John Mayleben Blog

IRS moves will impact credit card merchants

by ... Bob Negen David Coleman Dianna Stampfler Ed Borowsky Elissa Hillary James P. Hallan Jennifer Cherry John Mayleben Ken Seawell Scott Watkins Steve Flaster Tom Borg Tom Scott

IRS moves will impact credit card merchants

The Internal Revenue Service recently announced it will begin issuing prepaid debit cards to some taxpayers on a trial basis in 2011 instead of mailing them refund checks during the tax season.

This could create more traffic around tax time in retail stores that accept debit card payments.

The pilot program is designed to make it easier for Americans without savings and checking accounts to get access to their income tax refunds. The IRS says too many recipients are forced to use “high-cost alternative financial products,” such as check-cashing and similar services that eat into their refunds.

The government estimates there are 30 million Americans without bank accounts or with accounts that don’t meet their needs.

Another, perhaps “more taxing,” IRS change involving businesses that accept credit and debit card payments comes as a result of the U.S. Housing and Economic Recovery Act of 2008.

The legislation was one of the responses to the recent financial crisis and, as a way to fund it, Congress directed the Internal Revenue Service to make sure all merchant processing transactions are appropriately reported as “income” to a business and, therefore, taxed.

Starting in January 2011, all credit card processors (such as Michigan Retailers Association) must report individual business transaction volume to the IRS along with the merchant’s TIN (Taxpayer Identification Number). That also means virtually every merchant will be receiving a 1099 form from the processor at the end of 2011 showing the transaction volume that was processed.

If a merchant does not provide an accurate TIN, the credit card processor is required to withhold 28 percent of the processing volume and remit those funds to the IRS. Clearly, this is something that both processors and merchants want to avoid.

For those businesses that use MRA for processing transactions, you should know that we are working on creating a method of confirming that everyone’s TIN and legal name are accurate, in order for MRA to avoid the withholding requirement.

A third important change you should know about also comes in response to recent federal legislation — this time health care reform. Merchants who sell products or services that could be paid for with a FSA (Flexible Spending Account) card will need to review the changes scheduled to take effect January 1, 2011.

FSA cards are tied to tax-favored accounts, such as Section 125 Flexible Spending Accounts, Health Reimbursement Accounts, and Health Savings Accounts. After January 1, a number of items previously allowed for reimbursement via a FSA card will no longer be allowed.

Most, if not all, over-the-counter medications (except those “prescribed” by a doctor) will be eliminated from the list of eligible items. For those people with a prescription for an over-the-counter medication, they will need to pay for it and seek manual reimbursement.

As you can see, January will usher in a new year and important new changes by the IRS.

John Mayleben is Michigan Retailers Association senior vice president, technology and product development, and a national expert on electronic payment processing.

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