The following announcement was published today on the PLF Web site:
Important Information Regarding Withholding Penalties Affecting Lawyers
Who Accept Credit Card Payments
New IRS requirements regarding the reporting of credit card transactions have the potential to negatively impact IOLTA accounts and lead to ethical violations by lawyers. Here are the key points you need to know if you accept credit card payments:
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Pursuant to the Housing Assistance Tax Act of 2008, credit card processing companies are required to verify and match each merchant’s federal tax identification number and her legal name with those found on file with the IRS. An EXACT match is required.
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For the purposes of this requirement, lawyers who accept credit card payments are considered “merchants.”
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If there is NOT an exact match between the information provided to the credit card processing company and the information on file with the IRS, there are serious consequences:
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Beginning January 2013, the IRS will impose a 28% withholding penalty on all credit card transactions, including those that the lawyer directs to her IOLTA account.
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If client funds that should be in the IOLTA account are withheld due to the lawyer’s failure to act and thus are not available to the client on demand, ethical issues are raised.
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Although several steps are required before backup withholding begins, practitioners should take precautionary steps now.
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The credit card processing company should have received information from the IRS if a mismatch occurred and already notified the lawyer of the problem. However, it is not known if all processing companies have provided such notice.
What You Can Do Now To Avoid IRS Withholding Penalties and Ethical Repercussions
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Contact your credit card processor to verify that a match occurred (your legal name and federal TIN match the legal name and federal TIN on file with the IRS).
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Correct mismatches if informed of one.
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Act now – before December 31, 2012 – to avoid withholding penalties.
For more information on this issue, see
- For members of Bloomberg BNA, www.bna.com, refer to Tax Practice Series: Tax Practice and Procedure ¶3820: Tax Returns and Information Returns, Explanation – ¶3820.04 Withholding Tax Returns – ¶3820.04.G. Backup Withholding.
This information was provided by the ABA Commission on IOLTA and supplemented by Hertsel Shadian, J.D., L.L.M Taxation – http://www.shadianlaw.com/ Hoang Nguyen, CPA – http://www.hhnpc.com/.
Oregon Law Practice Management 