The IRS just announced new proposed regulations that will explain how to implement a new tax code section that requires credit card, debit card, and third party payments such as Paypal to be reported to IRS starting in 2011. Institutions will be required to disclose amounts paid to recipients. What this means is that when you pay a bill or buy something over the internet with a credit or debit card, the bank clearing the transaction will tell IRS how much was received by the payee.

The reason for this rule, as announced in the IRS press release, is “to improve voluntary tax compliance by business taxpayers and help IRS determine whether their tax returns are correct and complete”.

It seems that Congress thinks some of you business owners haven’t been quite as “voluntary” as you should be…

So, if you run a business and accept credit card, debit card, or Paypal type payments, IRS will be looking to match up your reported gross receipts with what will be reported to them by the banks. Since this data by itself will be worthless for the purpose of trying to match up with total reported gross receipts, look for another round of reporting requirements on businesses that will eventually require all businesses to separately state on tax returns how much they received via electronic payments and how much they received via cash and checks. And woe be to the small business that doesn’t get it to agree with the bank’s records! Helloooo audit!

The good news: It will take the government years to figure out that the program is ineffective without additional reporting requirements. Since this is starting in 2011 it will be some time before it affects anyone other than the reporting institutions.

The bad news: Someone will have to pay for all the accounting and reporting costs. Guess who that will be?