Lawmakers decided that closing some of the oft-bemoaned tax gap (the money that taxpayers owe but never pay, estimated by the IRS to be $290 billion in 2001) would help offset the cost of aiding struggling homeowners.

Congress' plan to narrow the tax gap, in this instance, was to require more reporting of business receipts. Specifically, lawmakers decided that starting in 2011, merchants' credit-card transactions must be reported to the IRS.
This has caused plenty of upset among small businesses, which fear higher costs will result, and plenty of confusion among consumers. Many bloggers are warning about the new rule, with statements such as: "Every credit card transaction will now be reported to the IRS."

In a sense, that's true -- but the new law requires reporting only of the "gross amount of reportable transactions" per merchant, once per year. That is, the total dollar amount not the details of every transaction.

While the new rule may bring more IRS audits, it's also aimed at encouraging business owners to report income accurately.

If the IRS, through this system, gets information on a merchant that shows X amount of credit-card sales and their statistics show that type of merchant probably has 80% of their business done on credit-card sales, and total reported revenue doesn't seem to mesh up, it probably will result in audits.

The new law requires reporting on credit- and debit-card transactions, as well as third-party network transactions such as through PayPal and Google Checkout.

Reporting is not required for merchants who collect less than $20,000 in such receipts and had fewer than 200 reportable transactions in a given year.

Wishing you many happy returns,

Dr. Wayne T. Essex