When it comes to 1099 reporting requirements, method of payment is immaterial to the IRS. Payments made by payment card (p-card) have always been regarded as reportable payments if they meet the reporting requirements. Likewise, backup withholding on independent contractors without a valid TIN is required, regardless of payment method. This creates a dilemma in using a p-card as a method of payment due to the third party involvement, tax identification and verification issues and timing.
In 2003, the IRS issued proposed regulations that would make p-cards easier to use for payors, allowing payment card organizations (p-card program providers) to become Qualified Payment Card Agents (QPCAs), collect TINs from vendors/merchants and access to the IRS TIN Matching Program to verify those TINs. Payors would be excepted from backup withholding on p-card payments if the p-card company is a QPCA and the payee is a qualified payee.
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In July 2004, the IRS issued final regulations relating to these information reporting requirements, penalties and backup withholding for p-cards (purchasing cards, procurement cards, payment cards). The final regulations were only slightly revised from the original proposed regulations. The reporting rules were to be applicable January 1, 2006, and the backup withholding rules applied to payments made in 2005 and after. However, by mid-2006, no card providers had been designated a QPCA.
In concert with the final regulations, the IRS issued two revenue procedures. The first allows and sets the requirements for a payment card organization to obtain an IRS determination that it is a "Qualified Payment Card Agent" (QPCA). The procedure sets forth that a QPCA may act on behalf of its cardholders in soliciting, gathering and validating (via the TIN Matching Program) the names and TINs of the vendors/payees. To obtain a QPCA determination, the payment card organization is required, among other things, to demonstrate the reliability of its data by participating in the IRS TIN Matching Program and matching its merchant name/TIN data with IRS name/TIN data.
The P-card program providers have applied to become QPCAs. They reportely have also voiced concerns to the IRS regarding difficulties in some of the details of the program, and the IRS has not declared anyone a QPCA. Companies, therefore, still face the difficulties of 1099 reporting on p-card payments as before, and will until the IRS designates QPCAs.
The second revenue procedure provides a procedure for payors and their agents to use in determining whether p-card transactions are reportable. The procedure allows payment card organizations to classify businesses by merchant category codes (MCCs) or equivalent industry codes, according to whether they "predominantly furnish services (for which payments are reportable) or predominantly provide goods (for which payments are not reportable)." Payment card organizations will assign MCCs or equivalent industry codes to payees, and payors/cardholders will be permitted to rely on the assigned codes for information reporting purposes.
Only payment card organizations will be authorized to classify a vendor according to IRS rules in which they have become qualified. Payers may not use the MCC table to determine reportability of payments to vendors not made with a p-card. Payments made via an invoice/payment process require that the payer gather the TIN from the vendor and determine reportable status in its normal manner, even if the vendor has also been paid for other purchases with a p-card. Only p-card purchases are covered by the QPCA program and the QPCA MCC classifications that determine reportability only apply to p-card purchases.
Nevertheless, for p-card purchases, the revenue procedure once implemented will simplify determination of reportable payments with regard to vendors that have been assigned an MCC by a payment card organization. Linked here (and below) is the IRS list of which MCCs are reportable and which are not.
The other great advantage to the regulations is they provide that backup withholding does not apply to p-card transactions if the reportable payments are made through a QPCA and the payee is a qualified payee.
According to the regulations, a payee is qualified if at the time of the payment, the QPCA has validated the payee's TIN through the IRS TIN Matching Program, or if the payment is made during the 6-month period following the date on which the QPCA first obtained the payee's TIN.
If the QPCA provides a payor with the TIN of a payee, reliance on that information serves as reasonable cause for the payor's defense against penalties. A payor does not have to solicit a payee's TIN at the time of the transaction. Also, a payor generally does not have to make the first and second annual solicitations. Under the regulations, a payor that relies on a QPCA is required to solicit a payee's TIN only if the QPCA fails to provide, within a specified period, a TIN that the payor believes in good faith to be the payee's correct TIN.
The final regulations differed from the proposed regulations with regard to the requirement of QPCAs to report payee status to the payor. Instead of including that status on each billing statement, the information may be provided as a part of a quarterly report on payee data to the payor (cardholder), within four months of the date of payment.
Regarding the payor’s obligations if the payor is notified that a payee has not provided a valid TIN to the QPCA and is therefore not a qualified payee, backup withholding may be required for purchases made no more than two months after the last date for furnishing the first notification that the payee is not qualified. For purchases after that date, the payor must backup withhold on any reportable payment, unless it has obtained the payee’s TIN and the QPCA has resolved the disqualification of the payee by obtaining and verifying the TIN.
Related materials (some related materials and links may be to other websites that require registration or subscription):
Click here to read example scenarios provided by the Treasury Department.
Program Update
Determining Whether P-card Merchants are 1099-Reportable
