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New IRS penalty could impact attorneys who accept credit card payments

Enacted in 2008 as part of the Housing Assistance Tax Act, the Internal Revenue Code Section 6050W requires credit card processors to report to the IRS gross dollar amounts of their merchant customers' (i.e. attorneys/firms) transactions. To accomplish reporting, the credit card processing companies must have federal tax identification numbers and names for their merchant customer accounts that match their customers' IRS records. Discrepancies may exist, such as when the merchant uses an abbreviated name or acronym for their account. Some processing companies have since notified their clients when a mismatch has occurred, thus enabling the client to rectify the discrepancy.

To encourage accurate reporting, beginning January 2013, the IRS will impose a 28 percent withholding penalty on all credit card transactions where the merchant account information provided by the processor does not match the merchant's federal tax identification number and legal name. The imposition of a withholding penalty could have real consequences for attorneys who accept credit and debit cards.  

To avoid any adverse impact to client trust accounts, there are three simple steps to take, which are echoed by the Massachusetts Board of Bar Overseers, in its announcement here:

  • Contact your credit card processor to ensure that your merchant account information matches your IRS records.
  • If your records do not match, direct your processor to make the necessary corrections. Be sure that you do not give your IOLTA account's federal tax identification number, but rather your law firm's federal tax identification number.
  • Remain diligent in monitoring and reconciling your IOLTA accounts pursuant to Massachusetts Rules of Professional Conduct 1.15, in order to identify and handle any IRS penalty assessed.

For more information on the IRS reporting requirements, see this article published by a Massachusetts Bar Association member benefit provider, Law Pay. For more information generally on using credit cards in your practice, see this article by Bar Counsel Constance Vecchione on the subject (which article and articles like it are accessible via the BBO/Office of Bar Counsel's ethics articles repository) and this Massachusetts Bar Association article written by practitioner Andrea Goldman and Bar Counsel John W. Marshall.

Tip courtesy of Heidi Alexander, Law Office Management Assistance Program.

Published December 20, 2012

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