Housing Bill Includes Sweeping Data Reporting Provision
The housing bill includes a sweeping provision requiring credit and debit card firms to report the transactions of certain businesses to the IRS, sparking privacy concerns and stirring the ire of the small business community.
Small business lobbyists plan to aggressively push back on the language requiring firms like MasterCard and Visa to give the IRS data on businesses that have made at least 200 transactions annually that together total $20,000 or more.
The provision says that any company that processes electronic payment transactions will have to report to the IRS the annual gross receipts of those transactions for each merchant beginning in 2010.
The soon-to-be law "will have a significant, negative effect on the small business community," said Kristie Darien, executive director with the National Association for the Self-Employed.
The provision is part of a greater effort to increase business and consumer tax compliance and narrow the "tax gap," which the IRS defines as the difference between the amount of tax that taxpayers should pay for a given year and the amount that is paid voluntarily and on time.
The proposal, which originally was included in President Bush's fiscal 2009 budget request, will raise an estimated $9.5 billion over 10 years, according to a summary of the bill by the House Ways and Means Committee.
President Bush is expected to sign the bill into law tomorrow.
According to the provision, merchant-card processors will have to verify a business's Taxpayer Identification Number. If the processor fails to do that or has an incorrect TIN, the processor is required to withhold 28 percent of the money due to the business while the situation is resolved. The withholding provision will take effect in 2011.
Molly Brogan, vice president of public affairs at the National Small Business Association, said her group will be working to repeal the withholding language.
"I don't think people really understand that credit- and debit-card companies would be required to withhold 28 percent from a small business's sales until a taxpayer ID could be confirmed," said Brogan. "When you think of the myriad clerical errors that could occur, thus forcing a small business to forfeit 28 percent of sales for an unknown period, this could be a big problem for small businesses."
She added that NSBA also is concerned that there is a "high likelihood" that any costs absorbed by credit-card firms to conduct the reporting would be passed on to consumers and small businesses, making for higher fees.
Darien said her group is working to push back the implementation date of the provision or have it repealed outright.
NASE's biggest concern is that "there's no indication of how this is going to be implemented and there's no clarity on how much time a business has to clarify an error," Darien said. "Also, who do they go to - the credit card firm or the IRS?"
NASE is "strongly urging" the IRS to prepare a report on how it will implement the plan, she said.
NASE also is concerned by the privacy issues the measure raises. Most of the group's members are businesses with fewer than 10 employees and many members are sole proprietors who use their Social Security numbers rather than a Taxpayer Identification Number as their business's identifier when filing taxes. "Their business returns are attached to their personal returns. TIN numbers protect personal data...Where is the IRS going to hold these massive amounts of data?" asked Darien.
Privacy advocates also say the proposal raises more questions than it answers. "There have been findings that the Social Security number is the most valuable commodity for an ID thief," said David Sohn, senior policy counsel for the Center for Democracy and Technology. "There have been efforts elsewhere in the government working to reduce the storage of SSNs and this proposal tends to run contrary to that."
Sohn outlined a situation where several flea market vendors may share an account because their stalls are next to each other - suddenly it looks as if each vendor has higher income than what is reported on their tax return. The discrepancy may be cause for an IRS inquiry. The same scenario could be applied to three dentists who share an office, file separate taxes, but use the same credit-card machine.
"Will the IRS keep needing more data to accurately explain the original data?" Sohn asked. "There are no answers as to what will happen if there are errors. Where does this stop - not just in terms of the IRS but will all the different state tax enforcement authorities begin collecting data as well?"
The small business community is arguing that lawmakers are focusing on how the reporting requirements could impact credit-card firms and are ignoring the bigger picture of how the new rules could harm small firms.
Rep. Charles Rangel (D-N.Y.), who chairs the House Ways and Means Committee, "specifically said at a hearing that this provision won't have a negative effect on small businesses and we wholeheartedly disagree with that," said Darien, who expressed her concerns to lawmakers before the bill was tucked into the housing measure. "The lawmakers see a potential pot of money to close the tax gap but electronic transactions already have a paper trail - this is not the place where people aren't reporting what they owe to the IRS, it's really the cash economy," that is the culprit.
House Small Business Committee Chairwoman Nydia Velazquez (D-N.Y.) also has criticized the measure. In a hearing on the provision in June, she said: "At first glance, this measure seems like a reasonable means of tracking financial records and a sensible way to plug the nation's tax gap. Upon further review, however, it becomes clear it could have some potentially disastrous effects on small businesses." Velazquez sent a letter to Chairman Rangel on the matter and asked the Government Accountability Office to conduct a study detailing the costs of implementing the proposal. The study is ongoing.
VelÃ¡zquez added: "Rather than driving new revenue, the measure would saddle small firms with a myriad of privacy concerns and undue financial burdens."
Darien also is concerned that the IRS may use the data to create industry profiles, using the total credit card receipts from a particular business sector to calculate industry averages. "Are they going to say all dry cleaners in the Northeast have this amount of credit cards so they should have this amount of cash and if you deviate we're going to flag you? In reality, it's dependent on the business. Maybe the business doesn't want to take credit cards because it doesn't want the fees," Darien said.
The American Bankers Association supports the housing bill overall, but opposes the payment card reporting provision. A spokesman for the group said now that the provision is set to become law, the ABA is certainly "willing to work with the IRS to make the process as painless as possible going forward."
By Sharon McLoone |
July 29, 2008; 3:00 PM ET
Previous: SCORE Offers Tips for Firms Facing a Sour Economy | Next: Senate Panel OKs Research and Tech Transfer Programs
Please email us to report offensive comments.
Posted by: rod ruger | July 29, 2008 7:07 PM
Posted by: Kelly | July 30, 2008 11:01 AM
Posted by: Chuck | July 30, 2008 2:38 PM
Posted by: Anonymous | August 13, 2008 5:39 AM
The comments to this entry are closed.