Information on Merchant Accounts,
Ecommerce and Credit Card Processing

July 13th, 2011 by Jamie Estep

IRS reporting, just how bad is it?

Filed in: Industry News, Merchant Accounts | 5 comments

By now, the majority of merchants in the US have been informed of some impending IRS reporting requirements for their merchant account. I blogged about this congressional mandate several years ago and since we’re finally past the day of reckoning, let’s revisit how this is exactly going to affect your merchant account and your business.

An Overview

Some time back, the IRS decided that they wanted to see a report of all the money that a merchant processes through their merchant account over the year.

While this is a nearly useless number because as we all know, most businesses also accept cash, checks, and other currency, it will in theory catch the most egregious tax evading businesses. Basically, the few fractions of a percent of businesses that grossly cheat on their tax returns “could” get caught. Regardless of the absurdity of requiring the entire country disclose their processing volumes, here we are…

Now for this to work, your processor has to file a 1099 form with the IRS. This is a seemingly simple task. However, for this to actually work, your business information with your processor must exactly match what the IRS has on file. This includes business name, address, your tax id, etc. Things as simple as capitalized letters, a single space, and punctuation will cause a mismatch. You get a new tax id after opening up a merchant account. You signed your application with only your SSN and not your tax id number. Things like this will cause errors. Since it’s rare that merchants fill out their merchant applications with the exact same business information, with the exact same capitalization, and spaces as they do when they fill out their tax information, and nothing changes with their business-IRS relationship, it’s fair to say a lot of tax reporting information will not be valid.

So, what if the tax information is not valid?

So, here comes the nasty part. The IRS mandates that your processor will withhold 28% of all credit card payments until the errors are corrected. Yes, 28% of all of your credit card sales with be held until you fix whatever information is incorrect. And, even if you fix the problem, you wont get that 28% back until the end of the year.

More fees

Most likely you have or will receive notice that you are going to be charged for the work required to verify and prepare this massive undertaking. I’ve seen everything from several hundred $ per year, to a few $ per month. The reason you are being charged this fee is that it actually requires a lot of work to verify and prepare one of these documents for a merchant. Processors often have thousands, or tens of thousands of merchants, which translates into thousands of man hours in just the initial verification, not even taking into account contacting every merchant that has errors to obtain the correct information. If you didn’t authorize e-file for your 1099, your processor needs to mail you a physical form.


The exceptions to the filing requirements are:

1. a merchant’s total payment transactions for the year does not exceed $20,000, and
1. the total number of transactions does not exceed 200

In which case your processor will not need to file a report. This may consist of a good percentage of businesses out there, but most full-time businesses process more than $20,000 per year.


It’s unfortunate that the reporting regulation was ever passed. It’s a useless piece of legislation that creates a lot more work for small businesses and it’s unlikely that the reporting will catch any but the worst tax offenders. But, it’s passed and taking effect and there’s not much any of us can do about it at this point. No matter who you process credit cards with, keep a close eye on the mail and your processing statements for instructions on how to verify your information. My recommendation is to take it very seriously to avoid the 28% withholding.

5 Responses to “IRS reporting, just how bad is it?”

  1. Gold Buyers July 21, 2011 at 10:33 am

    It’s the government they are always going to try and find a way to get more money out of the people who really don’t have that much. Plus they have a huge deficit to cover so they have to get some extra money to pay that back.

  2. Chris Phillips July 21, 2011 at 1:36 pm

    The exceptions ($20K, 200 transactions) you note do not apply to payment card transactions – they are for paypal-type networks. If you process $1, the acquirer has to file a 1099-K. There seems to be quite a bit of misinformation out there on this point.

  3. jackn July 28, 2011 at 2:30 pm

    Sounds like they are on to a good idea. This does not place any additional burden on the merchant.

  4. wymetto August 7, 2011 at 9:46 am

    Our government in action again – crazy. Let small business run their business and watch the economy flourish again..

  5. JK September 15, 2011 at 7:00 pm

    I were trying to change my merchant service provider since it seems to charge a lot and bad customer service. I were talking to new provider’s customer resp and he told me IRS charged any new merchant (me )$4.95/month for reporting. Does that sound right? When I asked him where is this rule? He started to insult me.

    Another question: How do you compare all the fee while selecting a merchant service?