Treasury Inspector General for Tax Administration
August 18, 2011
TIGTA - 2011-48
Contact: Karen Kraushaar
WASHINGTON -- Without improvements, plans by the Internal Revenue Service (IRS) to implement the merchant card reporting requirements of the Housing and Economic Recovery Act of 2008 could create a burden for taxpayers and problems for the IRS, a new report publicly released today has found.
The report, "Plans for the Implementation of Merchant Card Reporting Could Result in Burden for Taxpayers and Problems for the Internal Revenue Service," was conducted by the Treasury Inspector General for Tax Administration (TIGTA).
TIGTA's review was initiated to assess the IRS's current plan to control and schedule the implementation of the merchant card reporting law as intended by Congress. The new law was designed to assist the IRS in matching income from sales paid with credit or debit cards to income claimed on tax returns. The law requires that payment settlement entities (generally banks and other organizations with contractual obligations to make payments to merchants for credit and debit card sales) report merchant card and third-party payments to the IRS on Form 1099-K, Merchant Card and Third Party Network Payments. Implementation of this new requirement will add millions of additional information reporting documents to IRS computer systems.
TIGTA found that the IRS's redesigned Tax Year 2011 income tax forms may not facilitate a direct match between sales reported on Forms 1099-K and amounts reported on tax returns.
"We found that improvements must be made if this effort is to function as intended, which is to help reduce the Tax Gap," said J. Russell George, Treasury Inspector General for Tax Administration. "Based on our finding, the IRS immediately made adjustments to one tax form and is reviewing the other affected forms to make similar improvements."
The law requires payment settlement entities to withhold a percentage of gross receipts (called "backup withholding") on those merchants who do not ultimately provide a valid Taxpayer Identification Number and name that match IRS records. Because of the increased volume of Forms 1099-K resulting from merchant card reporting requirements, there is a risk that mismatches might not be resolved timely before backup withholding becomes mandatory. TIGTA found that the IRS's risk assessment and implementation plan did not contain adequate details regarding these risks as well as appropriate contingencies. Auditors also found that the IRS did not properly account for funds appropriated for merchant card reporting implementation during the project's initial stages.
TIGTA made five improvement recommendations to the IRS, including improved monitoring of the amounts reported for merchant card and third-party payments; inclusion of additional information such as financial reporting on future risk assessments; and additional documentation. TIGTA also recommended that the IRS ensure financial reporting is added to the risk assessment and implementation plan so costs and schedules can be tracked and reported timely and costs can be accumulated when resources are first used.
In their response to the report, IRS officials agreed with the recommendations and are planning appropriate corrective actions.
Read the report.
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