If you haven't heard about the latest tax gap measure, which is becoming law in 2011, hold onto your hats because here we go again...
This new provision, which was hidden in The Housing and Economic Recovery Act of 2008 that passed in 2008, is known as "electronic transactions reporting". It requires banks and credit card issuers, e.g. Visa and Mastercard, to provide IRS a report of business owner's electronic payment transactions each year. Big Brother is watching you even closer now...
The idea behind this new reporting is that the Treasury Department doesn't think all of us business tax payers are doing our part to support the government, in other words, they think we're "under reporting" our business income - or cheating on our taxes. So, beginning in 2011 every payment settlement entity, such as banks, credit and debit card issuers, and others, will be required to report to IRS the total amount of sales processed for merchants whose processed payments are more than $20,000, or who have exceeded 200 transactions, during the tax year.
Here's the kicker. As if the insult and inconvenience of this provision were not enough already, this new law also states that if the processor fails to verify the tax ID, or if the tax ID is incorrect, the processor will be required to withhold 28 percent of the merchant's gross transactions. Think you can live on 28% less in 2011?
This whole situation has the potential to cause havoc in several ways, such as:
1. Credit and debit card issuers raising their rates to pay for the extra processing and record keeping.
2. Us business owners having to raise our rates to pay for the credit and debit card issuers raising their rates, and possibly losing some of our customers.
3. The IRS using all this nice data, provided to them free of charge, to use to calculate industry averages, make judgments about what should be normal, and possibly use that data to audit us.
4. Lack of clarity about how incorrect tax ID's can be resolved, and how taxpayers can be reimbursed when these discrepancies arise.
All of this so IRS can collect more data from us struggling small business owners, when they probably already have all of it in the first place! How many of you would try to dupe the IRS by excluding credit card receipts, when you know the credit card data is on your bank statements, etc.? That probably wouldn't be the smartest thing you could do, if you were trying to avoid paying taxes.
To prepare yourself for this provision, you may want to consider talking to your tax professional about options to make this new law easier for your business to digest.
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