Removing Barriers Blog

Proposed New Reporting Requirements for Financial Institutions and Payment Settlement Entities
Posted June 14, 2021 by CUNA Advocacy

On May 28, 2021, the President delivered the remainder of his Fiscal Year 2022 budget to Congress.  The Administration’s budget is an explanation of its spending and revenue priorities and does not have the force of law.

 

FINANCIAL INSTITUTIONS 

Perhaps the most consequential item in the budget for credit unions includes new reporting requirements for financial institutions.  In an effort to increase taxpayer compliance, these new reporting requirements, beginning in 2023, are estimated to increase federal revenues by $463 billion over ten years.  The Administration’s FY 2022 budget proposes the creation of a new and comprehensive financial account information reporting regime.  Banks, credit unions, and other entities would be required to annually report to the IRS the gross inflows and outflows of account holders (businesses and individuals) with a breakdown for cash, transactions with a foreign account, and transfers to and from another account with the same owner.

These requirements would apply to savings, transactional, loan, and investment accounts.  A de minimis exception would exempt accounts with gross flow threshold of $600.  The vehicle for this reporting will be the existing IRS Form 1099-INTs sent by financial institutions, brokerages, and others to account holders who earned more than $10 in interest in a calendar year.  In tax year 2019, over 81 million of these forms were delivered or made available to individual account holders.

Payment settlement entities would also be required to collect Taxpayer Identification Numbers and file a revised Form 1099-K expanded to all payee accounts (except de minimis amounts), reporting not only gross receipts but also gross purchases.  This enhanced requirement is in addition to the President's the new proposed reporting requirements on financial institutions outlined above.

It should be noted that the $600 de minimus exemption is deliberately set so low in order to require financial from nearly every account held in American depository institutions.  This also has the effect of discouraging people from spreading their funds to multiple accounts to avoid reporting requirements.  Finally, since other payment services like Paypal and Venmo are covered under similar reporting requirements (see below), with the same de minimus exemption, depository institutions would not be discriminated against nor would these online payment services be a viable destination for an outflow of funds from banks and credit unions in an effort to conceal financial assets.

CUNA remains concerned about the effect this proposed new compliance burden will have on credit unions.  Privacy and data security are paramount issues.  Whether is the massive data breach at the federal Office of Personnel Management in 2014 or this year’s IRS leak of federal tax returns of many wealthy Americans, CUNA needs additional reassurance that such data will be safe and secure.

Also, smaller credit unions would be especially burdened by this new proposal.  From the increased costs of software upgrades to staff training, smaller institutions would perhaps need financial resources and additional time for implementation to meet new requirements.

CUNA also has concerns about how the proposal will affects accounts that are comingled with business and personal funds, as well as how jointly held accounts would be treated.  We also want to avoid any intended consequences that may arise from the Administration’s proposal.  For example, the Federal Account Tax Compliance Act of 2010 placed similar burdensome reporting requirements on financial institutions.  In response, many Americans overseas were unable to obtain or lost access to the banking system as many financial institutions were unwilling or unable to meet the requirements of that law.  CUNA believes that any future account reporting requirements be subject to rigorous review and study.

Finally, credit unions and other financial institutions already churn out many federal tax informational reporting forms.  This new requirement further puts credit unions in the position of further policing their members and account holders.  CUNA has been in contact with Treasury officials on this proposal and appreciate their good faith efforts to address some of these issues.  This issue now moves to Congress where it is almost certain that this revenue generating proposal will be used as a partial funding mechanism for increased infrastructure spending.

PAYMENT SETTLEMENT ENTITIES 

These new reporting requirements, if enacted into law, will also greatly expand reporting requirements for “payment settlement entities.”  The new requirement would require all entities, including financial institutions, that process IRS Form 1099-Ks to add more reporting information.

Currently, MasterCard, Visa, PayPal, Amazon, and many others send 1099-Ks annually to the retailers that use their services to facilitate customer payments.  Gig economy workers (like Uber drivers) receive annual 1099-Ks from their “employers” (like Uber, Etsy, Airbnb) if their “employers” processed 200 or more transactions totaling $20,000 or more for that “employee.”  In 2021, Congress passed the American Rescue Plan Act of 2021.  This new law will lower this threshold next year to $600 with no minimum number of transactions.  Reportable transactions do not include ATM withdrawals or checks issued in connection with a payment card.

In particular, the Administration proposes that “payment settlement entities” would collect Taxpayer Identification Numbers (TINs) and file revised Form 1099-Ks … expanded to all payee accounts (subject to the $600 de minimis threshold).  They would have to report gross receipts, gross purchases, physical cash, as well as payments to and from foreign accounts, and transfer inflows and outflows.  This requirement would also start in calendar year 2023.

While the President’s proposal doesn’t define “payment settlement entities”, the tax code defines them as “merchant acquiring entities and third-party settlement organizations.”  Under current law, these entities must send Form 1099-Ks to the IRS by the last day of February of the year following the relevant transactions.  However, if they file electronically, they are due April 1st. Form 1099-Ks may be filed electronically through the Filing Information Returns Electronically (FIRE) system.  Entities that submit more than 250 of these information returns annually must file them electronically.

A “merchant acquiring entity” is the financial institution or other organization that processes payment card transactions on behalf of a merchant and then transfers the funds received from the customer's bank (the “issuing bank”) to the merchant's account.

A third-party settlement organization is an entity that makes payments to participating payees in a third-party payment network.  Paypal, Amazon, Venmo, GrubHub, Uber and Google Pay are examples of a third-party settlement organizations.

An entity operating a network (like the ACH – the “Automated Clearinghouse”) which merely processes electronic payments (like wire transfers, electronic checks, and direct deposit payments) between buyers and sellers is not required to file Form 1099-Ks.

While the proposal states that third party settlement organizations will not have to report aggregate transactions under $600 annually, merchant acquiring entities will still have to file Form 1099-Ks for all merchants who receive any amount (no de minimus amount pertains).

CUNA has significant concerns about these proposed new compliance burdens and will continue to work with lawmakers to achieve fair treatment for credit unions.