants have either abbreviated their name or used an
acronym for their merchant account. If this is the case, you will need to
contact your processor to assure that your legal name on your merchant exactly
matches the legal name you use to file your tax returns (at least within the
maximum number of characters provided by your merchant processor).
First, the good news. Originally set to begin January
2012, the IRS has decided to use the 2011 tax year as a "trial run" for
reporting on 1099-Ks. Due to system and reporting limitations with both the IRS
and virtually all card processors, the timeline for matching legal names and
TINs has been extended until the 2012 tax year. However, the bad news is,
beginning January 2013, the IRS will impose a 28 percent withholding penalty on
all credit card transactions if the merchant information on file is not an exact
match with their records. It is still unclear what steps merchants will need to
take to reclaim held funds, even if the legal name and TIN information is
Due to the steep withholding penalty, it is imperative that you confirm the
information on your 1099-K this year. If you have not yet received a 1099-K from
your processor, call and request a copy. All 1099-Ks should have been sent out
in late January for a "trial run." You will notice there is nothing further that
needs to be done for the current 2011 tax year.
Fees for 6050W?
It seems anytime the IRS changes a policy or tax
requirement, a new fee is created by the banking institutions to reclaim their
own costs. As a merchant, you will be happy to know Section 6050W specifically
states processors may not charge for implementing the 1099-K process. Beware of
new 6050W charges disguised as "government fees" or "tin-matching fees" that may
have been recently added to your merchant account.
No need for alarm
The intent of Section 6050W is to assist the IRS in
identifying businesses not filing accurate tax returns. In other words, the IRS
appears to be targeting businesses most likely to omit or avoid reporting
correct tax information. Requiring a taxpayer to account for discrepancies
between amounts reported on Form 1099-K and the taxpayer’s return would be
consistent with reporting on Form 1099-Misc. In the case of Form 1099-Misc, a
taxpayer reporting business income on Form 1040 reports only amounts that are
"properly shown" on the 1099-Misc. In the case of deviations, the taxpayer is
instructed to "attach a statement explaining the difference." (See 2010
Instructions for Schedule C: Profit or Loss From Business.) Thus, it would be
consistent with IRS policy in other areas to similarly require a taxpayer
reporting a return amount different from the amount shown on Form 1099-K to
attach a statement showing the reason for the difference. In the case of a
lawyer depositing amounts into an IOLTA, the statement would show the amount of
such deposits over the year which is excludable from gross income.
Fortunately, the IRS has recently provided guidance for the 2011 tax filing
year through a notice to tax filers dated Jan. 31, 2012, titled "Clarification to the
instructions for Schedule C, E and F on Reporting 1099-K Amounts."
Not only has the requirement to report the amounts of gross credit card
transactions been deferred for the tax tear 2011, there are other indications
that the IRS may not require small business tax filers to reconcile the
differences between 1099-K amount and income for future tax years.
Lastly, if, on January 2013, you have still not matched your legal name and
TIN with your processor, you should stop accepting credit cards until you verify
your legal name and federal tax ID names match. There is no reason to risk a 28
percent withholding penalty when it is so easily avoidable. While LawPay is
taking a very proactive approach to these new rules from the IRS by validating
all attorney merchants, not every processor is following suit. Do not wait for
your credit card processor to contact you. The IRS has assigned the reporting
requirements on the credit card processors, but the ultimate liability lies
squarely with you and your firm.
For more information on Section 6050W visit www.IRS.gov, or consult directly with
your tax advisor.
The LawPay Program, is a custom payment
solution designed by AffiniPay for attorneys. The LawPay Merchant Account
complies with American Bar Association and state requirements for managing