Thanks to the new Financial Reform Law merchant acquirers (the company you signed a contract with to take credit cards), beginning in 2011, will be required to report to the IRS how much their merchants process in annual credit card volume. What's motivating the government is their belief that many businesses have either not reported or have under-reported their annual earnings. As you might expect, many small business owners are unhappy with the new law. Here's a "heads up" on a few potential problems with the way the legislation is written, which may not be in your best interest ...

Requirements of the New Law

The new law states that starting in 2011 all parties to a credit card settlement must report merchant sales volume.  This not only includes your acquirer and the card networks such as VISA and MC, but also any other parties having a direct relationship with the merchant, such as American Express and the Discover card network.

Each of the parties referenced above must file an annual report to the IRS which discloses:

This will all be reported on the new IRS Form 1099-K.

Reporting Details

Not all transactions are included in the rules.  For example automated clearinghouse (ACH) transactions are excluded.  So are private-label credit cards that are only good at one location (e.g. a specific retailer), as well as a college campus card used only at businesses on campus.

What is included and requires reporting is if the campus card is used off campus and accepted by nearby merchants.

As noted above, all other credit and debit card transactions will need to be reported.

Need Help With YOUR Merchant Account?

Potential Problems

Unfortunately, there are also a couple issues which could cause unnecessary problems for some. Meaning you should take note in order to avoid an unintended headache.

Better Safe Than Sorry

 First, you could experience a problem if the legal name of your business that is on file with your acquirer, and your TIN on file with the IRS don't match.  How much of a problem? Try back up withholding of up to 28% of your payment card transactions until the discrepancy is resolved.

To avoid this problem it is strongly advised that you either personally verify or delegate to someone else the responsibility to check and make sure the name of your business recorded in your acquirers file and on your IRS TID are a match. This is one of those times when "an ounce of prevention is worth a pound of cure".   

A second problem involves the manner of reporting. Should gross revenues be reported, or revenues less chargebacks or other adjustments which occur from time to time? The argument here is that if the IRS wants to prevent under-reporting is doesn't have to create a new problem for the merchant by over-reporting revenue. It doesn't seem fundamentally fair to include revenues a merchant is going to lose anyway.  Yet, according to the IRS,  that is how the law is currently written.