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.

Velázquez 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 Regulation Legislation
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You signed a mortgage contract with the original mortgage broker/bank "A" promising to pay $150,000 plus 6% interest over 20 years. "A" sells your mortgage and 999 other mortgages to Bear Stearns who places them all in a "fund". The face value of the fund is now $150,000,000 and offers BS a return of 6%. "A" is now whole and out of the pciture.

BS owns your mortgage. BS borrowed money from banks and financial institutions to buy the 1000 mortgages, signing notes promising to pay back those financial institutions. BS did not sell your mortgage, but probably used it as "evidence of value" for the loans. You have no obligation to the banks. The banks, eager to make a buck, did not question the value of the mortgages in the BS fund. After all, that was Bear Stearns.

BS named the funds: "High-Grade Structured Credit Strategies Hedge Fund" and "High-Grade Structured Credit Strategies Enhanced Fund". (Aside: June 19, 2008: the two BS fund managers, Ralph Cioffi, 52, and Matthew Tannin, 46, were arrested by FBI agents at their homes in Tenafly, New Jersey and Manhattan, and charged with nine counts of securities, mail, and wire fraud.)

BS sold the 150,000,000 shares in its fund valued at $1.00 per share for $1.20/share with an annual return of 4.5%. The funds were backed by mortgages and by real houses, house prices always go up, rating companies rated the funds AA & AAA, and Dave's investment adviser touted the purchase as bullet-proof. The implication to Dave was "no risk", albeit no written obligation or guarantee.

4.5% is a good rate of interest, so Dave paid $120,000 for 1000 shares convinced that he can sell those shares anytime and recover his original investment. If interest rates go down, D might even be able to sell his shares for more than $120,000.

BS sold all the shares in the fund to investors for $180,000,000. BS pocketed $30,000,000 and will continue to pocket the .5% interest differential on the $150,000,000 face value. BS expected the interest rate differential to increase, because some of the mortgages in the fund are ARM's. BS has been made whole insofar as your mortgage is concerned.

Notice that your rock solid mortgage promise originally made to "A" became a risky investment for Dave. BS owns an obligation from you, but sold a risk. In essence, BS "used" your mortgage twice: BS sold it once to share holders of High Grade Structured Credit Strategies Hedge Fund and offered it as evidence of value to the banks from which it borrowed.

All this time, it turns out nobody can define the "real value" of what is in the fund, thus the "crisis". BS cannot pay shareholders in either fund, nor can it pay its debts to the financial institutions from which it borrowed money to buy your mortgage. BS defaults on its obligations related to the funds. BS sells what is left of itself to JPM Chase for 10 cents on the dollar.

Where is your mortgage obligation in this mess and to whom do you owe $150,000? Presumably, JPM, having purchased BS's assets, now owns your mortgage for which it paid $15,000.

BS defaulted on millions to shareholders, more millions to banks that lent it money, but you still owe $150,000 to somebody. The banks wrote off their losses pursuant to BS's liquidation. The banks then claimed IRS corporate tax refunds or exemptions based on their BS related losses. Investors in the banks took a minor short-term hit. The market justifies everyone's losses as being the result of risk taking ... the market at work. The only entity left with any interest in your mortgage is JPM and their interest is $15,000. Pay them $20,000 and they make $5000 profit. At the very least, JPM ought to be happy to collect on the $150,000 principle only.

Your mortgage, a risk in itself, enriched the original mortgage broker, bank A, BS, and now JPM, but no discount for you applies. The market worked for everybody, except you.

I suggest you trace your mortgage and offer to pay principle only if your mortgage was sold off for pennies on the dollar.

Posted by: rod ruger | July 29, 2008 7:07 PM

The government has no right to steal the money of its citizens. The government also has no right to go snooping around in our financial records to ensure that they are stealing enough from us. Small business owners are already paying too much, as we all are.

"...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." (Emphasis mine.)

Voluntarily?! We are FORCED to pay taxes, which amounts to theft. If we don't pay them, we are threatened with our very livelihood and freedom.

Don't let the government fool you. No small business owner has "volunteered" to pay taxes (which, by the way, is the only moral method of "collecting" taxes a government should participate in.)

The proper role of government is to protect man's rights. Unfortunately, the people of the greatest country ever known to man, the USA, are allowing their government to run amuck and trample over the very rights it should be protecting.

Castle Rock CO

Posted by: Kelly | July 30, 2008 11:01 AM

More data and bureaucracy: more potential for errors, delayed income, security breaches and identity theft. Is this really broke in the first place?

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Posted by: Anonymous | August 13, 2008 5:39 AM

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