New
IRS Section 6050W
What
is it, and How it Affects Attorneys
By
Amy Porter
It
is estimated there are over 10,000 credit card transactions made every second
around the world. This astonishing number results in over $7.5 trillion in credit
card payments per year (American Bankers Association). If you are one of the lucky
businesses processing these transactions, congratulations, 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 (the “Act”) 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 (LawPay, First Data, TSYS,
etc) and third-party payment aggregators (PayPal, 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 (August 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”, (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-firm 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).
Painful
Penalty
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. The bad news, however, 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 corrected.
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 January 31, 2012 entitled “Clarification to
the instructions for Schedule C, E & F on Reporting 1099-K Amounts” (http://www.irs.gov/formspubs/article/0,,id=253098,00.html). Not only has the
requirement to report the amounts of Gross Credit Card Transactions been
deferred for the tax Year 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 come January 2013, you have still not matched your legal name and TIN with
your processor, my advice is to 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. Don’t 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.
Amy
Porter is CEO of AffiniPay, provider of the LawPay Program payment solution for
lawyers.
EDITOR’S
NOTE: While LawPay is an advertiser in the Bar Journal, neither the State Bar
of California nor the Bar Journal received any compensation for publishing this
article.
Any opinions and/or viewpoints contained in this article belong solely to the author(s) and are not necessarily the opinion of the California Bar Journal or the State Bar of California or its staff and employees.