IRS Gives Penalty Relief, Delays Backup Withholding for Payment Card Reporting

The IRS postponed for a year the effective date of the backup withholding requirement for payments in settlement of payment card and third-party network transactions. The Service also created an FAQ page explaining the new requirements.

The postponement, in Notice 2011-88, applies to transactions subject to reporting under Sec. 6050W and related backup withholding under Sec. 3406. Under the notice, backup withholding will now apply only to such payments made after December 31, 2012.

The IRS also issued Notice 2011-89, which provides transitional relief from penalties under Secs. 6721 and 6722 for incorrect or incomplete information on information returns (Form 1099-K) and payee statements required under Sec. 6050W.

Sec. 6050W requires any “payment settlement entity” to file annual information returns and payee statements reporting credit card or other payment card transactions and third-party network transactions. The requirement applies to payment settlement entities with respect to each payee to which the entity makes more than 200 payments during a calendar year having a gross aggregate total of more than $20,000. The total (with monthly subtotals) must be reported on Form 1099-K, Merchant Card and Third Party Network Payments (which is still available only in draft form for 2011).

The IRS said in the notice it offered the penalty relief “to provide additional time to develop appropriate procedures for compliance with these new reporting requirements,” noting that penalties could still apply for failing to file an information return or payee statement, including Form 1099-K. Reporting entities still must file and issue the forms beginning in early 2012 and make good-faith efforts to provide accurate information on them.

Sec. 3406 requires backup withholding (currently 28%) if the payee fails to furnish a correct taxpayer identification number (TIN) or the payer has been notified by the IRS that the payee has previously underreported interest or dividend income. Payers, however, can use the TIN matching procedures of Rev. Proc. 2003-9 (see Announcement 2009-6).

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