New IRS Section 6050W: What is it, and How it Affects Attorneys
by Tracey Gavin
If you are a law firm processing credit cards, you are now subject to the newest IRS requirement—Section 6050W.
What is 6050W?
Effective Jan. 2012, The Housing and Economic Recovery Act of 2008 required the IRS to collect a 1099-K from credit card processors (LawPay, First Data) and 3rd party payment aggregators (PayPal, Square) for merchant credit and debit card transactions. This means the gross dollar amount of all transactions is now reported on a special 1099-K, regardless of returns or processing fee deductions.
What about my IOLTA?
In the case of attorneys, Section 6050W does not make a distinction between credit card transaction deposits made to a trust or IOLTA bank account and an attorney’s operating bank account. This has many attorneys concerned the IRS will view these transactions incorrectly as income. However, there are two important items to note: (1) the new 1099-K is only intended to be “informational,” (2) your processor should include a merchant industry code on your 1099-K identifying you as a law firm or provider of legal services.
The reporting requirements under section 6050W require credit card processors to report to the IRS on Form 1099-K the total gross amount of payment card transactions processes for each client over the calendar year, without reduction to account for amounts deposited into IOLTAs. Although there are few instructions from the IRS informing taxpayers on how to account for discrepancies between 1099-Ks issued to them and amounts reported on the taxpayer’s return, it is clear that the IRS does not intend the Form 1099-K to match net, taxable, or even gross income. Thus, the amount shown on the Form 1099-K will not in all instances be required to be reported as income.
Match or Mis-Match?
In addition to the gross volume reporting, Section 6050W also requires processors to verify and match your federal tax ID and legal name to IRS records. Due to technology limitations with most Visa & MasterCard processors, merchant statements are usually limited to only 25-35 characters. As such, many law firms’ merchants have either abbreviated their name or used an acronym for their merchant account. If this is the case, you will need to contact your processor to assure that your legal name on your merchant exactly matches the legal name you use to file your tax returns.
In 2013 the IRS may begin imposing a 28 percent withholding penalty on all credit card transactions if the merchant information on file is not an exact match with their records.
Due to the steep withholding penalty, it is imperative that you confirm the information on your 1099-K. If you have not yet received a 1099-K from your processor, call and request a copy. While the IRS requires your processor to send a notification, in the case of a mismatch, the ultimate liability lies squarely with you and your firm.
No Need for Alarm
The intent of Section 6050W is to assist the IRS in identifying businesses not filing accurate tax returns. The IRS appears to be targeting businesses most likely to omit or avoid reporting correct tax information.
Referring to the 1099-K, IRS FAQ documentation states, “Separate reporting of these transactions is not required.” For more information visit www.irs.gov/uac/General-FAQs-on-New-Payment-Card-Reporting-Requirements.
While the new 6050W requirement requires your Tax ID and name match what is on file, the new rule should have minimal impact on your business.
The benefits of accepting credit cards are far more impactful. Offering your clients flexible payment options while getting paid quickly and securely far outweighs any potential obstacles.
For more information visit www.IRS.gov or consult directly with your tax advisor.
About AffiniPay/ LawPay
The LawPay Program is a custom payment solution designed by AffiniPay for attorneys. LawPay complies with ABA and state requirements for managing client funds.
Tracy Gavin is the Marketing Director for LawPay. She can be reached at firstname.lastname@example.org.