The IRS has issued final regulations regarding the new information reporting requirement under Sec. 6050W for payment card and third-party network transactions (T.D. 9496). Starting January 1, 2011, banks and similar transaction settlement entities must file annual information returns for each participating merchant or other payee reporting aggregate gross receipts for the calendar year from credit and debit card sales or third-party network transactions. The final regulations adopted with several modifications—some in response to numerous comments—proposed regulations issued in November 2009 (REG-139255-08).
The final regulations provide implementation guidance and amend existing regulations under Secs. 6041 and 6041A to provide relief from duplicate reporting for certain transactions. They also amend the regulations under Secs. 6721 and 6722 to reflect penalties applying to failures to file correct information returns and payee statements required by Sec. 6050W. In addition, the final regulations adopt without change proposed amended regulations under Sec. 3406 to provide that amounts reportable under Sec. 6050W are subject to backup withholding (effective for amounts paid after December 31, 2011).
Explanations of Common Types of Payment Cards
The final regulations included explanations and examples of several common types of payment cards and related instruments that were asked about by commenters but do not meet statutory requirements for reporting, the IRS said. For example, purchases made with a payment card issued by a retail merchant that may be used only with that merchant are not reportable, nor are ATM withdrawals or similar transactions. The IRS noted that reportable payment card transactions must involve use of a card that is accepted as payment (Sec. 6050W(c)(2)) by a network of unrelated persons (Sec. 6050W(d)(2)(B)). Thus, it classified these common transactions as shown in the exhibit.
Mitigation of Expanded Form 1099 Reporting Requirements
To avoid duplicate reporting of transactions, the regulations provide relief from the expanded information reporting requirements under Sec. 6041. Under the Patient Protection and Affordable Care Act, P.L. 111-148, payments by a trade or business aggregating $600 or more to any single vendor during any calendar year will have to be reported at the end of each calendar year to the vendor and to the IRS on an information return, such as Form 1099. The final regulations specify that transactions that are reportable under both Secs. 6041 and 6050W must be reported under Sec. 6050W and not under Sec. 6041.
The proposed regulations did not provide similar relief for third-party network transactions. In response to “numerous” requests, in the final regulations the IRS also extended this relief to third-party network transactions. Solely for purposes of determining whether a payer is eligible for this relief, the de minimis threshold for reportable third-party network transactions under Sec. 6050W (more than 200 transactions to a payee aggregating more than $20,000 per calendar year) is disregarded.
How to Handle Charge-Backs
The final regulations also addressed another common question: How transactions that incorporate “charge-backs” or other adjustments should be handled. The IRS did not adopt suggestions to report net sales as being more likely to match amounts reported on tax returns, noting that the statute requires reporting of gross amounts (Sec. 6050W(a)(2)). “The information reported on the return required under these regulations is not intended to be an exact match of the net, taxable, or even the gross income of a payee,” the IRS said in the regulations’ preamble.
Definitions and Clarifications
The final regulations contain detailed definitions and examples illustrating various terms employed in Sec. 6050W, including:
- Payment settlement entity (Regs. Sec. 1.6050W-1(a)(4));
- Gross amount (Regs. Sec. 1.6050W-1(a)(6));
- Payment card transaction (Regs. Sec. 1.6050W-1(b)(1));
- Merchant acquiring entity (Regs. Sec. 1.6050W-1(b)(2)); and
- Third-party settlement organization (Regs. Sec. 1.6050W-1(c)(2)).
Other matters clarified in the final regulations include:
- Where more than one payment settlement entity is involved in a transaction, the reporting entity is that which in fact makes payment in settlement of the transaction.
- When a payment is made or received in a foreign currency, it is converted into U.S. dollars on the date of the transaction at the spot rate or other reasonable convention.
- The role of electronic payment facilitators (Sec. 6050W(b)(4)(B)).
- The exclusion under Sec. 6050W(d)(1)(B) for payees with a foreign address.
- Application of backup withholding rules for third-party network transactions in light of the de minimis threshold.
The regulations apply to returns for calendar years beginning, or amounts paid, after December 31, 2010, except that the backup withholding rules under Sec. 3406 are effective for amounts paid after December 31, 2011.