IRPAC Comment

INFORMATION REPORTING PROGRAM ADVISORY COMMITTEE (IRPAC)
1111 Constitution Avenue, NW, Room 7563, Washington, D.C. 20224

Elizabeth Dold,
Chairperson
Burden Reduction
Sub-Group:

Kathy Ploch, Chair
Julia Chang
Kathryn Tracy
Arthur Wolk
Lonnie Young
Emerging CompliAnce
Issues
Sub-Group:

Candace Ewell, Chair
Susan Bo Itacz
Rebecca Harshberger
Anne Jetmundsen
Jerri Langer
Employee
BenefitslPayroll
SUb-Group:

Leonard Jacobs, Chair
Lisa Germano
Tony Lam
Anne Lennan
Emily Lindsay
Michael Lloyd
International Reporting
& Withholding
Sub-Group:

Donald Morris, Chair
Douglas Borisky
Duncan Brenan
Terence Coppinger
Jeffrey Mason
Marjorie Penrod

March 28, 2011

Honorable Douglas Shulman
Commissioner of Internal Revenue
Internal Revenue Service
Attn: Yvette Lawrence
Room 6129
1111 Constitution Avenue, N.W
Washington, DC 20224

RE:

Comments on Merchant Card, Third-Party Payments Form l099-K

Dear Commissioner Shulman:
The Information Reporting Program Advisory Committee (lRPAC) 1 is pleased to
submit the following comments regarding Form 1099-K reporting for Merchant Card
and Third-Party Payments, which implements the rules set forth in section 6050W of
the Internal Revenue Code of 1986, as amended, (lRC),2 and Treasury Decision
("T,D.") 9496. 3 Although this correspondence is submitted in response to the IRS's
Notice and Request for Comments Regarding Form 1099-K (Feb. 11,2011), the
significant effect of the payment card rules prompted IRPAC to provide additional
comments on substantive issues that have been raised in the taxpayer and reporting
communities following the issuance of the final section 6050W regulations.
As more fully described below, based upon the sweeping effect of the final section
6050W regulations, open questions and uncertainty related to the scope of these rules,
the substantial compliance burden on those required to comply, and lack of clear
guidance that raises significant noncompliance concerns, IRPAC strongly urges
Treasury and the IRS to:

I IRPAC was established in 1991 as a result of an administrative recommendation contained in the final
conference report for the Omnibus Budget Reconciliation Act of 1989. The recommendation suggested
that the Internal Revenue Service ("IRS") consider "the creation of an advisory group of representatives
from the payer community and practitioners interested in the Information Reporting Program (IRP) to
discuss improvements to the system."
2 Hereafter, all section references are to the Internal Revenue Code.
3 The Treasury Regulations promulgated or revised under T.D. 9496 include the following: Treas. Reg.
§§ 1.6041-1, 1.6041A-l, 1.6050W-l, 1.6050W-2, 31.3406(b)(3)-5, 31.3406(g)-I, 31.3406(a)-2,
31.3406(b)(3)-5, 31.3406(d)- I, 31.6045-4, 301.6721-1, and 301.6722-1.

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1. Postpone the current effective dates for both reporting and backup
withholding by at least one additional year, or otherwise make the reporting
optional for 2011, at least for third party networks that have been
historically reported on Form 1099-MISC, and provide ample relief during
the transition period. 4
2. Issue guidance in whatever form necessary -- revised regulations, notices,
FAQs, form instructions, etc. -- to limit, where necessary, the application of
these rules and to provide much needed guidance. This guidance should:
a. Limit the scope of the term "third party payment network," and
define the key terms referenced therein: (i) substantial number of
providers of goods or services, (ii) guarantee, and (iii) central
organization.
b. Provide a broad exclusion for healthcare payments (regardless of the
funding arrangement), which have historically been reported on
Form 1099-MISC.
c. Provide a broad exclusion for all accounts payable processing
arrangements (regardless whether the processing is performed by
the purchaser of the goods or services, an affiliate or other related
party, or a third party), which have historically reported reportable
payments on Form 1099-MISC.
d. Apply the non-U.S. payor documentation requirement for foreign
payees to all payors.

I.

SECTION 60S0W REGULATIONS GENERALLY

The regulations issued under T.D. 9496 have a dramatic effect on the information
reporting and backup withholding landscape and on compliance responsibilities for
payors in general. In the case of payment cards, the new Form 1099-K and final
section 6050W regulations reduce the compliance burden on payment card users by
shifting the reporting burden to merchant acquiring entities. In the case of third party
networks, however, organizations that did not foresee that the potential scope of the
section 6050W rules could impact their reporting obligations have discovered that their
organizations are either required to report under section 6050W or are possibly
required to report under section 6050W. Further, the rules require reporting of the
gross amount of reportable payment transactions on a monthly basis on new Form
1099-K. This new approach to reporting and the very short time horizon between the
promulgation of the final regulations on August 16, 2010, the effective date for
4 This would mean that the reporting on Form 1099-K would be required for payments made on or after
January 1,2012, and the backup withholding requirements would be required for payments made on or
after January 1,2013.

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reporting of transactions (and the need to track such transactions) occurring on or after
January 1,2011, and the issuance of the new Form 1099-K on January 18,2011,
allows insufficient time for many reporting organizations to determine whether they, in
fact, must report and, if so, whether they can establish the necessary procedures and
systems to reasonably comply with the rules. The fact is that many reporting
organizations simply cannot timely comply with these rules. Accordingly, the IRS
should issue supplementary guidance to clarify the effect of the final section 6050W
regulations and Form 1099-K instructions and extend by at least one year both the
reporting and backup withholding requirements currently in place. In addition, the IRS
should liberally grant penalty relief for those reporting organizations that attempt to
comply but encounter difficulty doing so.

II.

SIGNIFICANT ISSUES RELATED TO THIRD PARTY NETWORKS

One of the greatest areas of confusion regarding Form 1099-K and section 6050W
compliance relates to the meaning of "third party payment network." Treas. Reg. §
1.6050W-l(c)(3) provides that the term "third party payment network" means:
[a]ny agreement or arrangement that -(A) Involves the establishment of accounts with a central
organization by a substantial number of providers of goods or services
who are unrelated to the organization and who have agreed to settle
transactions for the provision of the goods or services to purchasers
according to the terms of the agreement or arrangement;
(B) Provides standards and mechanisms for settling the
transactions; and
(C) Guarantees payment to the persons providing goods or
services in settlement of transactions with purchasers pursuant to the
agreement or arrangement.
The above definition of "third party payment network" in the final regulations is very
similar to the statutory definition set forth in section 6050W(d)(3). 5 Congress defined
"third party payment network" broadly to capture specific arrangements that had
previously eluded the information reporting provisions of the tax law (i.e., PayPal and

The breadth of the definition of third party payment network potentially implicates arrangements not
intended to be covered by section 6050W, For example, IRPAC members have observed that an
expansive reading of the third party network provisions in the final section 6050W regulations could
potentially implicate common commercial arrangements involving the transfer of accounts receivable.
IRPAC does not believe that Congress intended such arrangements to be subject to reporting as third
party payment networks nor does IRPAC believe that the IRS contemplated such arrangements when it
developed the section 6050W regulations.
5

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similar arrangements) and subject them to information reporting. 6 Congress did not
intend to "reinvent the wheel," however, by complicating, substituting, or duplicating
information reporting standards for arrangements and transactions that had been
previously subject to reporting under section 6041,7 To prevent duplication and
tension between sections 6041 and 6050W, Congress granted Treasury authority under
section 6050W(g) to promulgate regulations or other necessary guidance.
The final section 6050W regulations addressing third party network transactions
urgently require additional development to address the meaning of key terminology, to
more carefully harmonize the reporting under sections 6041 and 6050W, and to clearly
identify those arrangements subject to reporting under section 6050W. IRPAC is very
concerned that without such further development the transition to reporting under
section 6050W will be exceptionally difficult for both the IRS and those required to
report on Form 1099-K.

A.

Definitions Needed for Key Terms

The third party network regulations use terms that must be clearly defined in order to
properly understand the scope of reporting and properly apply the regulations. These
terms include, "substantial number of providers of goods or services," "guarantee," and
"central organization."

1.

Substantial Num ber of Providers of Goods or Services

Under the final section 6050W regulations, in order for an agreement or arrangement
to constitute a third party payment network, it must, among other things, involve the
establishment of accounts with a central organization by a substantial number of
providers of goods or services who are unrelated to the organization and who have
agreed to settle transactions for the provision of goods or services to purchasers
according to the terms of the agreement or arrangement. Treas. Reg. § 1.6050W1(c)(3)(A). (Emphasis added). The correlative language in section 6050W(d)(3)(A)
refers to a substantial number of persons rather than to a substantial number of
providers of goods or services. Moreover, neither section 6050W nor the final section
6050W regulations touch upon the meaning of the term "substantial number" for
purposes of these provisions.
In the context of a third party payment network, the only guidance regarding the term
"substantial number" is provided in the Technical Explanation of Division C ofH.R.
The House Ways and Means Report on the Alternative Minimum Tax Relief Act of2008, includes the
Committee's report on section 6050W and a section entitled "reasons for change." Following a general
statement regarding information reporting of credit card and other electronic payment transactions, the
report states "[g]enerally, business receipts that are subject to information reporting are less likely to be
undelTeported by taxpayers." This infers that the legislative intent of section 6050W was to subject
transactions to reporting -- generally credit card and electronic payment transactions -- that were not
previously subject to reporting in order to improve compliance with the tax law. H.R. Rep. No. 110728, at 35 (2008).
6

7

Id.

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3221, the "Housing Assistance Tax Act of 2008" prepared by the Staff of the Joint
Committee on Taxation [JCX-63-08, 7/23/2008] (the "JCT Report"). There, the term
"third party payment network" is defined (in part) as any agreement or arrangement
which involves the establishment of accounts with a central organization by a
substantial number of persons (e.g., more than 50) who are unrelated to such
organization, provide goods or services, and have agreed to settle transactions for the
provision of such goods or services pursuant to such agreement or arrangement.
(Italics provided).
Thus, for purposes of determining whether the substantial number requirement for
establishing a third party payment network is satisfied, existing guidance offers as an
example of the requisite number, persons who number more than 50. This guidance is
insufficient to enable a third party organization to determine its status as a third party
settlement organization. If a putative third party settlement organization takes the
position that an agreement or arrangement lacks a substantial number of providers of
goods or services to establish the existence of a third party payment network and the
IRS disagrees on audit, the third party organization may potentially be subject to
penalties and backup withholding. Accordingly, additional guidance is necessary
regarding this issue. For example:
~

It is not clear whether the reference to "e.g., more than 50" in the JCT
Report is intended to provides a safe harbor or a bright line rule. Under
what circumstances is the third party organization able to rely on treating an
arrangement with 50 or fewer providers as not involving a substantial
number and, therefore, as not a third party payment network? Under what
circumstances should the third party organization be able to demonstrate
that merely having an arrangement with more than 50 providers at a
particular point in time does not necessarily constitute a substantial number
for purposes of the third party network rules?

~

Is each person (the term used in the Code and the JCT Report) to be treated
as a separate provider ofgoods and services (the term used in the final
section 6050W regulations) and is each provider of goods to be construed
as satisfying the definition of "person" under section 770 I(a)(l)? Thus, if
the provider is a partnership with 20 partners, how is this arrangement
counted for purposes of the substantial number requirement? Similarly,
how does a taxpayer determine the number of providers of goods or
services when a bill for services is submitted and payment is received by a
single payee that covers services provided by persons who are owners,
independent contractors or employees of that payee?

IRPAC believes that rules must be provided to determine whether an arrangement
"involves a substantial number of providers of goods or services." Further, these rules
must be set forth in a manner that allows ready and consistent application by both third
party settlement organizations and the IRS, and that are consistent with the spirit of the

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JCT Report language and the section 6050W reporting requirements. IRPAC submits
that a bright line test is necessary for application of this rule.
IRPAC recommends that such a rule should provide that the arrangement does not
involve a substantial number of providers in a calendar year if, for any day in the
calendar year, the number of providers that accept payments from the taxpayer in
settlement of accounts does not exceed 50. This provision is consistent with the JeT
Report language, is easily administered, and provides a reasonable rule for seasonal
businesses and for taxpayers who are starting up or winding down a business. The rule
should also specifically provide that a provider that receives payment on behalf of
others under the aggregated payees rule or otherwise should be counted as one provider
for purposes of the substantial number of providers requirement. Otherwise, third
party settlement organizations would have the difficult, if not impossible, task of
determining the various kinds of sub-arrangements that may underlie the arrangement
between the third party settlement organization and the providers receiving payments.
2.

Guarantee

Section 6050W(d)(3)(C) and Treas. Reg. § 1.6050W-l(c)(3)(C) require that in order
for an agreement or arrangement to constitute a third party payment network, it must,
among other things, guarantee payment to persons providing goods or services in
settlement of the transactions subject to the agreement or arrangement. Neither the
statute nor the final regulations set forth the meaning of "guarantee" for this purpose or
the factors that establish the existence of a guarantee. 8 IRPAC believes that the term
"guarantee" is a term of art and can be ambiguous,9 and, therefore, the IRS should
issue guidance to define the meaning of "guarantee" for purposes of Form 1099-K and
the section 6050W regulations so those third party settlement organizations potentially
subject to reporting can properly understand and apply the standard. lo
The term "guarantee" has been defined as "[a]n agreement by which one person
assumes the responsibility of assuring payment or fulfillment of another's debts or
obligations." I I Black's law dictionary defines "guarantee" as [t]he assurance that a
contract or legal act will be duly carried out." 12 In most U. S. jurisdictions under the
statute of frauds, a guarantee (a/k/a a surety) -- an arrangement by which one party, the
guarantor, assumes responsibility for the debt obligation of another -- must be in
writing to be enforceable against the guarantor. In cases in which the guarantor acts
The term is sometimes spelled "guaranty" in legal writing. See Black's Law Dictionary 772 (9 th ed.
2009).
9 For example, the language in VCC § 3-419(d) seems to imply that there is a distinction between a
ftuarantee of payment and a guarantee of collection.
o In a number of situations, the Internal Revenue Code and the Treasury Regulations address situations
involving guarantees. For example, Treas. Reg. §§ 1. I 66-8 and 166-9 address circumstances involving
the deductibility of bad debts when the debts are subject to guarantees, and under the "at-risk" rules set
forth in Prop. Treas. Reg. § 1.465-6(d) when a guarantor's amount at risk is increased on account ofa
repayment guarantee.
II See The American Heritage College Dictionary 603 (3rd ed. 2000).
th
12 See Black's Law Dictionary 772 (9 ed. 2009).
8

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for its own benefit, however, a written agreement may not be required in certain
jurisdictions. 13 Thus, the term "guarantee" is subject to interpretation based upon
various meanings and requirements under state and commercial law. Accordingly, it is
necessary to provide guidance regarding the meaning of "guarantee" for those
potentially subject to third party network reporting requirements.
For this purpose, IRPAC believes that a guarantee should mean an enforceable legal
obligation on the part of the third party settlement organization to make payment to the
provider of goods or services and that such obligation must be set forth clearly and
unambiguously in a written agreement under which both the third party settlement
organization and the provider of goods or services are parties. Reporting under section
6050W should not be a nuanced determination where taxpayers are left guessing as to
the applicability of the requirement. Further, where a putative third party settlement
organization that makes payments to providers of goods or services promises to, and
ordinarily does, make prompt payments from its own funds or from the funds of the
recipient of goods or services, but is not legally required to provide payment if, for
example, the purchaser of the goods or services can no longer fund its obligations, the
agreement or arrangement should not constitute a qualifying arrangement because the
putative third party settlement organization does not provide a payment guarantee for
purposes of the third party network rules.
Vague or ambiguous arrangements whereby a putative third party settlement
organization is not under a clear legal duty to make such payments should not be
subject to the requirements of section 6050W. IRPAC believes that qualifying
guarantee agreements or arrangements could be two party or multiple party agreements
or arrangements. That is, the agreements or arrangements may involve only the third
party settlement organization and the providers of the goods or services, or
alternatively such agreements or arrangements could involve multiple parties,
including the third party settlement organization, the providers of the goods or
services, and the purchasers of the goods or services. In either case however, the
existence of a guarantee under the terms of the agreement or arrangement must be clear
and legally binding.

3.

Central Organization

Lastly, the relationship between a putative third party settlement organization and the
provider of goods or services is critical in determining the existence of a third party
payment network under Treas. Reg. § 1.6050W-I (c)(3). In particular, a third party
payment network does not exist when the payor is related to the provider of goods or
services. Treas. Reg. §§ 1.6050W-I(c)(3)(i)(A) and 1.6050W-I(d)(5). It is unclear
under the final section 6050W regulations, however, whether a third party payment
network can exist when a putative third party settlement organization is related to the
purchaser of the goods or services. Such a determination is critical when evaluating
any potential third party network transaction.

13

This exception is referred to as the "main purpose rule."

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An example of an arrangement in which the relationship between the putative third
party settlement organization and the purchaser of goods or services is critical is a
"shared services" arrangement. Example 18 in the final section 6050W regulations
addresses a scenario involving the processing of accounts payable by a shared-service
organization that is unrelated to both the purchasers of goods or services and to the
providers of goods or services. 14 The example concludes that the shared-service
organization is a third party settlement organization under Treas. Reg. § 1.6050W1(c)(2) and that the arrangement constitutes a third party payment network under
Treas. Reg. § 1.6050W-1 (c)(3). It is unclear in the example, however, whether this
conclusion changes in a true "shared-service" arrangement in which an entity
purchasing the goods or services is related to the entity performing the shared-service
function. Based upon the flush language of the final regulations, it is unclear whether
such an arrangement constitutes a third party payment network. Nevertheless, IRPAC
does not believe that either Congress or the IRS intended for arrangements between
purchasers of goods or services and related settlement organizations to constitute third
party payment networks.
To resolve this issue, IRPAC strongly urges the IRS to issue guidance defining the
term "central organization" as an organization that is unrelated, within the meaning of
Treas. Reg. § 1.6050W-1(d)(5), to the purchaser of the goods or services.
B.

Harmonization of Sections 6041 and 60S0W

Congress enacted section 6050W with a focus on a transaction-based reporting model
generally used by financial institutions (e.g., banks, credit card companies, etc.). This
approach is fundamentally different from the payment-based reporting model
ordinarily used by non-financial businesses (e.g., reporting on Forms 1099-MISC in
connection with the processing of accounts payable) in which payments are made
following the receipt of an invoice, and reporting on Forms 1099-MISC is based upon
actual gross payments made during the calendar year. Applying the reporting
requirements of section 6050W to traditional, non-financial businesses previously
subject to reporting under section 6041 is a sea change for such organizations and the
implementation burden -- both administrative and economic -- is substantial. For these
reasons, the harmonization of sections 6041 and 6050W is exceptionally important,
and the careful exercise of the power granted to Treasury and the IRS under section
6050W(g) is necessary to ensure a realistic and efficient transition to Form 1099-K
reporting.
Congress granted Treasury the authority under section 6050W(g) to prevent section
6050W from displacing functional, well established, and effective information
reporting mechanisms already in place under section 6041. The final section 6050W
regulations issued in August of 2010, amended the regulations under section 6041 to
provide that transactions otherwise "subject to reporting under both sections 6041 and
14 The use of the tenn "shared service" in example 18 is a misnomer. Typically, shared service
arrangements only exist in the context of related parties. The tenn "total outsourcing" is generally used
to describe arrangements involving the perfonnance of such services by third parties.

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6050W are reported under section 6050W and not section 6041." Treas. Reg. §
1.6041-1(a)(l)(iv). In other words, the final section 6050W regulations adopt a
standard whereby section 6050W always trumps section 6041 when a transaction is
potentially subject to reporting under both sections.
IRPAC does not believe that this universal approach to harmonize sections 6041 and
6050W is the best or most effective approach in the case of third party network
transactions. 15 IRPAC believes that those third party arrangements that were
previously subject to reporting under section 6041, a reporting process that worked
very well for many years, should remain under section 6041 and not shift to section
6050W. The economic and administrative burden created by shifting reporting for
such arrangements to section 6050W reporting appears to outweigh the benefits likely
to be realized from this significant change. 16 Moreover as pointed out previously in
this correspondence, the universal harmonization approach used in the final section
6050W regulations seems inconsistent with Congressional intent to the extent that it
displaces efficient and functional information reporting practices.
Two examples of situations in which Treasury and the IRS should allow the
information reporting requirements under section 6041 to remain in effect are the
reporting of medical and healthcare payments and third party accounts payable
processing arrangements (addressed separately in parts III and IV, respectively).
Accordingly, IRPAC urges Treasury and the IRS to issue guidance and modify the
language of Treas. Reg. § 1.6041-1(a)(l)(iv), as necessary, to allow long-standing
section 6041 reporting to remain in effect for functional and well-established reporting
situations.

III.

ALL MEDICAL PAYM ENT MADE BY HEALTHCARE NETWORKS SHOULD BE
TREATED CONSISTENTLY AND EXEMPTED FROM THE REPORTING
REQUIREMENTS OF SECTION 6050W.

In addition to the traditional accounts payable functions that have always been covered
under section 6041, IRPAC strongly urges the IRS to exempt both fully-insured and
self-insured healthcare arrangements from reporting medical and healthcare payments
on Form 1099-K, 17 as well as those payments otherwise exempted from reporting since
15 IRPAC was concerned that a broad, overreaching approach regarding third party networks would be
disruptive to businesses, and it cautioned the IRS on this issue in correspondence submitted on January
20, 20 IO. At that time, IRPAC recommended that existing reporting under section 6041 should remain
in place rather than replace such reporting with new rules under section 6050W.
16 As of the date of this letter, Congress appears poised to repeal the expanded Form 1099 reporting
passed under the Patient Protection and Affordable Care Act of 20 I0, so the notion that the reporting of
property purchases and payments to corporate payees is critical in the context of all third party network
arrangements that are already compliant with the requirements of section 604 I should not a factor.
17 Before the issuance of the final section 6050W regulations, medical and health care payments under
both fully-insured and self-insured healthcare arrangements were reportable in box 6 of Form 1099MISC. Those healthcare arrangements not implicated by the final section 6050W regulations continue
to be required to report medical and health care payments in box 6 of Form 1099-MISC. Special
exceptions preclude reporting of payments made under employee flexible spending arrangements

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such amounts have also always fallen under sections 6041 and 6041 A.18 The preamble
to the final section 6050W regulations contemplates that certain self-insured
arrangements could constitute third party payment networks, and that reportable
payments made under such arrangements would be reported on Form 1099-K.
Because such payments are already subject to reporting on Form 1099-MISC for both
fully-insured and self-insured healthcare arrangements, IRPAC believes that reporting
under section 6050W for payments made by a subset of self-insured healthcare
arrangements that happen to satisfy the broad definition of third party payment
network under section 6050W(d)(3) and Treas. Reg. § 1.6050W-l(c)(3) frustrates
rather than enhances Federal information reporting for healthcare payments.
IRPAC also believes that requiring separate reporting on Form 1099-K for effected
healthcare arrangements will be administratively burdensome and economically costly
for payors, confusing for payees and oflittle enforcement value for the IRS. Health
insurers have informed IRPAC members that the aggregate estimated compliance costs
to implement the information reporting requirements of section 6050W for payments to
healthcare providers will exceed $50 million industry wide in the first year, and
prospective costs to comply with the duplicative, split reporting for payments to the
same providers on Forms 1099-MISC and Forms 1099-K (e.g., duplicative software,
IT, printing, postage, etc.) based upon the type of plan triggering the payment (fully
insured or self-funded) will be significant. Importantly, the payments at issue are
already subject to reporting on Forms 1099-MISC.
As noted above, section 6050W(g) grants Treasury the authority to issue regulations or
other guidance to prevent duplicative reporting, and IRPAC believes that a
comprehensive exemption from section 6050W reporting for healthcare networks is
warranted. IRPAC recognizes that a broad definition of "third party payment network"
was necessary under the statute and regulations to facilitate reporting under section
6050W, but in this particular case, an exemption is necessary to retain the longstanding reporting of healthcare payments and to prevent needless confusion,
encourage administrative efficiency for payors, contain costs in an industry where cost
containment is paramount, and foster effective tax reporting of healthcare payments.

("FSA") under section 106(c)(2) or health reimbursement arrangements ("HRA") treated as employerprovided coverage under an accident or health plan under section 106. When payments are made from
FSAs and HRAs, they are exempt from Form 1099 reporting even ifmade to a medical provider under
section 6041 (t). It is not clear whether the exemption applies to payments for medical services through
health savings accounts ("HSA"). Section 6041 (t) predates the creation of HSAs and does not address
them, but the vehicles are similar and many practitioners believe that the exemption should extend to
cover HSAs.
18 Treas. Reg. § 1.6041-3(p)(1) exempts payments to (a) a hospital or extended care facility
which qualifies as a tax exempt charitable organization; or (b) a hospital or extended care
facility owned and operated by the U.S., a state, the District of Columbia, or a U.S. possession
(or a political subdivision or an agency or instrumentality of any of the foregoing). In addition,
payments to pharmacies are also not subject to reporting. See Situation 4 in Rev. Rul. 70-608,
1970-2 C.S. 268.

Pagel I

IRPAC understands that health insurers participating in Administrative Services
Contracts ("ASC") or Administrative Services Only ("ASO") arrangements l9 and
independent third party administrators (ITPAs") -- those healthcare organizations
potentially implicated as third party settlement organizations in the preamble to the
final section 6050W regulations -- universally concluded following the issuance of the
proposed regulations that healthcare networks were fully exempt from reporting under
section 6050W.zO This belief was reasonable in light of the discussion ofthe issue set
forth in the preamble to the proposed section 6050W regulations. Specifically, the
preamble to the proposed regulations included two paragraphs that discussed
healthcare networks. The first paragraph discussed healthcare networks broadly, and
makes reference to both fully-insured and ASC (self-insured) arrangements. Without
adequately distinguishing fully-insured healthcare arrangements from self-insured
arrangements, the second paragraph states that "health carriers operating healthcare
network are outside the scope of section 6050W" and concludes that "because the
purpose of a healthcare network is not to enable buyers to transfer funds to sellers, a
healthcare network is not a 'third party payment network' within the meaning of the
proposed regulations. liZ) IRPAC believes that the IRS would have been inundated with
comments from the healthcare industry had the proposed regulations clearly explained
that self-insured arrangements could be subject to reporting under section 6050W.
IRPAC submits that those payors (insurers) under ASC and ASO arrangements and
TPAs potentially subject to reporting under section 6050W for payments to healthcare
providers were caught completely unaware and by surprise by the discussion of selfinsured arrangements in the preamble to the final section 6050W regulations and will
have significant difficulty complying with these rules for 2011. In addition, insurers
that administer both fully-insured and self-insured healthcare arrangements have
universally expressed concern to IRPAC members that distinguishing between
payments to healthcare providers in order to report correctly on Forms 1099-MISC and
Forms 1099-K will be exceptionally difficult and costly because payments are often
made to healthcare providers that satisfy charges for both fully-insured and self-insured
participants.

IV.

ALL ACCOUNTS PAYABLE PROCESSING ARRANGEMENTS SHOULD BE
TREATED CONSISTENTLY AND EXEMPTED FROM THE REPORTING
REQUIREMENTS OF SECTION 60S0W.

IRPAC strongly urges the IRS to exempt all accounts payable processing arrangements
from reporting transactions with providers of goods or services on Form 1099-K,
19 ASC and ASO arrangements are arrangements under which an employer hires a third party to
administer employee benefit services to the employer. Such services typically include health claims
processing, including adjudication of claims, and billing.
20 After the proposed section 6050W regulations, the IRS received no comments from health insurers
regarding ASCIASO arrangements or TPAs regarding self-funded health plans. The IRS received a
single comment regarding self-funded insurance arrangements (Document: IRS-2009-0032-0005) on
December 30, 2009, from Roger O. Longenbach of Triple S Petroleum.
21 Preamble to Proposed Regulations under Section 6050W, 74 Fed. Reg. 61294, 61297 (Nov. 24, 2009).

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including third party accounts payable arrangements. Payments to providers under
accounts payable processing arrangements have historically been subject to the
provisions of section 6041 and reportable payments are reported on Forms 1099MISC. For the reasons discussed herein, this well-established and effective practice
should be allowed to continue.
There are three fundamental approaches to accounts payable ("AP") processing: an inhouse AP department, a shared-service AP arrangement, and a total outsourcing (t. e. ,
third party) AP arrangement. An in-house AP department is an accounting function of
the purchaser of goods and services by which the purchaser makes payments directly to
sellers on the purchaser's own behalf. As stated in the preamble to the proposed
regulations, such a department is not a "third party" and, therefore, is not a third party
settlement organization of a third party network.
A shared-service AP arrangement typically provides for a single entity (which may be
domestic or foreign) within an affiliated group to process the AP for all or a subset of
the members of the group. This arrangement does not differ materially from the inhouse model, discussed above, except that in the shared-services arrangement, the AP
function is housed in a separate related entity rather than in a separate department or
division of the purchaser. The legal formality of a separate but related entity should
not result in treating a shared-services AP arrangement differently from an in-house
arrangement for purposes of section 6050W. Moreover, as discussed above under
"Central Organization" (in part II.A.3) IRPAC believes that in a shared-services AP
arrangement, the related AP entity does not constitute a central organization, and
therefore, is not a third party settlement organization of a third party payment network.
Under a total outsourcing AP arrangement, the AP function of a purchaser of goods or
services is conducted by an entity that is unrelated to that purchaser (i. e., a true third
party). The AP processing activities performed under a shared-service AP
arrangement and the AP processing activities performed under a total outsourcing
arrangement are identical and reportable payments made under both arrangements are
subject to reporting under section 6041.
IRPAC believes that all AP processing arrangements (in house, shared-service, and
total outsourcing) should remain subject to the information reporting rules under
section 6041 and not subject to reporting under section 6050W because the only
distinction between such arrangements is that the AP processor in total outsourcing
arrangements is a third party. No other substantive differences exist that should
necessitate a different reporting regime, including the fact that all three types of AP
processing arrangements are subject to section 6041 reporting and have been for years.
Accordingly, IRPAC believes that the introduction of Form 1099-K reporting to total
outsourcing AP arrangements is inconsistent with Congressional intent, inconsistent
with other AP processing arrangements, and administratively and economically
inefficient for third party AP processors and the IRS.

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V.

ONEROUS AND DISPARATE TREATMENT OF U.S. PAYORS UNDER TREAS. REG.

§ 1.6050W-l(a)(5)(ii) CREATES SUBSTANTIAL COMPETITIVE
DISADVANTAGES FOR U. . P AYORS IN FOREIGN MARKETS A D SHOULD BE
IMMEDIATELY REMEDJED.

IRPAC recognizes the pressure on Treasury and the IRS to stem the tide of U.S. tax
evasion and to narrow the Federal tax gap. IRPAC also recognizes that this requires
action, including the need for rulemaking and increased enforcement. Nevertheless,
IRPAC believes that the creation of rules that unquestionably and dramatically skew
the competitive playing field against U.S. payors attempting to compete in foreign
markets directly or through foreign affiliates is ill advised, especially when the U.S.
fisc is unlikely to recognize any appreciable economic benefit.
The establishment of a rule that requires U.S. payors to obtain tax documentation from
foreign payees while largely exempting non-U.S. payors from the same requirement,
not only prejudices U.S. payors in foreign markets but seems inconsistent with
Congressional intent. 22 The creation of rules that dramatically disadvantage the
competitiveness of U.S. businesses in foreign markets should only occur for substantial
and compelling reasons because such rules threaten the existence and profitability of
businesses that the Federal government seeks to tax. The rule set forth in both the
proposed and final section 6050W regulations does not seem to be supported by
economic benefits to the U.S. fisc sufficiently compelling to justify the economic harm
likely to be sustained by U.S. payors competing abroad. Accordingly, IRPAC believes
that a single standard under Treas. Reg. § 1.6050W-l(a)(5)(ii) for both u.s. payors and
non-U.S. payors must be applied. IRPAC believes that given the nature of the
significant tax and economic policy concerns with respect to this specific issue, the
establishment of such a disparate standard between u.s. and non-U.S. payors should
be reserved for Congress.
Specifically, Treas. Reg. § 1.6050W-l(a)(5)(ii) requires U.S. payors to obtain tax
documentation from foreign payees -- generally foreign merchants for payment cards
and both foreign merchants and non-merchants for third party payment networks -- that
satisfies the requirements found in Treas. Reg. § 1.1441-1 (e)(1 )(ii). 23 Such
documentation may be a completed Form W-8BEN, a U.S. taxpayer identification
number ("TIN"), or other official documentation that establishes the foreign payee is a
foreign person. Without this documentation in hand, U.S. payors must impose backup
withholding (currently 28%) under section 3406 for payments made on or after January
1,2012. Conversely, unless non-U.S. payors have reason to believe that a foreign
IRPAC made this point previously in comments submitted to the IRS on January 20, 2010. Section
6050W(d)(l )(B) provides that the term "participating payee" does "not include any person with a
foreign address."
23 The final section 6050W regulations use a very broad definition of "U.S. payor or middleman" that
includes not only U.S. payment settlement entities, but also foreign branches and controlled foreign
corporations ("CFCs") of a U.S. payment settlement entity. See Treas. Reg. § 1.6049-5(c)(5). The
effect of this standard means that the subsidiaries of U.S.-based multinationals that act as payment
settlement entities are generally subject to these rules and are similarly disadvantaged compared to nonU.S. payors.
22

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payee is a US. person, non-U.S. payors are not required to obtain any such
documentation from foreign payees and may rely on the fact that the foreign payee has
a foreign address. This documentation requirement foisted on the foreign accounts of
U.S. payors may seem innocuous to seasoned U.S. tax practitioners, but to wholly
foreign merchants with no US. connection whatsoever, applying to the US. taxing
authorities for a TIN or completing a Form W-8BEN is disconcerting. 24 This reality
coupled with the fact that a similar requirement is not imposed on non-U.S. payors that
compete side by side with U.S. payors for the same accounts has an obvious and
profound effect on the foreign business of US. payors. That is, foreign merchants
faced with a burdensome requirement for doing business with US. payors will likely
just decline to do their payment card and third party payment business with US.
payors and opt to do business with non-U.S. payors not subject to these rules. 25
IRPAC does not believe that either Treasury or the IRS intended to dramatically
impede the competitiveness of US. payors in foreign markets, but IRPAC believes that
this is the practical effect of the foreign payee standard imposed on US. payors under
the final section 6050W regulations. In testimony at the Public Hearing on Proposed
Regulations under Section 6050W on March 15, 2010, (the "Hearing"), representatives
of companies adversely affected by the foreign payee rules testified on how their
businesses would suffer under those rules. Some excerpts from that testimony are set
forth below.
American Express signs millions of foreign merchants to accept the
American Express card. Approximately 98 percent of merchants in a
typical region are small retail merchants that usually do not speak
English. Legal agreements and all account communications are in local
language ... When American Express recently surveyed its merchant
account information data, less than 1 percent of active foreign
merchants have a U.S. address on record. 26

The proposed and final section 6050W regulations imposed this standard on U.S. payors when the
regulations under section 1441, which were harmonized with the reporting rules under section 6041 et
seq. and backup withholding under section 3406, include presumption rules under Treas. Reg. § 1.1441(b)(3)(iii) to determine U.S. or foreign status in the absence of documentation. It is puzzling why the
proposed and final section 6050W regulations impose such a burdensome standard when the same
standard is not used in this other context.
25 The rules set forth in section 6050W(b)(4)(B) shift the documentation and reporting requirements to
intermediaries that qualify as Electronic Payment Facilitators ("EPFs"). If an EPF is foreign, it may rely
on the foreign address of foreign payees and need not obtain documentation from the payee. U.S. payors
could separate themselves from payments to foreign payees by using a foreign EPF for foreign payees.
Although this approach would allow a U.S payor to avoid the documentation requirements for foreign
payees, the use of an EPF could be detrimental to business relationships and increase costs considerably.
More importantly for Treasury and the IRS, however, this approach would remove U.S. payors from the
payment chain and thwart efforts to identify U.S. tax evasion. Making documentation requirements
reasonable for U.S. payors in a manner that encourages the monitoring of indicia of U.S. status for
foreign payees would seem to be more advantageous for the U.S. fisc than encouraging an approach that
bifurcates the documentation and payment processes simply to allow U.S. payors to sidestep an
unreasonable documentation standard that ultimately allows reliance on the foreign address anyway.
26 Testimony of Anne Pontrelli, Vice President and General Tax Counsel for American Express.
24

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[t]he average merchant will not easily understand or accept,
notwithstanding our educational efforts, that the Form W-8BEN is not
asking for any information that Elavon most likely has in its account
information; that the form will not result in unanticipated and
unwarranted tax consequences to the merchant; or that Elavon will not
provide the form or its information to the IRS or any government body,
foreign or domestic. The merchant will see that it's a United States tax
form and ... will be highly resistant to completing and providing the
form to us. 27
First Data provides services to over two million merchants located
outside the U.S .... This requirement would hurt our ability and the
ability of other companies like us to compete in foreign markets. In
essence, the proposed regulation as written will cripple US. payor's
attempts to compete outside the US. in the merchant economy space.2 8
In addition to testimony given at the Hearing, Treasury and the IRS received
significant feedback regarding the harm caused by this rule, including written
comments from US. payors that would be directly and adversely affected. 29 IRPAC
believes that the concern raised by these U.S. payors is accurate and justified.
Although it is important to curtail US. tax evasion and narrow the tax gap, it is also
critical to maintain competitive parity among market participants. It makes little sense
to implement a standard that will doom the competitiveness of US. business in foreign
markets. Accordingly, IRPAC strongly recommends that the rule set forth in Treas.
Reg. § 1.6050W-l(a)(5) for U.S. payors be promptly revised in such a manner that
U.S. payors and non-US. payors are afforded the same treatment in order to maintain
competitive parity between U.S. payors and non-US. payors. Specifically,IRPAC
recommends that the standard currently applied to non-US. payors under Treas. Reg. §
1.6050W-l(a)(5)(ii)(B) apply to both U.S. and non-US. payors so that both may rely
on the foreign address of a foreign payee, absent any indication that the payee may be a
U.S. person.

VI.

COMPLIANCE BURDEN, PENALTY RELIEF, AND THE NEED TO EXTEND THE
EFFECTIVE DATES FOR BOTH SECTION 60S0W REPORTING AND BACKUP
WITHHOLDING

IRPAC believes that the implementation of section 6050W reporting is so significant
that it is unlikely that many of those subject to these rules, particularly in the context of
third party network transactions, will be able to timely comply by the current effective
dates. It is unlikely, ifnot impossible in many cases, for business software providers
and the IT functions of reporting organizations to develop and test software that
Testimony of Stuart Harvey, Chief Executive Officer of Elavon.
Testimony of Mark Waring, Vice President of Compliance for First Data.
29 For example, the American Bankers Association submitted detailed comments on this issue on
January 25, 20 I O.

27

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conforms to the rules in sufficient time to allow for reasonable compliance with the
section 6050W rules. Further, significant open questions exist under the final section
6050W regulations that require additional consideration and attention before these
rules should be implemented.
For the reasons set forth herein, IRPAC believes that to persist with the current
effective dates when so many reporting organizations cannot reasonably comply makes
little sense and is unreasonable. Accordingly, IRPAC strongly urges the postponement
of the current effective dates for both reporting and backup withholding by at least one
additional year, or otherwise make the reporting optional for 2011 and 2012, at least
with respect to third party payment networks that have historically reported payments
on Form 1099-MISC. And even with such an extension of time, IRPAC urges the
adoption of a much more lenient standard for penalty relief during the transition period
to section 6050W reporting than the traditional reasonable cause standard.
IRPAC appreciates the opportunity to comment on the important issues addressed
herein raised by the Form 1099-K and the promulgation of the final section 6050W
regulations. Please do not hesitate to contact us if you have any questions or need
additional information.
Sincerely,

~~~

Elizabeth Thomas Dold
IRPAC Chair