December 03, 2012
New IRS Credit Card Transaction Reporting Requirements
What It Means For Attorneys
Most attorneys accept credit cards as a form of payment from clients. As such, they are “merchants” and “businesses” when it comes to reporting these transactions to the IRS. All merchants and businesses 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 informational return to the IRS for each calendar year reporting all payment card transactions and third party network transactions with participating payees (merchants and businesses) 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 (i.e. LawPay, First Data, TSYS, etc.) and 3rd 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.
What About My Trust Accounts?
In the case of attorneys, Sections 6050W does not make a distinction between credit card transaction deposits made to a trust account (whether IOLTA or some other form of trust account, e.g., interest bearing trust account set up for a particular client or non-interest bearing trust account) and an attorney’s operating bank account. This has some attorneys concerned the IRS will view these transactions incorrectly as income. However, there are two important items to note: (1) the new 1099-K filed by the credit card processors is only intended to be “informational”, (2) the attorney’s credit card processor should include a merchant industry code on your 1099-K identifying you as a law firm or provider of 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 for each “merchant” client over the calendar year, without reduction to account for amounts deposited into trust accounts. 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.
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 for your credit card processors to file the 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 firms 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 account and your law firm tax ID number exactly match the legal name and tax ID number you use to file your tax returns.
Does The Name And Tax ID On My Trust Account Need To Match Those On My Tax Filing?
No. If you maintain an interest bearing trust account on behalf of an individual client with the interest being paid to the client, then that trust account needs to have your law firm name, the client’s name on whose behalf you maintain the account and that client’s tax ID number. If you maintain a non-interest bearing trust account, then it is ok to have your law firm’s tax ID on that trust account because there is no “income” associated with it. If you maintain an IOLTA account, it needs to have and should already have your firm name as well as the name of the IOLTA program (Legal Services Corporation of Virginia) and the IOLTA program’s tax ID.
What needs to match for purposes of Section 6050W is the name and tax ID on the merchant account with your credit card processor with the name and tax ID on your own tax return. If they don’t match, the IRS could impose a 28% withholding penalty on all credit card transactions.
Due to the steep withholding penalty, it is imperative that you confirm the information on your 1099-K this year. If you have not received a 1099-K from your credit card processor, call and request a copy. All 1099-Ks should have been sent out in late January of 2012 for a trial run. Penalties will start to apply for tax year 2012 for which you will receive a 1099-K from your credit card processor in early 2013. The safest approach is to call your credit card processor now to resolve any mis-match between your firm name and tax ID as reported by the credit card processor and the firm name and tax ID you use to file with the IRS.
If I Deposit Credit Card Transaction Funds Directly Into My Trust Account, Won’t The 1099K Filed By My Credit Card Processor Show More Gross Income For Me Than I Actually Received?
The IRS understands that the 1099-K is a statement of gross credit card transactions and that for a law firm that deposits funds into trust accounts, some or all of the funds might not be includable in the income of the law firm. Therefore, if the IRS were to inquire as to the discrepancy between gross credit card receipts and claimed income by the law firm, the law firm will only need to explain that a particular dollar amount of the gross credit card receipts was deposited into client trust accounts from which the law firm receives no income.
posted Dec 03, 2012
Updated: Jan 30, 2013