P-Card/Corporate Credit Cards, 1099 Reporting

and Transaction Processing

Jerry Michael, IRSCompliance.org

Payment Cards• Who has the ultimate liability for payment?

– If cardholder/employee defaults on payment– Who controls the card?

• Reportable– Company name – company paid– Employee and company name – company paid or employee

reimbursement – Employee name – company paid or employee reimbursement

• Accountable Expense – Means that expenses that are accountable by receipts or under certain

thresholds on purchases on behalf of the company are not reportable to the employee

– Accountable expenses – if payments are reportable transactions, they are required to be processed in the same manner as internal payments under IRS Section 3405 and 3406

Transactions

• Reportable - Individuals– Services– Services and goods– Health care – Legal corporations

• Reportable – Corporations– Health care – Legal entities

• Non-Reportable– Goods (Legislation is proposed for TY 2007 to require

government agencies to report goods)

Credit Cards

• Reportable– Company name – company paid– Employee and company name – company paid or employee

reimbursement – Employee name – company paid or employee reimbursement

• Accountable Expense – Means that expenses that are accountable by receipts or under

certain thresholds on purchases on behalf of the company are not reportable to the employee

– Accountable expenses – if payments are reportable transactions, they are required to be processed in the same manner as internal payments under IRS Section 3405 and 3406

Information Reporting Requirements

• All persons, partnerships, companies, corporations, estates or trusts engaged in a trade or business and making payment in the course of such trade or business to another person, of rent, salaries, wages, premiums, annuities, compensations, remunerations, emoluments, or other fixed or determinable gains, profits, and income are required to report these payments to the IRS, states and the payee

• Different thresholds ($0, $10, $600) for different types of payments

• Reporting is prescribed by the forms as designated by the IRS

Who has the responsibility of Tracking and Reporting Card

Transactions?

• The organization using the card to transact reportable events. YOU

Information Reporting Requirements

• Reporting and Withholding Requirements Apply to Federal and Most States

• TIN and Name Solicitation/Certification of the Payee• Backup Withholding Requirements• Establishing Procedures and Documenting Reasonable

Cause• Reporting and TIN Compliance History• Documentation – Record Keeping

State Reporting Requirements

• Combined Federal State Reporting Program (CFS) – Additional reporting to CFS states may be required under certain

conditions

• Forms not included in the IRS reporting program• Direct reporting if state tax withheld• Direct reporting for payments to residents and non-

residents• State specific criteria

Current Year State Reporting

• Current Year Quarterly Reporting– Maine

• Any form with state tax withheld

• Independent Contractors (New Hire Reporting)– California Connecticut– Florida Iowa– Massachusetts Minnesota– New Hampshire New Jersey– Ohio Michigan*– Maine Mississippi– Guam*

Independent Contractor Reporting

State Days Penalties ThresholdCalifornia 20 days $24 / $490 $600 Florida Voluntary at this timeGuam For government contractors onlyIowa 15 days $25 / Contempt $600 Maine For government contractors onlyMassachusetts 14 days $25 / $50 / $100 $600 Minnesota* 20 days None NoneMississippi 15 days $25/500 NoneNew Hampshire 20 days $25 / $500 $2,500 Connecticut 20 days None $5,000 Ohio 20 days $25 / $250 NoneNew Jersey 20 days Warning / $20 NoneMichigan 28-Feb Federal None

Backup Withholding Requirements - Overview

• IRC Section 3406• Required:

– On reportable payments if a TIN is not provided in the required manner.

– If subject to a B-Notice– If subject to a C-Notice

TIN Provided in Required Manner

• Certified under penalties of perjury for payments reported on:

– Form 1099-B

– Form 1099-DIV

– Form 1099-INT

– Form 1099-OID

– Form 1099-PATR

• All others, TIN can be provided in writing, on contracts, phone call, invoices, etc., until such time you are notified by the IRS that the information is incorrect (B-Notice, TIN Penalty).

Missing or Incorrect TINs

• Missing TIN – – No TIN provided by payee

– TIN has invalid characters • Incorrect TIN-

– Name/TIN combination does not match IRS or SSA files

• Not Currently Issued TIN:– TIN cannot be found in IRS or SSA files

Payments Issued via Payment Card

      

 

             

 

           

 

             

 

               

 

      

 

        

 

           

 

            

 

     

 

Payment Card Parties

• Cardholder/payer - Buyer• Merchant/payee - Seller• Bank issues a payment card (issuing bank)• Merchant/payee's bank (merchant bank,

acquiring bank, or acquirer)• Payment card organization

Payment Card Organization

• Entity that sets the standards and provides the mechanism, either directly or indirectly through members and affiliates, for effectuating payment between a purchaser and a merchant in a payment card transaction.

• A payment card organization generally provides this mechanism by issuing payment cards, enrolling merchants as authorized acceptors of payment cards for payment for goods or services

• Ensures the system conducts the transactions in accordance with prescribed standards of payment card transactions.

Cardholder Processing and Payment Card Reporting

• Analyzing the payment card transactions data (under current withholding requirements)– The employee of the cardholder/payer may not or can

not request and obtain the name/TIN combination of the merchant/payee at the time of the transaction. (TIN solicitation)

– Soliciting the TIN and Name of the merchant via phone or US mail

• May rely on payment card transaction provided by card organizations? (under 2006 Tax Bill)

Cardholder Issues With Payment Card Reporting

• Managing the information reporting process for payment card transactions is challenging– Invoice is not issued, record is payment card transaction– Alternative action if merchant TIN/Name is not provided

• Current regulations vs. 2006 Tax Bill– Current year state reporting requirements (Independent

Contractor) – Combining PCard Transaction with internal AP activity to same

merchant– B-Notices and Penalty Notice– Delivery of annual payee statements

• Will this issue be addressed under the 2006 Tax Bill?

Cardholder Issues With Payment Card Reporting

• How can backup withholding be implemented?– Merchant receives payment from the payment card

organization within a few days after the transaction– Cardholder does not pay the payment card

organization until after it receives a payment card monthly billing statement from the payment card organization.

– Correct delivery address and/or phone to solicit TIN/Name information or to send B-Notice

– How do you withhold money from the merchant if they are paid by the card organization/issuer?

New Developments QPCA• Major Card Organizations have applied for QPCA status

– as of March/April 2006– Card organization must meet IRS standards for QPCA

designation• Data collection• Validation• Maintenance• Distribution

• The IRS has no specific time frame to complete their determination

• Outstanding issues for Card Organizations on behalf of Cardholder Payers

Payment CardOrganization

Vendor MasterFiles

IRS

Issuing BankMerchant Bank

Cardholder/PayerMerchant

(Service Provider)

Payment Card

Transaction

Process P-Card

Transactions

MerchantValidated

No

Yes

Perform TIN Solicitation

Post to 1099 Process

Merchant Response

No

Yes

Document andB/U Withhold

Document andFile Response

(W-9)

Payee Statements Federal and State Filing

IC and Quarterly Reporting

MerchantReport

QPCA Responsibilities

Cardholder / PayerResponsibilities

Cardholder Issues With Payment Card Reporting

• How can backup withholding be implemented?– Merchant receives payment from the payment card organization

within a few days after the transaction– Cardholder does not pay the payment card organization until

after it receives a payment card monthly billing statement from the payment card organization.

– Correct delivery address and/or phone to solicit TIN/Name information or to send B-Notice

– How do you withhold money from the merchant if they are paid by the card organization/issuer?

Non-Resident Alien (NRA) Merchants

• NRA not covered under these regulations• Different withholding regulations under §1441• Withholding based foreign country treaty rates (0% to 30%)• Documentation for the payee is on of the Forms W-8• NRA TIN is usually an ITIN and starts with ‘9’• Form W-8 must be original and include US TIN • NRA TIN can be validated through TIN matching• Some states have a requirement to report 1042-S

Payment Card Relationship with a Qualified Payment

Card Agent (QPCA)

Qualified Payment Card Agent (QPCA)

• Final Regulations T.D. 9136 – July 2004 (1/31/2003)• IRS Rev. Proc. 2004-42 – July 2004 (7/14/2004)• IRS Rev. Proc. 2004-43 – July 2004 (7/14/2004)• Allows payment card organization to request a

determination as a QPCA from the IRS.• Applies to IRS Code §3406 (Backup withholding), §6724

(Reasonable Cause) and §6721 and §6722 (Penalties)• QPCA must Validate Merchant/Payee Information via IRS

TIN Matching Program• QPCA must obtain determination from the IRS • Determination must be renewed every five years• Establishes Merchant Category Codes and reportability

QPCA Responsibilities

• QPCA can act on behalf of cardholder/payer– Soliciting Merchant/Payee TIN and corporate status – Collecting the Merchant/Payee TIN/Name information– Validating the Merchant/Payee TIN/Name information– Verify Corporate Status of Merchant/Payee– QPCA must notify cardholder/payer when payment was made to a

merchant/payee that was not qualified.• Must be authorized by the cardholder/payer and merchant/payee to

act on their behalf as QPCA.• QPCA must agree to participate in TIN Matching program on

cardholder/payer behalf.• Must notify cardholder/payer of all merchant/payees that are not

qualified via TIN matching• May provide TIN, name, corporate status, merchant category code,

etc. to cardholder/payer

Cardholder/Payer Responsibilities

• Cardholder/payer must review all communication from QPCA to determine status of merchant/payees for TIN qualification status.

• Required to perform TIN solicitation to obtain correct TIN, name and corporate status from those merchant/payees identified by the QPCA as unqualified.

• If unqualified merchant/payee fails to furnish information, backup withholding is required.

• Cardholder/payer may have to initiate alternative action (other than backup withholding).

Reasonable Cause

Not required to perform backup withholding if payment was made to a merchant/payee if:

• At the time of the payment, the QPCA has validated the payee's TIN or the payment is made during the 6-month period following the date on which the QPCA first obtained the payee's TIN.

• Reportable payments made through a QPCA are also exempt from backup withholding if the payment is made within 60 days after the date of the first payment with respect to which the QPCA is required to provide notification to the payer that the payee is not a qualified payee.– Record keeping required on those merchants not

qualified for up to 60 days

Reasonable Cause

• Not required to perform a TIN solicitation for those payees that were qualified by the QPCA and are included in the CP2100/CP2100A (B-Notice)

• Required to perform TIN solicitations for those payees that were not qualified by the QPCA and are included in the CP2100/CP2100A (B-Notice)

• May successfully abate assessed penalties applying to payments made to qualified payees by establishing “reasonable cause” due to the reliance on the QPCA.

Merchant Category Codes (MCC)

• Established by Notice 2003-37• MCC can be used to determine reportable

payment card transactions• QPCA may assign MCC to merchant/service

provider• Based on the MCC table in the notice –payer can

determine if the payment is reportable using the MCC assigned by the QPCA

Benefits of Payment Card Relationship with QPCA

• Focus on “Core” business• Improved Management Control• Reduced processing costs

– Accounts Payable processing is costly – could be as high as $250+ per invoice

– Payment card processing is less costly – as little as $25 per invoice• Reasonable Cause

– For those merchants verified by the QPCA via TIN Matching• Not required to solicit TIN and Name of merchant• Not required to send B-Notice or backup withhold• Provides Reasonable Cause defense in the event of a penalty accessed for

incorrect merchant TIN/Name combination • Reduced Risk

– Improves regulatory process– Reduces exposure for incorrect returns and withholding penalties

QPCA Final Regulations

• QPCA has a six month grace period to qualify the merchants TIN / Name combination through the TIN matching program.

• QPCA must report non-qualified payees to the cardholder/payer within four months.

• QPCA may choose the reporting period to cardholder payer as quarterly or some shorter length of time

• QPCA may choose the timing of payments made to merchants with two methods

– Payment is made on actual date – the six month grace period and the four month reporting period start on the date the QPCA makes the payment.

– Payment is made at end of reporting period – the grace period and the reporting period start on the first day of the reporting period. (i.e. the first day of a quarter if the reporting period chosen is quarterly)

• The cardholder/payer must backup withhold on any payments made after 60 days of notification that the payee is non-qualified.

• If the cardholder/payer continues to use a method of payment that is incompatible with the backup withholding requirements (PCARD), then the continued use of that method does not relieve the cardholder/payer of its backup withholding obligation.

New Developments• Major Card Organizations have applied for QPCA status –

as of March/April 2006– Card organization must meet IRS standards for QPCA designation

• Data collection• Validation• Maintenance• Distribution

• The IRS has no specific time frame to complete their determination

• Outstanding issues for Card Organizations on behalf of Cardholder Payers

• Effective TY 2011 – mandatory withholding on services payments to IC engaged by government agencies– Will this be extended to the filing community?

New Developments

• President Bush’s Tax Bill– Proposes that card organizations be required

to backup withhold on payments to merchants where the TIN and Name have not been provided or mismatch from The IRS TIN Matching Program

– Would this relieve withholding obligations on card transactions for cardholder payers?

– Remain as reasonable cause defense?

IRS Focus• For FY 2005 the IRS collected a record of $47.3 billion in

enforcement revenue, an increase of $4.2 billion from the previous year. 

• In FY 2006, the IRS expects that total to increase to $48.1 billion, a 42 percent increase from FY 2001. 

• The IRS estimates that for each dollar invested in enforcement it will return four dollars in additional enforcement revenue.

• Improving workload selection techniques in examination and collection.  Some examples of these improvements include:  – Increased efficiency of LMSB examination process

• improve identification of risks• enable earlier issue resolution• reduce audit cycle time

– Additional agents hired in 2006 – Resolve simple cases quickly– Maintenance of audit coverage for large organizations – Expedite compliance checks to place returns with agents more quickly– Processes and procedures examined – including card transactions

The IRS – Closing the GAP• The tax gap is the difference between the amount of tax imposed on

taxpayers for a given year and the amount that is paid voluntarily and timely.  The tax gap represents, the annual amount of noncompliance with US tax laws. 

• Estimates tax gap is approximately $345 billion, indicating a noncompliance rate of 16.3 percent. 

• Estimate that the net tax gap, or what is remaining after enforcement and other late payments, is $290 billion.

• Cause of the GAP– Estimates that underreporting constitutes nearly 82 percent of the gross

tax gap,

– Non-filing constitutes 8.6 percent and

– Underpayment 9.6 percent of the gross tax gap.

• Estimates that individual income tax underreporting is approximately $197 billion.  This constitutes about 56 percent of the overall tax gap. 

The IRS – Closing the GAP• Estimates that the current underreporting of individual income tax

and self employment constitutes about two-thirds of the overall tax gap.

• The opinion of the IRS is that Payment cards (including credit cards and debit cards) are a growing form of payment in retail business transactions.  The failure of some merchants to accurately report their gross income, including income derived from payment card transactions, accounts for a significant portion of the tax gap and creates a significant competitive advantage for those businesses that underreport.

• President’s FY 2007 proposed budget includes;– Proposes that the Treasury Secretary be given the authority to

promulgate regulations requiring annual reporting of the aggregate reimbursement payments made to merchants in a calendar year, and to require backup withholding by payment card companies in the event that a merchant payee fails to provide a valid taxpayer identification number.

– Proposal will extend information reporting, with some exceptions, to the purchase of goods by federal, state, and local governments.

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Jerry – michaelj@irscompliance.org – (877) 829-7347

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