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Carolinas Cash Adventure Conference IRS Compliance Rules for Card Clients: New Rules for 2011, 2012, 2013

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Title: Carolinas Cash Adventure Conference IRS Compliance Rules for Card Clients: New Rules for 2011, 2012, 2013


1
Carolinas CashAdventure ConferenceIRS
Compliance Rules for Card Clients New Rules
for 2011, 2012, 2013
Paula Porpilia TIN Compliance Consultants May 16,
2011

2
Legal Disclaimer
  • Visa does not make any warranty or representation
    as to the completeness or accuracy of this
    information, nor assume any liability or
    responsibility that may result from reliance on
    such information. The information contained
    herein is not intended as legal or tax advice,
    and readers are encouraged to seek the advice of
    a competent tax professional where such advice is
    required. Even though the information contained
    herein does not address any significant federal
    tax issue, is not intended as tax advice, and
    Visa does not know or have reason to know that
    any of the information will be used or referred
    to by other parties in promoting, marketing or
    recommending any partnership or other entity,
    investment plan or arrangement, in order to
    comply with certain U.S. treasury regulations, we
    inform you that any U.S. federal tax advice
    contained in this communication, including
    attachments, was not intended or written to be
    used, and cannot be used, by any taxpayer for the
    purpose of avoiding any penalties that may be
    imposed on such taxpayer by the Internal Revenue
    Service. In addition, if any such tax advice is
    used or referred to by other parties in
    promoting, marketing or recommending any
    partnership or other entity, investment plan or
    arrangement, then (i) the advice should be
    construed as written in connection with the
    promotion or marketing by others of the
    transaction(s) or matter(s) addressed in this
    communication and (ii) the taxpayer should seek
    advice based on the taxpayers particular
    circumstances from an independent tax advisor.

3
Advisory
  • The purpose of this presentation is to alert
    you to the requirements of federal tax law and
    regulations regarding IRC sections 6041 and
    3402(t). It reflects the best information
    available as of the time presented. Over the
    next few months, additional guidance is expected
    to be released. Such developments may change the
    information provided herein. Be sure to check
    for the most recent guidance. In addition, how
    to implement a compliance program is up to each
    company, working with its tax advisers

4
Things Have Changed
  • The combination of Regulations issued in August
    2010 along with a Notice released in December
    2010 means that card transactions are no longer
    subject to IRS reporting and withholding rules
  • Check transactions in 2011 and 2012, on the other
    hand, are subject to the same rules as before
  • Additional rules for certain governments will
    take effect in 2013
  • The planned expansion of reporting for check
    transactions has been repealed.

5
Treas. Reg. 1.6041-1(a)(1)(iv)
  • For payments made by payment card or through a
    third party network after December 31, 2010that
    otherwise would be subject to reporting under
    both sections 6041 and 6050W are reported under
    section 6050W and not section 6041.

6
Basic Dividing Line--How You Pay
  • Beginning in 2011, HOW you pay will determine
    WHAT you have to do for IRS
  • Cash and check transactions will have one set of
    rules
  • Card transactions will have another set of rules

7
2011 And Beyond--Rules For Card Transactions
  • Beginning for 2011, if you use your card to
    purchase goods or services NO IRS compliance
    rules apply
  • You DO NOT have to
  • Get the merchants TIN
  • Backup withhold
  • File Form 1099-MISC
  • Respond to post-2010 B Notices
  • Deal with post-2010 Penalty Notices

8
Overview of IRS Reporting and Withholding Rules
for Check Transactions
9
2011 and 2012 Check Transactions
  • For most payers, check transactions in 2011 and
    beyond will be subject to the same rules as prior
    years
  • Obtain TIN before payment or backup withhold 28
  • File Form 1099-MISC if at least 600 paid in the
    calendar year
  • Deposit timely or be subject to penalties
  • File Form 945 annually to state withholding
    liabilities
  • Process B Notices
  • Respond to Penalty Notices
  • For Federal, State and Large Local governments,
    for 2011 and 2012 use above rules, but in 2013
    TIPRA rules take over

10
Basic Concepts for Check Reporting
  • Statute Report when you pay anyone or anything
    for any purpose unless you know an exception
    applies
  • Regulations provide some exceptions
  • Merchandise
  • Freight, telephone
  • Corporations
  • Unless corporation provides medical or legal
    services
  • Unless the payor is a federal agency
  • If part of a payment is reportable and part is
    not, report everything
  • When in doubt, report
  • You must file returns for all reportable payments
    made in a calendar year if the total is at least
    600
  • Use transaction date, not posting date
  • Aggregate all reportable transactions--check or
    cash (not card)-- to determine if 600 or more
    for same supplier

11
Supplier Names and Addresses
  • Report payments to all types of payees unless you
    know an exception applies
  • Exceptions include payments to tax-exempt
    organizations and government entities
  • Payees legal name--not DBA name -- is the one
    the IRS wants
  • Sole Proprietor Individuals Name (1040)
  • Name as shown on SS4 when applied for EIN
  • IRS wants the legal address (the one shown on
    taxpayers tax return)

12
Accurate TINs
  • IRS matches Name / TIN combination on information
    return with master file
  • The IRS issues a B Notice for an invalid Name /
    TIN combination
  • TIN Matching not required, but highly recommended
  • Frequent cause for a mismatch
  • DBA name used instead of sole proprietor name
  • Name misspelled or abbreviated
  • Missing TIN
  • TIN not 9-digits long
  • TIN contains alpha characters or hyphens
  • Paper reporting IRS scanning errors

13
Confidentiality
  • Cannot use TIN information for any other purpose
  • Cannot penalize merchant for failure to provide
    TIN

14
Backup Withholding
  • Must withhold 28 of any payment if TIN is not in
    hand at time of payment
  • Must also withhold if a B Notice is received
  • Payor receives if Name / TIN on information
    return does not match IRS master file
  • If you receive one, you must get the merchant to
    sign a Form W-9 or backup withhold on future
    transactions

15
Deposit Rules
  • If you withhold, you must deposit according to
    the same rules used for wage withholding (but
    done separately) electronic deposits may be
    required
  • If withhold is less than 2,500, deposit annually
  • If withhold is less than 50,000 in base year,
    deposit monthly by the 15th of following month
  • If more, deposit semi-weekly (Wednesday and
    Friday)
  • If more than 100,000 at any time, deposit next
    day
  • File Form 945/Schedule A annually
  • Penalties
  • 2, 5, 10 or 15 percent depending upon how late
    the deposit is (most are 10)
  • Penalty is in addition to the liability for the
    backup withholding itself
  • Penalty may be assessed for timely deposits not
    done according to the proper procedure (e.g. not
    using electronic deposits when required)

16
Reporting
  • Payee Statements
  • Must be sent to payee by January 31st or
    penalties apply
  • Extension of time (EOT) available
  • May use official form or qualified substitute
  • Separate penalties may apply
  • Information Returns to IRS
  • Due by March 31st if filing electronically,
    February 28th on paper
  • Penalties apply for late or inaccurate filing
  • Questions can be addressed to
  • IRS Martinsburg, West Virginia Payor Call Site
  • (866) 455-7438 or (304) 263-8700
  • 830am 430pm EST
  • No Charge for Service
  • Anonymous

17
Filing Penalties
  • Legislation in September 2010 changed the
    penalties effective for 2010
  • Now it is 100 per error, maximum of 1.5 million
  • Reduced to 60 per error, maximum of 500,000 if
    corrected by August 1st
  • Reduced to 30 per error, maximum of 250,000 if
    corrected within 30 days of due date
  • 250 per error, no maximum if intentional
    disregard
  • Separate 100 penalty/1.5 million maximum for
    errors associated with sending payee statements

18
Year End Checklist
  • To meet the current IRS requirements, you need
  • Merchants legal name
  • Merchants full mailing address
  • Merchants TIN
  • Annual totals
  • Questions for the payor to ask
  • When was the payment?
  • Use transaction date, not posting date
  • For how much?
  • Aggregate supplier payments to reach 600
    threshold
  • Card transactions not reportable therefore not
    included in total
  • Is the transaction for merchandise or services?
  • Is the merchant a corporation (except federal
    agencies) or other exempt recipient?

19
2012 Check Transactions
  • Same as before
  • Plans to expand reporting have been repealed
  • The repealed expansion would have required
  • Report payments to corporations
  • Report payments for merchandise
  • Will need TINs for all these merchants or backup
    withhold
  • H.R. 4, just passed by Congress, takes check
    reporting back to what is has been all along

20
2013 Check Transactions
  • For private sector and small governments, use the
    same rules as in 2012
  • For Federal, State and Large Local Governments,
    TIPRA becomes effective and generally supplants
    the old rules except for transactions subject to
    backup withholding
  • But see next slide

21
Sections 3402(t) and 6041
  • Section 6041 contains the old rules, and
    3402(t) the new rules, but these new rules appear
    to be additional rules not in stead of rules
    in some cases
  • If a Govt is backup withholding under 6041, then
    3402(t) does not apply
  • But the reverse does not appear to be true. So if
    a transaction is exempt from the 3402(t) rules
    (for example, because it is under 10K), nothing
    in the regs says the old rules do not still
    apply. In fact, since the regs contemplate that
    you may be backup withholding under 6041, clearly
    6041 continues to apply.
  • As a result, it appears that if a transaction is
    not reportable under 3402(t), it may still be
    reportable under 6041.

22
TIPRA and Checks
  • Under TIPRA, beginning for 2013 Federal, State,
    and large local governments are required to
    report all payments made AND withhold 3 every
    time, even if they have a good TIN
  • However, Notice 2010-91 provides relief for card
    transactions indefinitely since they will be
    reported by the merchants acquiring bank on Form
    1099-K
  • Check transactions (including convenience checks)
    will be subject to the TIPRA Rules
  • Some exceptions apply but can be difficult to
    implement
  • Tip to minimize IRS reporting requirements use
    a card to pay for everything

23
100 Million Exception
  • 100 Million Exception
  • Local governments with annual spend of under 100
    million are exempted from these requirements
  • To calculate spend, either
  • Look at the base year 2 years before the
    current year (for 2013 look at the spend in
    2011), OR
  • Average 4 of the 5 consecutive years ending with
    the base year (for 2013, average 4 of the years
    from 2007 to 2011)
  • Exclude from the spend calculation anything
    exempted from the reporting requirements except
    transactions excluded solely because they are
    under 10,000 or transactions associated with old
    contracts
  • As a result, payroll and retirement benefits are
    not included in the spend total

24
Exceptions to 3402(t)
  • Exceptions to 3402(t)
  • Under Proposed Regulations, Governments will not
    have to report and withhold under 3402(t) for
    transactions
  • Under 10,000
  • Connected to a pre-2013 contract (may be
    eliminated in 2014)
  • Connected to classified contracts
  • Connected to certain welfare programs
  • Payments to government employees, Indian tribes
    or other governments
  • Connected to emergency or disaster situations
  • For services by non-US persons outside the US
  • That are rental payments for real property or
    interest
  • Payments where backup withholding is already
    being done under 6041

25
Review of IRS Reporting Rules for 2011, 2012, 2013
26
2011 and 2012
  • No reporting for card transactions begins
  • Check transactions continue to be subject to
    current rules
  • B notices for 2010/2011 transactions
  • Penalty Notices for 2009/2010

27
2013
  • Card transactions continue to be free of IRS
    compliance requirements
  • For certain Government Payors paying by check
  • Reporting and withholding 3 effective under
    3402(t)
  • File Forms 1099-MISC
  • For everyone else paying by check
  • Same rules as for 2011
  • File Form 1099-MISC
  • Penalty Notices for 2011 Forms 1099-MISC

28
Private Sector/Small Local Governments
  • 2011 and beyond
  • If paying by check - report using existing rules
  • Report services, not merchandise on Form
    1099-MISC
  • Report sole proprietors, partnerships, medical
    and legal corporations
  • Do not report other corporations, governments,
    TEOs
  • Get TIN or backup withhold 28
  • B Notices and Penalty Notices
  • If paying by card - no IRS requirements

29
Federal/State/Large Local Governments
  • 2011 and 2012
  • If paying by check Report using current
    rules--see 2010
  • Report services, not merchandise on Form
    1099-MISC
  • Report sole proprietors, partnerships, medical
    and legal corporations
  • Do not report other corporations, governments,
    TEOs (Federal agencies report all corporations)
  • Get TIN or backup withhold 28
  • B Notices and Penalty Notices
  • If paying by card No IRS requirements
  • 2013
  • Card transactions continue to be free of IRS
    compliance requirements
  • For checks, for all transactions (goods and
    services) to all merchants (except other
    governments or TEOs) report on Form 1099-MISC and
    withhold 3 (28 if no TIN) (Some exceptions
    apply)

30
Impact on Card Clients
  • After years of turmoil and efforts by Visa to
    obtain compliance relief for cardholders, the
    payoff is at hand
  • After 2010, card transactions are not reportable
    by card clients, so use your card for everything
  • After 2012, payments by check get even more
    complicated for many government agencies as they
    will have to withhold 3 and report on all check
    transactions
  • QPCA will be withdrawn as unnecessary

31
Impact on Merchants
32
Merchants Point of View
  • Form 1099-MISC
  • Merchants will continue to receive Forms
    1099-MISC from AP departments for check payments
    but not card payments
  • Exemption for merchandise continues
  • Non-legal, non-medical corporations will continue
    to be exempt recipients--payers do not have to
    send Form 1099-MISC to them
  • If the payer is a Federal Government agency then
    the forms will be sent to corporate payees if
    they are otherwise required
  • Beginning in 2013, Federal, State and large local
    governments will report on all check (but not
    card) transactions (goods and services, corporate
    or not) and withhold 3 of all check payments as
    pre-paid taxes

33
Merchants Point of View Part II
  • Form 1099-K
  • Merchants will receive Form 1099-K for their
    payment card transactions
  • No exemption for merchandise
  • No exemption for consumer cards
  • No exemption for corporate payees
  • IRS revising corporate tax return forms to
    utilize Form 1099-K data

34
Other Considerations
35
State Activity
  • These are the Federal Rules
  • Many states have their own information reporting
    requirements
  • Some ride in tandem with Federal law and others
    require legislative action to mirror Federal
    changes
  • As a result, although reporting may no longer be
    required for the IRS, reporting may be required
    to states where your merchants are located
  • Each payor should work with their counsel to
    determine whether they have state reporting
    duties, and whether the states involved will
    follow the Federal lead and adopt 3402(t), the
    anti-duplication rules, and/or the expanded 6041
    reporting

36
How Visa Data Can Help With State Reporting
  • Payee legal name, TIN, address
  • The incorporation status of the supplier
  • 1 Sole Proprietor (use the individuals name
    EIN or SSN is OK)
  • 2 Partnership
  • 3 Corporation
  • 4 Medical or Legal Corporation (reportable by
    all)
  • 5 Associations/Estates/Trusts
  • 6 Tax-Exempt Organizations (TEOs)
  • 7 Governments (Federal/State/Local/Foreign)
  • 8 International Organizations
  • 9 Limited Liability Company (LLC)

37
Visa Activities
  • TIN Matching was done on all merchant records
    with 2010 transactions Visa worded with
    acquirers to resolve IRS TIN mismatches
  • This resulted in improved data for cardholders
    for 2010
  • Visa will continue to work with IRS and Congress
    to protect our recent gains and to monitor the
    development of future regulations

38
Reporting Help
  • Questions can be addressed to
  • IRS Martinsburg West VA Payor Call Site
  • (866) 455-7438 or (304) 263-8700
  • 830 430pm EST
  • No Charge for Service
  • Anonymous

39
IRS Numbers
  • Call Site 866-455-7438
  • Forms and Pubs 800-777-4778
  • Taxpayer Advocate 877-777-4778, 202-622-3125,
    or systemic.advocacy_at_irs.gov
  • EFTPS 800-829-4933
  • TeleTax 800-829-4477
  • E Help desk at 866-255-0654
  • On-line at www.irs.gov/efile

40
Additional Information
  • IRS Resources
  • 6041 Regulation Change
  • http//www.federalregister.gov/articles/2010/08/16
    /2010-20200/information-reporting-for-payments-mad
    e-in-settlement-of-payment-card-and-third-party-ne
    twork
  • TIPRA Regulations
  • http//www.federalregister.gov/articles/search?con
    ditions5Bterm5DTIPRAcommitGo
  • TIPRA Notice 2010-91
  • http//www.irs.gov/irb/2010-52_IRB/ar15.html

41
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