Housing Bill + Tax Gap = New IRS Reportsby Tim Manni
For months different versions of the housing rescue bill were kicked back and forth between lawmakers, debating and rejecting various stipulations that called for tax credits for first-time homebuyers, as well as financial relief for businesses and communities weakened by the housing crisis. So how did a mandate involving credit cards and the IRS wind up somewhere in between government-backed refinanced mortgages and counseling for lending agencies?
In an attempt to narrow the national tax gap, starting in 2011 lawmakers will require that every merchant who collects over $20,000 in payment-card transactions, or over 200 card transactions, be reported to the IRS:
While the new rule may bring more IRS audits, it’s also aimed at encouraging business owners to report income accurately. “It’s probably designed to lead to increased compliance,” said Mark Luscombe, a principal analyst with CCH Inc., a Riverwoods, Ill., tax publisher.
“If the IRS, through this system, gets information on a merchant that shows X amount of credit-card sales and their statistics show that type of merchant probably has 80% of their business done on credit-card sales, and total reported revenue doesn’t seem to mesh up, it probably will result in audits,” Luscombe said.
Neither business owners nor payment-card processors are very happy over the upcoming arrangement. The new stipulations are likely to increase costs, which always seem to find their way back to the consumer:
Small-business owners are worried about higher costs under the new rule. “The credit-card companies or the banks are going to have to build this [reporting] system out. That cost is likely to be passed on to the small-business owner,” said Bill Rys, tax counsel for the National Federation of Independent Business, a trade group in Washington.
They’re also worried about mistakes because any mismatch or problem related to a business owner’s taxpayer identification number on the report means the payment processor creating the report must withhold 28% of the total sales. That’s a 28% hit to gross sales, not taxable income.
The American Bankers Association is especially displeased with the mandate, as expressed in a letter submitted to lawmakers:
“This burdensome unfunded mandate would impose hundreds of millions of dollars in costs on the business community. In order to comply with this mandate, the payment card industry and its third-party processors would be required to fundamentally redesign card processing systems that were developed to accommodate the efficient and reliable processing and settlement of transactions between consumers and merchants.”