New IRS rules could lead to fee gouging

New IRS rules could lead to fee gouging

A recent Internal Revenue Service reporting law wasn't designed to serve as an excuse for merchant account overbilling. Yet that's how some payment processors might be using Internal Revenue Code Section 6050W, which was implemented on January 1, 2011.

Section 6050W compels processors to disclose their clients' gross payment volume receipts directly to the IRS via Form 1099-K. Filing annual and monthly sales figures enables tax authorities to check for unreported taxable income.

The Department of the Treasury estimates that the new law will recover up to $10 billion in additional taxes over 10 years.

Creative billing practices
Processors incur expenses when they comply with Section 6050W, such as system and administrative costs for submitting Form 1099-K to the IRS by February month-end (March 31 for electronic filings). This means that some processors might start charging merchants extra fees to cover those costs -- and they're allowed to do so because of the legal clauses in the agreements and applications that their merchant clients sign.

"I'm almost certain that there's not supposed to be an IRS fee imposed on the merchant," says Phil Hinke, president of MerchantFeeSavers LLC and payment industry expert. "But what the processors are doing is that they're calling the charge a regulation fee, a regulatory compliance fee or a reporting fee. It's an IRS fee, but they're just getting around that."

A major concern is that the fees processors charge merchants to cover the IRS reporting costs might not accurately reflect the costs the processors actually incur. In other words, aggressive processors might start padding their charges to increase revenue.

"They'll charge you $1.50, $2.95 or $5 per month or whatever it might be, or they may charge a $40 annual fee.  Some of these processors will simply keep adding fees," Hinke says.

Root of the problem
Overwhelmed by their own business priorities and deadlines, many merchants fail to review their processing statements. As a result, they are often unaware that they're paying extra fees.

Hinke warns that IRS fee gouging is part of an accelerating trend.

"I've never seen so much deception as there is in this industry now," he says. "Payment processors have these fees that they're adding, whether it be the PCI fees or the IRS fees that they're calling something else. Then, on top of that, I know some processors that are adding a $99 annual fee. Processors realize that a lot of merchants just won't know."

As a general rule, the annual total for all processing charges should never exceed $200.

"You've got to start paying attention to your statement, because that's just too much," adds Hinke.

Fighting back
When merchants uncover deceptive IRS fees, they are often tempted to move their payment processing function to another provider. Unfortunately, some merchant agreements impose severe penalties for early contract termination.

Ongoing education is the best defense to ensure reasonable processing fees.

"You still have to know what the interchange rates are," Hinke says. "You have to know what rates and fees you should be getting at your processing volume and your type of business. The merchant has to know all that."

Savvy merchants consult third-party payment industry experts or use processor auction bid websites. These resources enable merchants to independently compare the latest fees from different processors.

The merchant agreement's terms and conditions are also critically important. Instead of accepting a locked-in term for up to three years, merchants should ask for a month-to-month contract, an agreement with a negotiable term or one without punitive early termination charges.

By planning ahead, merchants can have a flexible emergency escape plan ready if suspicious IRS fees and other charges appear on their current processor's statements.

See related: How to make sure you get your debit card fee reduction; How to decode your merchant payment processing statement

Published: February 7,2023