IRS To Watch Debit and Credit Purchases - Other News

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Credit Card Applications » News » Other » IRS To Watch Debit and Credit Purchases

IRS To Watch Debit and Credit Purchases

IRS To Watch Debit and Credit Purchases
The content is accurate at the time of publication and is subject to change.

In 2008, Congress passed a law called the Housing and Economic Recovery Act which changed the rules for debit and credit card reporting, in an effort to improve tax compliance. These changes took effect starting at the beginning of the new year on January 1, 2011, with the first reports due early 2012. Under the new law, companies involved in payment processing must track debit and credit card payments and then report the yearly transaction totals of merchants to the IRS. From there, the agency intended to match that information with the income reported by business taxpayers on their returns. According to a recent audit performed by the Treasury Inspector General for Tax Administration, improvements need to be made to its implementation.

“We found that improvements must be made if this effort is to function as intended, which is to help reduce the tax gap,” said TIGTA Inspector General J. Russell George, in a statement as reported by Accounting Today’s website. “Based on our finding, the IRS immediately made adjustments to one tax form and is reviewing the other affected forms to make similar improvements.”

IRS officials have indicated their intentions to utilize the data about cash transaction rates in various industries in order to better direct their auditing resources toward businesses that are likely underreporting income. When the law was passed, estimates were made by the Congressional Joint Committee on Taxation that it would generate some $9.5 billion in revenue for the federal government over a 10 year period, Bloomberg reports.

One issue that the audit revealed was the forms created by the IRS may lump any cash back portion of debit card transactions in along with the income amount for the merchant. A different form was proposed that included a separate line for cash back, as a potential fix to this problem.

Another problem seems to lie in the antiquated system the IRS uses to match tax ID numbers to businesses. Bloomberg reveals that, according to Mary Bennett, a director of government and industry relations at the Electronic Transactions Association, a Washington industry group representing payment processors, requests can be rejected due to even small disagreements such as using an ampersand in lieu of “and.”

IRS officials agreed with the recommendations enclosed within the report. Accounting Today further reports the commissioner of the IRS’s Small Business/Self-Employed Division, Faris Fink as saying, “The implementation of merchant card legislation should help to reduce the Tax Gap. As the reporting of merchant card payments is a new requirement, we will monitor the reporting for merchant card and third-party payments in our efforts to simplify this new reporting requirement. We plan to communicate our findings from the monitoring to taxpayers and practitioners. We also recognize the importance of obtaining meaningful feedback from the public, and whenever possible, will enhance the forms and instructions to ensure accurate reporting.”

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