The landscape of payment processing continues to change.  We always knew that 'Big Brother' was watching, and I'm sure it's not really a surprise to find out the IRS will soon be keeping a closer eye on things as well. Starting in 2011, the government will be keeping tabs on business owners who have merchant accounts which allow them to accept credit and/or debit cards.

It all stems back to a law that was quietly passed in 2008 by President Bush. The new rules state that business which use merchant accounts will be required to file a new form with the IRS that indicates the exact sales figures generated by credit and debit card transactions.

Of course, there are quite a few unhappy people, as credit card payment processors say this means costs will go up and others assert it's an invasion of privacy and a money grab.

The whole system of payment processing can seem pretty complicated.  But basically, a consumer receives a bank-issued credit card and a merchant who accepts credit cards needs to be "sponsored" into the payment processing field by a bank. The consumer's and merchant's banks exchange transaction information via a processing system that is operated by companies such as MasterCard, Visa, Discover, and American Express. Either bank can have a third party business carry out the payment processing job.

The latest law means the banks or private party processors will have to collect and report the total payment card transactions to the government.  It's somewhat similar to a W9 form, which is sent in by businesses when total payments to contractors go over $600 a year. Uncle Sam wants these transactions reported because it's a well-known fact that more and more business is conducted with credit cards these days and some merchants aren't reporting their gross incomes.

While the law has several people up in arms, some merchants will get a break. If their total credit and debit card sales are less than $20,000 or 200 transactions, then they don't have to send in a report. Merchants who do send in reports will now have to be very accurate when reporting credit card income. The Treasury Department believes the new bill could generate an extra $9.8 billion in taxes over the first 10 years!

The law was originally a stand-alone bill which was part of the 2007 budget proposal. However, some people consider it to be confusing to merchant customers and there's a concern that some business owners might stop taking credit and debit cards as payment in the future. It's also believed some businesses will find loopholes in the system and that new, unsecured databases of merchants' private information could be created and pose a security risk.

It could also be hard to keep accurate track of payments as several merchants may share a single credit card merchant account. In this case, the card processor won't know exactly how much money each individual has charged to the payment processing system. If there are any discrepancies, they will have to be looked after so accurate tax returns can be filed.

All merchants should research this topic more and find out exactly who is responsible for doing the reporting, and how gross amounts are calculated. The IRS has released the new 1099K form and all business owners and their accountants should study it before the big day arrives on January 1, 2011.

One point is certain, the banks have to report gross receipts. But because merchants deal with refunds and chargebacks, and can also give cash back on debit card transactions, the banks and other payment transaction services will only report the gross monthly and annual payments. Any fees and refunds, etc. won't be counted against the gross amounts. It would be a sound idea for merchants to keep track of these items separately when performing payment processing duties.

The new system also means merchants will have to supply their payment processor with the full legal name of the company along with the address and taxpayer identification number. Any business that doesn't supply their taxpayer identification number may be subject to backup withholding at a rate of 28 per cent on their payments.

It's also possible that credit card transactions might be subject to backup withholding or garnishment if a merchant misses a tax payment as the IRS stated this could happen on gross card payments.

The year 2011 will be here before you know it, so it's advisable that you look into the new law and make sure you're well prepared for it as you navigate the field of payment processing.