I thought Big Brother was busy regulating eating habits in Los Angeles but he does seem to get around! It seems as if he’s had his fingers in the new housing bailout bill just signed by President Bush. This should not be a surprise to anyone. After all, it was to the IRS that Congress turned when they realized that they had to do something about the crisis. Now it’s done and we can sit back and watch what happens in the housing market. Will Fannie and Freddie shape up, or will they take their new revenues and continue to spend like drunken sailors on a long awaited and all too short shore leave? We’ll have the answer to that soon enough. The issue here is what is not being reported in the media, some little changes to the tax code that should concern anyone in business. The Tax Man cometh!

eBayers Beware

The new law, The Housing Assistance Tax Act of 2008, has provisions that come online at once, and others that are activated over the next few years. The section of interest today is set to be activated in 2011. If you are an eBay merchant, or you accept credit cards, debit cards, or third-party payments, your merchant bank will have to report to IRS your total annual gross payment card receipts if you have more than 200 transactions per year that generate sales of $20,000 or less.

For your convenience, your merchant bank will also send you a copy of the report that goes to the IRS. However, like many such reports that add up total deposits, the odds are good that the report will be wrong. Over a year, you are likely to have issued credits and refunds that probably won’t make it into the report since things like that aren’t usually reflected in the total gross receipts. On top of that, costs and fees aren’t reflected on such reports either, so you will need to make sure that the figures are as accurate as possible by including all these things that aren’t normally there.

Merchants will have to provide their TIN numbers to their merchant bank and if they fail to do so, their electronic payments will be subject to a standard 28% backup withholding. The issue here is that backup withholding is usually imposed on income with no offsetting deductions, such as interest or dividends. Under the new law, this backup withholding would be applied before the merchant is able to deduct any offsetting expenses. In other words, they are going to apply a tax designed for a certain kind of income to a type of income that the tax was never meant for. That, however, is not the really troubling part.

New Auditing Power for the IRS
For most of us, it was just a matter of time before Congress began to impose taxes on the Internet. Lawmakers have been itching to do so for years, seeing all that untaxed growth just passing them by. Now they have taken their first real step in that direction. Watch out for the next one. No, the troubling thing about all this is the new power that the IRS has to get information. You see, in the good old days, if the IRS wanted information from banks and merchant accounts, the agency had to go before a judge, show cause and get a subpoena. Only after this judicial review could they then proceed. This new law, however, changes that. Now, the IRS no longer needs to go through the judicial formalities before it can rifle through your records. The agency can now simply come in and audit them at any time and with a little or no notice.

According to the Treasury Department, the reason behind this explanation in information reporting is that it will assist the IRS to increase the merchant compliance rate. The agency plans to compare the merchant’s overall volume of payment card sales to the expenses claimed and cash transactions reported by the merchant. The Treasury estimates that this new reporting scheme will raise over $9.5 billion.

The Bottom Line

New income reporting structures, new taxes, new powers to the IRS, how will small business across the country respond? The cost of taking plastic for payment is rising to the point where many businesses simply cannot afford it. Throw this into the mix and I wonder if many of these establishments will be going to a cash-only system. There is a law of diminishing returns at work here. Eventually, if this scenario plays out, businesses may stop taking these convenient forms of payment because the cost of doing so is too high. This legislation will help Freddie Mac and Fannie Mae, and it will provide funds for house construction and loans for first time homeowners, and only time will tell how all that will work out. My question is, what about the rest of the provisions in the new law? Will that help or will it hurt, and what other governmental Pandora’s Boxes will it open up? We’ll see.