If eBay power sellers are nervous about getting hit by the tax man, the online payment networks that handle their money should be equally worried. That's the advice lawyers are doling at as they warn about the coming effects of a new but little known law that former President Bush signed before leaving office. It's a snippet tucked near the end of the massive housing bill, which requires banks and online payment networks to report to the Internal Revenue Service any online merchants who made more than $20,000 a year in 200 or more transactions.
The goal is to catch any tax cheaters making a lot of money on the Internet, lawyers said, But many in the online community are unaware of the hidden provision, which doesn't take effect until 2011. And those who are aware of it are uncomfortable with monitoring and tracking consumer activity for government purposes, they added.
Meanwhile, attorneys are advising online payment companies, such as PayPal and Googlecheckout, to get the technology in place to meet the new reporting requirements, which, they stressed, could raise privacy and auditing complications.
"I think audit rates are going to skyrocket," said Zahara Alarakhia, of Dallas' Munck Carter, who advises companies on e-commerce matters. She said many of her clients lack the technology to meet the "new reporting obligations that they've never had before."
"Now they've got an imposition of making sure that they report accurate income," Alarakhia said.
And if any mistakes are made, which is likely to happen given the complexity of banking transactions, Alarakhia said, "the [Internal Revenue Service] is going to come down on them the most."
Under the new electronic payment provision, online payment networks will be required to provide the IRS with the name, address, and tax information number (TIN) of merchants who made more than $20,000 with 200 or more transactions in a year. The provision is expected to raise $9.8 billion in taxes over 10 years.
Attorneys said that, as in most bank reports, mistakes are likely to happen when tracking online sales for merchants like eBay sellers. For example, credits may have been issued for a particular purchase, but the refunds won't be reflected in the total receipts. That could raise a red flag within the IRS.
"Financial intermediaries like banks are assuming a whole new responsibility of tracking user behavior," said David Sohn, senior policy counsel for the Center for Democracy and Technology, who has privacy concerns about the new law.
Sohn said the bill contradicts the government's recent philosophy of moving away from relying too heavily on Social Security numbers. Instead, it will force online banking institutions to track and store those numbers, making them more vulnerable to theft.
Sohn also fears the new law sets a dangerous precedent.
"Once the government starts down the path of requiring banks to be tracking and reporting on the activities of users for tax purposes, what's next?" Sohn said. "Are all the state governments going to say, 'Hey, that's a great idea. Maybe we should do it, too.' "
Officials with the IRS were unavailable for comment.