The IRS is scheduled to start backup withholding in 2013 for businesses that have invalid or non-matching Tax Identification Numbers (TINs). Backup withholding was supposed to start in 2012, but the IRS postponed it for one year. It's been on the back burner, but its time to start thinking about it again.
The IRS requires that processors have a valid TIN on file for each business they process for. If a processor doesn't have a valid TIN, or it doesn't match the number on file with the IRS, the processor is obligated to institute backup withholding- they will keep 28% of the merchant's gross sales.
This is going to sit terribly with merchants, primarily because when a merchant corrects the issue with an invalid/mismatched TIN they are going to expect the withholding to stop. However, this is not the case. Merchants will not be refunded until they file their tax return and the IRS determines they are eligible for a refund.
In addition 2013 will be the year the IRS rolls out the new 1099-K for merchants that contains a line for the merchant to report their gross credit card sales. That figure must match the gross sales amount reported by the merchant's processor.
These reporting requirements represent a big expense for processors, and most have reacted by passing on a new reporting fee to merchants. This fee will go by different names on your processing statement, but is usually some variation of IRS Fee or Reporting Fee. The most common amount of the new fee is $5.00 a month; unfortunately there are a few processors who never miss out on a chance to gouge their merchants and are charging as much as $25-$35 a month.
Ideally merchants have proactive processors or account representatives who will contact them this fall to make sure that their TIN numbers are valid and guide them through the new reporting requirements. If not, don't wait until 2013 to handle the matter yourself. Contact your processor and make sure the TIN numbers they have for your business are the same ones you will use to file your 2013 taxes.
Processors have until February 1 to provide you with documentation of the the amount of gross sales they reported for your business. Be on the phone to your processor the morning of February 2 if you haven't received the documentation.
Feel free to contact me with any questions, concerns, or problems you may have about your TIN requirements and reporting requirements- it can seem very confusing. The IRS don't like to make things easy.
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