New IRS requirement puts onus on PSPs to report sales

Some online merchants will need to report sales to the Internal Revenue Service beginning next year.

Beginning this tax year, payment service providers must submit reports to the IRS of merchants who make 200 annual transactions totaling at least $20,000. This 1099-K form will allow the U.S. government to recoup some of its quot;tax gapquot; – the difference between money that is estimated to be owed to the IRS versus the money that is actually paid.

The requirement comes as part of the Housing and Economic Recovery Act, which President Bush signed into law in 2008. The law is meant to account for a part of the economy that has, for the most part, avoided IRS regulations.

Online transactions comprise a significant part of the tax gap, estimated to be either $345 billion, which is the gross tax gap, or $290 billion, which is the net tax gap that takes into account money paid after IRS collection actions.

quot;This won#039;t catch all of it,quot; the Tax Foundation#039;s Joseph Henchman told AuctionBytes. quot;I have to think your sort of average eBay seller is under that threshold.quot;

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The new reporting requirement is part of an ongoing effort by federal and state governments to treat online transactions in the same manner as brick-and-mortar transactions. Legislation is pending in several states that would institute a sales tax on goods and services sold over the internet.

Both reforms place a burden on e-commerce businesses to ratchet up their accounting infrastructure to account for the new reporting practice. High-risk merchant accounts, such as dating merchant accounts, that receive inquiries from clients that may not be honest about their identity are especially vulnerable to reporting inaccuracies. Companies will require robust payment platforms to more closely monitor transactions for the IRS. Businesses should conduct a payment processing review to determine whether they have the means adapt to these new procedures.

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