Are you missing some of your Deposits?

It could be the IRS!

From time to time we hear horror stories from merchants with deposits that seem to be missing money. Several weeks ago we heard from such a merchant with this experience.

He said the scariest part initially is that no one knew where his money went. His processor could see his batches, and his funding reports, and everything added up. But when it came to his bank statements he was missing about 30% from each deposit. He told us he was just sick when he added up all the missing funds and it came out to around $30,000. It took him and his processor more than a week to sort out where the funds had gone, and once found, he learned that he was not going to be able to access those fund until the following year.

Where did his money go you might wonder? This merchant was a victim of the new IRS regulations which allow the IRS to place an account on a mandatory 28% withholding. In 2008, buried in the middle of the Housing and Economic Recovery Act was a provision that had nothing to do with housing but was a new requirement that banks and credit processors must now report payments to the IRS. The rule, which took effect in 2012, was meant to “improve voluntary tax compliance” by business taxpayers to help the IRS determine whether their tax returns are correct and complete. This is where the 1099-k was born.

Merchants are now required to complete a W-9 form for their credit card processor, if in the prior calendar year, they received payments:

• from payment card transactions (e.g., debit, credit or stored-value cards), and/or
• in settlement of third-party payment network transactions above the minimum reporting thresholds of –
  • gross payments that exceed $20,000 AND
  • more than 200 such transactions

So now it is required that your merchant account provider collect and verify every merchant TIN (Taxpayer Identification Number). At the end of the year, merchant account providers file 1099-k forms reporting annual gross payments processed by credit or debit cards to the IRS. Not only must the TIN match but the address and name must match exactly to the IRS or there will be what is called a TIN mismatch. If the mismatch is not corrected by the end of the year (starting in 2014) then the processor is required to withhold 28% of the merchant account deposits. In addition some states have jumped on the bandwagon (California for one example) and require the processor to withhold an additional 10%.

The deadline to impose the penalty for most major credit cards was initially required to begin in 2012. However, the IRS postponed the requirement until October 2014. If a merchant’s TIN was not valid by this time, they will start to see revenue withheld. Any merchant who receives a “B” notice initiated by the IRS will have 30 days to respond prior to mandatory IRS-directed withholding of a minimum of 28% of gross sales.

The crux of the whole situation, is that IRS guidelines do not permit the held funds to be immediately returned to the merchant. But rather, the merchant can re-acquire them when they file their tax return. Unfortunately, businesses aren’t going to file their current year tax return until sometime in the following year at the very earliest. Additionally, the way this revenue is treated, it is very possible that the funds being held are simply used to offset any tax owed to the IRS at the time of their filing. To summarize, the way this money is held is an extremely painful burden to a merchant who was anticipating their normal sales revenue to be in their bank account.

Where can a merchant find out if they have a TIN mismatch?

A merchant’s name and TIN should match those used on the tax return in order to match the IRS database. The merchant account provider should have been sending notifications via mail, email, phone, and/or fax, in addition to special statement messages if a merchant is in risk of having their money withheld. Many processors also offer an online merchant portal where merchants can go to verify this information.

If you have any doubt please contact your agent or your processing company. If the IRS begins withholding there is no way to get the funds released until you file your return the following year. You can stop the withholding by becoming compliant but you won’t get the monies that have been held until you file your return.

In the event that your money is held, we strongly suggest speaking to a knowledgeable CPA or tax attorney so that you can fully understand the implication of having money held this way.