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March 24, 2014

IRS 6050W: How to Protect Your Business From Backup Withholding

Don’t Lose 28% of Your Sales to New IRS Rules

Pay attention…..it’s not spam, it’s not junk mail, its important communication that if ignored could cost you 28% of your gross credit card sales! If you have not heard of “Backup Withholding” or “TIN Mismatch”, this is a must read!

The IRS has come up with ways to ensure merchants are not cheating them out of their piece of the action, mainly by having credit card processors report your sales directly to Uncle Sam.

The Housing and Recovery Act of 2008 included Amendment 6050W, Merchant Tax Reporting. The purpose of this Amendment is to encourage accurate tax reporting.

The Amendment requires all merchant service providers to collect and verify Taxpayer Identification Numbers (TIN) and report annual gross payments processed by credit or debit cards using Form 1099-K to the IRS and to merchants.

Why Is This Important to Know?

For those merchants who have not provided a valid Taxpayer Identification Number (TIN), address, and name match to their merchant service providers, they will have backup withholding imposed upon their merchant account, which can put some limo operators out of business.

What is Backup Withholding?

Backup withholding is a type of withholding imposed by the IRS for federal taxes on certain types of investments and incomes sources. Fundamentally, it is similar to the income tax withholding done on an employee’s paycheck.

Now, however, the IRS has added another prong to backup withholding.

Many merchants will be affected and we want to educate the ground transportation industry on how to avoid this painful experience.

What Happens If You Overlook This

Merchants who overlook or refuse to match up Taxpayer Identification Numbers may face an automatic 28% backup withholding deduction from their merchant account deposits. Consequently, a merchant may not get access to the withheld funds until the following year, so even a small oversight or temporary non-compliance could lock up vital funds for a long time.

On top of the Federal 28%, some states may impose their own penalty.

In California, the state assesses a separate 7% withholding penalty, which means that some merchants may see up to 35% of their money tied up.

Not sure about you, but if 35% of my gross sales were held up, that would not be a fun time for me!

One additional concern is that credit card transactions could become subject to backup withholding or garnishment if a business becomes delinquent on their tax payments. This withholding process could leave a business in severe financial difficulties.

How to Protect Your Business

Fortunately, you are still safe, according to the recent publications by the IRS, especially if you process with First Data (the world’s largest credit card processor). I am one of a small group of individuals that sits on the First Data ISO Advisory Board, so I keep up to speed with all things major such as this.

The deadline to impose this penalty for most card brands has been pushed back until October 2014 (originally slated for 2012) and the burden of reporting is on merchant service providers, so you don’t have any reporting responsibility under the new law.

However, for some merchants who process direct with American Express, we have already seen this process started and funds withheld. Simply put, if your TIN is not valid by October 2014, you will start to get your revenue withheld.

It is your responsibility to ensure that your merchant service provider has the correct full legal name of your business, your address, and taxpayer identification number so that they can accurately report it to the IRS.

For most businesses, this would be your Employer Identification Number (EIN). Due to this, merchant service providers will likely request that businesses provide them with a Form W-9 to acquire this information.

You can prevent the backup withholding tax from being applied to you by making sure that you fill in your correct TIN on your W-9 form. Be proactive when it comes to this requirement — especially since the financial consequences of non-compliance could be significant.

Accuracy and Consistency Are Key

A big issue that we notice is that most business owners are not sure what the IRS has on file associated with their taxpayer identification number and because many businesses are inconsistent with the business name on their tax returns from year to year. It can be as simple as using the “&” symbol instead of the word “and” or any other abbreviations.

The IRS’s system only notes if there is a variation but does not provide what they have on file. So it could be a transposed letter or number, the use of a symbol, a misspelled word, missing word or letter, or a number of other possibilities.

If you think the IRS may have the wrong information on file for your business, please contact your merchant service provider and the IRS directly to update the information. Accuracy and consistency on all of the data you provide to the IRS and your merchant service provider is vital!

What to pay attention to:

If you have a TIN mismatch for a specific reason code set forth by your credit card processor you will be notified. If you receive any sort of notification with regards to a TIN mismatch, act quickly to correct this. Based on your processor, you may be notified via mail, phone, fax or email.

If you don’t want to chance it, you can proactively reach out to your credit card processor and ask them where you can log in online to ensure what they have on file matches what the IRS has, avoiding any future headaches. If your credit card processor is not educated on this or cannot assist you, I would look for a new credit card processor.

For most businesses, a 28% withholding could be devastating, so pay attention to any communications from your merchant service provider, your statements, special mailings, or phone calls for notices of information not matching.

Where can I find more information about the IRS 6050W regulation?

You can visit the IRS Website here: IRS Section 6050W

Further details regarding credit card and merchant account reporting are outlined in an FAQ by the Internal Revenue Service http://www.irs.gov/uac/General-FAQs-on-New-Payment-Card-Reporting-Requirements

It is also recommended that you review your bookkeeping and accounting practices. When card payment reporting begins, you will need to reconcile the information reports submitted by the banks to your own books. Any discrepancies in reporting will need to be fixed so that accurate tax returns can be filed with the IRS.

Fees, Chargebacks and Refunds

The new law requires banks to report gross receipts. However, merchants often have chargebacks, issue refunds, or have debit card transactions where the customer receives cash back. Don’t worry!

Under the proposed regulations, banks and other payment transaction services will be reporting only gross monthly and annual payments. Fees, chargebacks, refunds and other items will not be netted against these gross amounts for IRS reporting purposes. For that reason, businesses should have comprehensive accounting procedures in place to keep track of these items separately.

So, if you are currently recording only a net deposit from a merchant account, it would be wise to separate those net amounts into gross receipts and the associated fees and refunds. That way your internal reports can be more easily reconciled to the new Form 1099-K.

The IRS details who is responsible for reporting, how gross amounts are calculated, and that merchant service providers can be required to withhold funds for backup withholding. The IRS has also released instructions for Form 1099-K. Business owners and accountants should review this new form to familiarize themselves with the format.

Be proactive and not reactive here. Make sure your TIN information that your credit card processor has on file matches exactly what the IRS has on file. The last thing any ground transportation needs is to have their credit card sales (which generally makes up 70% of operators revenue) held by the IRS.

To get help with IRS 6050W compliance, please fill out the form  below.

photo credit: OhKyleL via photopin cc

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