New IRS reporting system affects PayPal accounts

Businesses that process payments through credit cards, debit cards or payment merchants like PayPal beware.  The IRS has a new reporting system and surprise, surprise, according to a Treasury Department audit released July 26, 2011 the system that includes “a revised form” that may be flawed. Imagine that?

In 2008 the enacted Housing and Economic Recovery Act legislated requirements for banks and other merchant services like PayPal to report annual gross payments processed by credit or debit cards or accounts to the IRS and to merchants.

So where’s the beef?

The TIGTA audit found that a newly revised form may not facilitate matches between what merchants report and what payment processors report.  To make matters worse, there’s mandatory back up withholding involved and the fear is that with the great volume of reporting this new system requires, mismatches may be unresolved when mandatory withholding kicks in.

According to J. Russell George, Treasury Inspector General, the audit found “that improvements must be made if this effort is to function as intended, which is to help reduce the tax gap.”

The claim was that this new system would reap $10 billion over 10 years.  Back in April of 2007 a letter presented to the Ways and Means Subcommittee on Oversight expressed “uncertainly over the benefits of this reporting system” pointing out that Treasury proposals has been $9 million for for 2007 but $92 million from 2007 to 2011, $113 million in 2008 but $3.3 billion from 2008 to 2012.  All of these figures were reportedly based on data gathered in 2001 without an explanation of how the figures “astronomically jumped.”

There were also concerns expressed over privacy and data security as well the burden this new system would place on merchants, payment processors and even the IRS.  Many believed the benefits would be negligible compared to the risks and burdens.  Fast forward to 2001 and now we learn that even if the idea for reporting wasn’t flawed, the current system in practice is.

Here are two excerpts from the 31 page report from the TIGTA, reference number 2011-40-065, dated July 26, 2011.

“The IRS’s risk assessment and implementation plan did not contain adequate details regarding these risks as well as appropriate contingencies.  TIGTA also found that the risk assessment and implementation plan prepared by the IRS lacked other details.

“Finally, the IRS did not properly account for funds appropriated for merchant card reporting during the project’s initial stages.”

Are you a business owner that could be affected by this new reporting system?  What are your thoughts?  Is all this new data collecting a worthy way to close the tax gap or is it just another risky proposition that ultimately wastes a lot of time and doesn’t save a lot of money?