Many acquirers remain confused about IRS TIN (Taxpayer Identification Number) requirements. Those who maintain accountability to resolve this requirement may take hints from a TIN expert’s recommendations.
Say I’m a TIN matching and 1099-K reporting novice. What are the basics?
Acquirers and ISOs have a sustained responsibility to obtain correct TIN information and legal business names for each merchant and to report the settled card payments of their merchants annually to the IRS.
Penalties for mismatched TIN begin Jan. 1, 2013.
Acquirers must annually provide a 1099-K form to merchants by Jan. 31 of each year.
Merchants may correct this form, which contains monthly gross revenue information.
Acquirers must file the original or corrected 1099-K forms with the IRS.
Acquirers must correct any mismatched TIN>
Why is TIN matching and 1099-K reporting a problem among acquirers?
Many acquirers streamline merchant boarding and do not receive accurate or complete TIN information from new merchants. After boarding, most never follow up to get the complete set of tax information.
Tracking TIN information may mean new systems, new personnel, more time and more cost. For these and other reasons, TIN matching is often a secondary priority for many acquiring banks.
When business ownership changes, merchant tax information may also change. Companies acquire other companies, stock is issued to new investors and even a change in marital status can affect ownership and tax status. Many reasons contribute to the inaccurate, incorrect, mismatched or missing TIN among acquiring banks.
The majority of acquirers do not have a console dedicated to checking the TIN status of their merchants at any moment in time. As a result, acquirers continuously question the TIN compliance of their portfolio.
Won’t the IRS just extend the deadline again like they did last year (January 1, 2012)?
The IRS did not change its original deadline, it merely changed the penalty date. At the end of 2011, the IRS announced the deadline for acquirers to gather all merchant TIN was still Jan. 1, 2012 but the government wouldn’t issue penalties until Jan. 1, 2013. This extended penalty deadline provided acquirers time to implement a “dry run” of the TIN process. Most experts believe the IRS will not push back the penalty date again.
What fines are applicable to acquirers/ISOs?
Acquirers and ISOs will be fined up to $100 per invalid/mismatched merchant TIN per tax year beginning Jan. 1, 2013. However, they are not liable for this fine if their merchants refuse to contact them, or repeatedly send incorrect information if:
The acquirer sends one initial and two follow up communications to their merchants, warning them of an impending 28% withholding if their TIN is not correctly matched with the IRS.
The acquirer keeps a documented record of these communications.
What fines are applicable to merchants?
Acquirers are required by the IRS to withhold 28% of all merchant transactions from mismatched merchants. Withholdings are not available for return to the merchant until the following years’ taxes are filed. The merchant can then reconcile directly with the IRS to receive the withheld revenue.
Why are acquirers like me worried about TIN matching and 1099-K reporting?
It’s new. Most acquirers are looking to others to get ideas to fix the problem.
Loss. Putting additional requirements on a merchant might make them more likely to leave their acquirer.
Cost Recovery. Charging a merchant fee to recoup the cost of TIN matching is illegal.
Churn. Merchants may skip from processor to processor to forestall withholding.
Fines. The IRS will fine acquirers for any missing or mismatched TIN.
Paperwork. The W-9 is one more form for merchants to fill out.
Internal Cost. Personnel, systems, etc.
Is it easier for me to tackle my own TIN matching, or is it easier to outsource?
It depends. Staff, portfolio size, percent TIN already complete, aversion to risk…there are many things to consider. I recommend acquirers first do all they can through current merchant communication channels (e.g., statement messaging, assigned bank reps). If acquirers consider outsourcing, they must be aware that the longer they wait, vendors may charge more and may even reject requests because of limited capacity.
What do I look for in a TIN vendor?
Vendors must have an online system that allows themselves, acquirers, or merchants to update TINs against IRS records.
Vendors must proactively call their merchants directly and, in real time, ping the IRS database to ensure the merchant data is matched accurately.
What is the simplest way to cut down on my workload?
Because the IRS interactive system is difficult to log into multiple times a day, TIN submitters typically wait until they collect thousands of merchant TINs, and submit them in bulk. It takes at least 24 hours to get matched and/or mismatched TINs back from the IRS. In our experience, 50% of merchant TINs return unmatched. Acquirers often find the process extremely cumbersome.
Are there any new TIN mandates I should know about?
Yes. As of February 9, 2012, the IRS confirmed that merchants are no longer required to reconcile actual gross transaction receipts reported on their 1099-K forms with the gross receipts they report on their taxes.
What is my timeframe?
In our experience, merchants are very unresponsive when it comes to reporting TIN. It takes multiple solicitations to get a response, which usually comes from setting an arbitrary due date or issuing a bank policy. As long as a bank doesn’t fine to recoup TIN matching costs, banks can penalize merchants if they become unresponsive to TIN requests.
A popular idea in finance is delaying payment as long as possible. It is important that acquirers break free from this idea. Matching portfolios now will save money in the long run. Any company that makes and executes a plan now will be much better off and ahead of the game.
I think I’m finished matching my merchant portfolio. How can I be sure I won’t be fined?
Acquirers may compile all merchant TINs in one file and submit them to the IRS. If nothing returns mismatched, it is safe to assume the portfolio is entirely matched. But be aware: a significant amount of acquirers will never be 100% accurate. We estimate that up to 30% of merchant tax information changes from year to year, including TIN and legal business name.
What happens after I submit my merchants’ TIN to the IRS?
After a six-month period of verification, the IRS mails each acquirer a CD/DVD with the list of merchant TINs that do not match IRS records. The acquirer has three weeks to rectify those merchant TINs.
How do I avoid the TIN headache in the upcoming years?
Since this is an annual requirement, it is important to collect TINs when acquirers land new accounts. After securing an account, the superior way to avoid the headache is through organized record keeping. Many acquirers plan to keep a collection of TINs, and bulk TIN match every January to check the validity of their list. Our TIN advice? Start early and stay on top of it.