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The feds are shaking up up your well-oiled Accounts Payable procedures. A just-added section of the Internal Revenue Code (Sec. 6050W) is radically changing how payments made via credit cards, purchasing cards and other third-party networks (Paypal, etc.) are handled.
Starting with Tax Year ’11, all “payment card transactions” will have to be reported on information returns, just like all your other vendor payments — but in this case, you’ll be relying on the card issuer or other third-party processor to hand over the vendor’s name, address, Taxpayer Identification Number (TIN) and the gross amount paid.
All of this is to make sure that those payments (a) get reported and (b) get taxed properly. The rule also drives home the point that these transactions are subject to backup withholding if you don’t have a TIN for the vendor – just as any other payment would be. The problem there is, you can’t backup withhold on a payment that’s already been made.
For that reason, the rule also allows card issuers and other payment processors to immediately start submitting the names and TINs of vendors in their networks to IRS’ TIN Matching Program. The hope is that by getting a running start, the payment processors can confirm accurate TINs for every vendor and avoid having to do any backup withholding.
A new form 1099 needed?
Two things are still up in the air:
- How exactly these transactions will be reported, and
- How you and your card processor will need to interact to ensure all the correct info is recorded and filed.
It may require a new form altogether, or IRS may opt to simply add a few lines or boxes to the existing 1099-MISC. It may also require you and the bank or other third party that facilitates these payments for you to get together to revamp processes, confirm transaction records, etc.
The good news is: You have two years to prepare — and IRS still has time to work out the kinks. We’ll keep you posted on any developments.
You can read all the details here.