The Housing Assistance Tax Act of 2008 added Section 6050(w) to the Internal Revenue Code (IRC), requiring annual information returns—Form 1099-K—to be filed by merchant acquiring entities and other payment settlement entities. The first Form 1099-Ks due for calendar year 2011 must be submitted to the IRS by February 28, 2012–March 31, 2012, if filed electronically—and related payee statements must be furnished by January 31, 2012.

A merchant acquiring entity is the bank or organization with the contractual obligation to pay the participating merchant when settling payment card transactions. A bank is responsible for reporting such transactions on the new Form 1099-K if it submits the instructions to transfer funds to the account of the payee. Banks often outsource transaction processing to a third party such as an electronic payment facilitator. In such instances, the entity submitting the instructions to transfer funds to the account of the participating merchant is responsible for preparing and submitting Form 1099-K to the payee and the IRS. By written agreement, the obligated reporting party can designate any other entity to satisfy the reporting requirements of IRC Section 6050(w). However, the obligated reporting party remains liable for any applicable penalties for inaccurate reporting.

The information needed to accurately file Form 1099-K can be obtained by issuing a Form W-9 to merchants to obtain the business’ full legal name, address and taxpayer identification number.

The act also amended IRC Section 3406(b)(3) to include amounts reportable as Section 6050(w) payments as subject to backup withholding requirements. Therefore, a merchant failing to provide this information could be subject to backup withholding at a rate of 28 percent.

In addition, the act amended IRC Section 6724(d) to include Form 1099-K as an information return for which penalties are assessed for failing to comply with certain reporting requirements. Penalties are imposed for failure to file correct information returns and failure to furnish correct payee statements, with more severe penalties for intentional disregard of filing information returns.

Backup Withholding Relief

The IRS recently released Notice 2011-88, postponing the effective date of potential backup withholding requirements associated with Section 6050(w) payments. This notice states backup withholding, required under Section 3406, will apply only to Section 6050(w) payments made after December 31, 2012, if a payee has not furnished a taxpayer identification number to the payor.

This transitional relief to banks and other payment settlement entities was a response to numerous postponement requests from payors. The U.S. Treasury and IRS carefully considered such requests, which cited the following reasons as support for the postponement:

• Unfamiliarity with the procedures for backup withholding due to lack of prior withholding obligations
• Additional time needed to develop systems to enable withholding
• Unfamiliarity with the IRS’ TIN matching program
• General difficulties matching TINs already obtained with the correct taxpayers

Penalty Relief

The IRS also released Notice 2011-89, providing transitional relief from the penalties for a Section 6050(w) filer reporting incorrect information on Form 1099-K and payee statements. The notice says penalties will not be imposed if a good-faith effort is made to accurately file Form 1099-K and to furnish the accompanying payee statements. This relief is available only for information returns and payee statements to be filed in 2012, which report payments made in calendar year 2011. This relief allows additional time to develop procedures for complying with the new reporting requirements. This notice does not repeal the filing requirement, so failure to file an information return will result in penalties.

IRS Guidance

These new reporting requirements can be complicated. Recognizing the complexity surrounding these requirements, the IRS provides guidance and newly updated FAQs at its online Third Party Reporting Information Center. The frequently asked questions provide a source for basic definitions and various scenarios to assist in understanding these reporting requirements.

For more information about these new requirements, contact your BKD advisor.

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