Electronic transaction reporting requirements slipped into Housing bill

A bill under consideration in Congress to bail out homeowners affected by the mortgage crisis enjoys strong bipartisan support, despite a recent White House veto threat. But the free-market advocacy group FreedomWorks is drawing attention to a provision introduced on the Senate side that has little to do with housing loans: a measure that would require credit card companies and electronic payment processors, such as PayPal, to file aggregate transaction reports with the IRS listing their total annual payments to individual merchants who receive more than $10,000 and conduct more than 200 transactions each year.

The reporting provision was introduced without debate as a revenue offset measure, meant to defray the costs of the housing bailout. According to the Senate’s summary, the measure is projected to raise some $9.8 billion in revenue over 10 years by increasing tax compliance and encouraging merchants to accurately report their income.

During hearings earlier this year before the House Small Business Committee, however, Committee Chair Nydia Velásquez complained that such reporting requirements create “significant technical and financial challenges for banks and entrepreneurs alike.” Projections of tax compliance gains, she said, were “built on the incorrect premise that electronic payments foreshadow profits. The reality is quite different for most small businesses: Electronic transactions bear little relationship to actual income, especially when chargebacks, merchant discounts, and other fees are accounted for. The result is that even careful compliance by entrepreneurs could lead to costly IRS audits.”

Representatives for small business associations opposed to the requirements observed, for instance, that many businesses took deposits via credit card that did not constitute true income. Some also worried that the IRS would use the data to target to audit businesses that accepted an unusual number of electronic or credit card transfers for their industry.

Privacy groups harbor their own objections. David Sohn of the Center for Democracy and Technology testified that the reporting requirements would force transaction middlemen to retain information like tax ID numbers—which in the case of many small businesses will simply be the owner’s Social Security Number—that the firms otherwise would discard. He also warned that an aggregate reporting requirement could easily transform into a demand for more detailed data.

The bill is expected to be kicked back to the House for a straight up-or-down vote sometime next week. That, according to CDT’s Ari Schwartz, is “bad process,” as it means the reporting measure is unlikely to be subject to much close consideration. The popular housing relief bill is expected to pass by a wide margin, despite the president’s veto threat. “If you’re going to add something like this,
says Schwartz, “at least have some independent discussion on the floor.”