The Internal Revenue Service has provided special transitional relief to banks and other payment settlement entities required under a 2008 law to begin withholding 28 percent of payments if they are unable to verify a taxpayer identification number for a retailer.
Payment processors are supposed to begin reporting payment card and third-party network transactions to the IRS on a new information form known as the Form 1099-K and withhold 28 percent of the money from retailers and others for whom a taxpayer identification number could not be verified, starting next year. However, under transitional relief granted by the IRS, they will not need to begin the withholding until 2013.
According to the Housing Assistance Tax Act of 2008, payment-processing companies that handle credit and debit card transactions were scheduled to begin reporting in early 2012 payment card and third-party network transactions that occurred in 2011. The law added Section 6050W to the Tax Code for reporting of payment card and third party network transactions, in order to increase transparency in relation to electronic payments and transfers. It was expected to raise $9.5 billion in extra revenue over 10 years.
Under the law, payment processors were supposed to withhold 28 percent of the payments they made to retailers and other entities for which they lacked verified taxpayer identification numbers.
However, in Notice 2011-88, the IRS postponed for one year the effective date for potential backup withholding obligations for payments made in settlement of payment card and third party network transactions. All payments made in settlement of payment card transactions are required to be reported under Section 6050W of the Tax Code. Payments made in settlement of third party network transactions, however, are required to be reported only if the amount paid exceeds $20,000 and the aggregate number of transactions exceeds 200 with respect to any payee within a calendar year.
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