Perils Of Our Data-Rich Age

Add one more entry to the list of concerns small businesses may have about their business data.  Cyber-fraud is a worry, and protecting clients’ personal data may be a challenge.  Now, with a new rule that takes effect for the 2011 tax year, our electronic age puts more information in the hands of the IRS, which now requires credit card companies to report exactly how much they paid to your business each month.

Credit card companies (and third parties like PayPal) must report the total and monthly subtotals by merchant for credit card transactions on form 1099K.  They must also send each business a payee statement reflecting these amounts.  The rule applies to any business to which the entity sent more than 200 payments for more than $20,000 during a calendar year. This is designed to give the IRS an independent data source to confirm the revenue reported on your tax return.

Even businesses who have been reporting correctly may find themselves with bookkeeping headaches. According to the IRS FAQs on this new rule, “the entity that submits the instruction to transfer funds to the participating payee is responsible for reporting the gross amount of reportable transactions.”  Some critics have expressed concern that this “gross amount” could include things like sales tax and tips, which are not revenue to the merchant’s business.

The IRS has postponed for a year some backup withholding requirements of this rule, which apply in specific cases, and provided “transitional penalty relief” for third parties who provide incomplete or incorrect information on the 1099K or payee statements.  According to the American Institute of Certified Public Accountants’ publication The Tax Advisor, this is intended to provide time for the development of proper compliance procedures.  However, third parties must still submit the forms on time, and make a good faith effort at accuracy.

From the small business standpoint this seems far from “relief,” creating even more need to verify the accuracy of payee statements, and even more potential for unnecessary IRS inquiries… or worse.

Scott Berger, CPA, is a principal with top accounting firm Kaufman Rossin

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