Letter to Treasury and IRS concerning the new 1099K reporting requirements mandated on all business tax forms
Ms. Emily S. McMahon
Acting Assistant Secretary (Tax Policy)
U.S. Department of the Treasury
1500 Pennsylvania Avenue, N.W.
Washington, DC 20220
The Honorable Douglas Shulman
Internal Revenue Service
1111 Constitution Avenue, N.W.
Washington, DC 20224
Dear Acting Assistant Secretary McMahon and Commissioner Shulman:
I am writing you on behalf of the U.S. Chamber of Commerce, the world’s largest business federation representing the interests of more than three million businesses and organizations of every size, sector, and region to voice our concerns regarding the new onerous data collection and paperwork burdens placed on the backs of many tax compliant businesses—especially small businesses, from the inclusion and required reconciliation of the “merchant card and third-party payments” section on the 2011 business income tax forms. Unless this section of the business income tax forms is eliminated, starting in 2012, all businesses across the United States who accept merchant cards will be subjected to costly and time-consuming daily data collection requirements that provide no value for the business operationally and would be of marginal significance to the Internal Revenue Service (IRS) in determining whether a taxpayer is tax compliant.
For most small businesses, reconciling merchant card totals as reported by the payment card processors on the 1099K at the end of the year with a business’s yearly gross receipts or sales would be a costly, protracted, and tedious process. For starters, those businesses with electronic register systems would have to bear the time and cost of reprogramming their systems to collect the nonrevenue or deferred revenue details of a transaction by cash or payment cards. This list could be lengthy and can include: cash-back debit transactions; deposits; state and local taxes; charitable contributions; lottery sales; gift cards; and warranty programs. For businesses with older register systems, updating existing programming may not be an option. As such, all data collection would have to be done by hand on a transaction-by-transaction basis or businesses may opt to pay for costly new equipment.
Furthermore, most businesses currently reconcile their cash and payment card receipts by hand, usually daily. Depending on the number of merchant payment card terminals, registers and the connectivity of the devices, management must verify whether the totals transmitted to the merchant card processor, the physical payment card receipts on-hand, and the cash-on-hand match the totals accumulated by each register.
Under the new data collection requirements, this process will be made even more complicated and time-consuming. Since the non-revenue and deferred-revenue components of a charge, such as state and local sales taxes, and the character of the transaction, whether it is cash or payment card, will be a factor in the end-of-year tax reporting, management will need to accurately reconcile the component parts of these transactions on a daily basis where they did not need to prior to the requirement. Additional time and managerial proficiency will be needed to correct inadvertent cashier errors made during a flurry of activity, such as tendering a charge card sale as a cash transaction, since it makes a difference in the accumulated totals at the end of the year if tendered non-revenue and deferred revenue items embodied in the transaction were paid by cash or charge.
More complicated mistakes would require even more laborious analysis to assure correct running totals of all the component parts of the cash and merchant card transactions are accurate. Related transactions that are separated by days, weeks or over different accounting periods, such as merchant card charge-backs, will be even more difficult and time consuming to properly account for and correct. Businesses on accounting periods other than a calendar year would have even greater challenges in collecting and reporting the correct information.
The IRS has always emphatically indicated that the 1099K merchant card and third-party reporting would be used as a tool to drive tax compliance and represented to Congress and the small business community that it would not impose any additional paperwork or data collection burdens on small businesses. At a hearing before the Senate Committee on Finance in April 2007, then Commissioner Mark Everson stated, “[Having the merchant-card processors report the payment card activity to the IRS]…is the most important way that we think we can get at this (closing the tax gap) by not having any extra burden on small businesses, because the banks that process this already have all that information in their databases.” The inclusion and required reconciliation of the “merchant card and third-party payments” section on the 2011 business income tax forms is an incredible departure from this longstanding position.
Moreover, the U.S. tax system is only as strong as the willingness of its participants to voluntarily comply. Imposing vast new data collection and reporting requirements may be viewed by many small business owners as unreasonable and overreaching, which would serve to undermine confidence in the government and further frustrate tax collection efforts.
The Chamber strongly opposes giving the IRS this broad sweeping authority because the proposal’s implementation could have substantial costs placed on the backs of compliant small business taxpayers. Given the costly and time-consuming daily data collection requirements that the inclusion and reconciliation of “merchant card and third-party payments” section on the 2011 business income tax forms would have on small business, we urge that this section be removed from all future tax returns and the IRS use the 1099K information as it was originally intended, as an internal IRS tool to drive tax compliance.
R. Bruce Josten