Carolinas Cash Adventure Conference IRS Compliance Rules for Card Clients: New Rules for 2011, 2012, 2013

1. Carolinas CashAdventure ConferenceIRS Compliance Rules for Card Clients: New Rules for 2011, 2012, 2013 Paula Porpilia TIN Compliance Consultants May 16, 2011

2. Legal Disclaimer Visa does not make any warranty or representation as to the completeness or accuracy of this information, nor assume any liability or responsibility that may result from reliance on such information. The information contained herein is not intended as legal or tax advice, and readers are encouraged to seek the advice of a competent tax professional where such advice is required. Even though the information contained herein does not address any significant federal tax issue, is not intended as tax advice, and Visa does not know or have reason to know that any of the information will be used or referred to by other parties in promoting, marketing or recommending any partnership or other entity, investment plan or arrangement, in order to comply with certain U.S. treasury regulations, we inform you that any U.S. federal tax advice contained in this communication, including attachments, was not intended or written to be used, and cannot be used, by any taxpayer for the purpose of avoiding any penalties that may be imposed on such taxpayer by the Internal Revenue Service. In addition, if any such tax advice is used or referred to by other parties in promoting, marketing or recommending any partnership or other entity, investment plan or arrangement, then (i) the advice should be construed as written in connection with the promotion or marketing by others of the transaction(s) or matter(s) addressed in this communication and (ii) the taxpayer should seek advice based on the taxpayer’s particular circumstances from an independent tax advisor.

3. Advisory The purpose of this presentation is to alert you to the requirements of federal tax law and regulations regarding IRC sections 6041 and 3402(t). It reflects the best information available as of the time presented. Over the next few months, additional guidance is expected to be released. Such developments may change the information provided herein. Be sure to check for the most recent guidance. In addition, how to implement a compliance program is up to each company, working with its tax advisers

4. Things Have Changed • The combination of Regulations issued in August 2010 along with a Notice released in December 2010 means that card transactions are no longer subject to IRS reporting and withholding rules • Check transactions in 2011 and 2012, on the other hand, are subject to the same rules as before • Additional rules for certain governments will take effect in 2013 • The planned expansion of reporting for check transactions has been repealed.

5. Treas. Reg. 1.6041-1(a)(1)(iv) “For payments made by payment card …or through a third party network …after December 31, 2010…that otherwise would be subject to reporting under both sections 6041 and 6050W are reported under section 6050W and not section 6041. “

6. Basic Dividing Line--How You Pay • Beginning in 2011, HOW you pay will determine WHAT you have to do for IRS • Cash and check transactions will have one set of rules • Card transactions will have another set of rules

7. 2011 And Beyond--Rules For Card Transactions • Beginning for 2011, if you use your card to purchase goods or services NO IRS compliance rules apply • You DO NOT have to: • Get the merchant’s TIN • Backup withhold • File Form 1099-MISC • Respond to post-2010 “B” Notices • Deal with post-2010 Penalty Notices

8. Overview of IRS Reporting and Withholding Rules for Check Transactions

9. 2011 and 2012 Check Transactions • For most payers, check transactions in 2011 and beyond will be subject to the same rules as prior years: • Obtain TIN before payment or backup withhold 28% • File Form 1099-MISC if at least $600 paid in the calendar year • Deposit timely or be subject to penalties • File Form 945 annually to state withholding liabilities • Process B Notices • Respond to Penalty Notices • For Federal, State and Large Local governments, for 2011 and 2012 use above rules, but in 2013 “TIPRA” rules take over

10. Basic Concepts for Check Reporting • Statute: Report when you pay anyone or anything for any purpose unless you know an exception applies • Regulations provide some exceptions • Merchandise • Freight, telephone • Corporations • Unless corporation provides medical or legal services • Unless the payor is a federal agency • If part of a payment is reportable and part is not, report everything • When in doubt, report • You must file returns for all reportable payments made in a calendar year if the total is at least $600 • Use transaction date, not posting date • Aggregate all reportable transactions--check or cash (not card)-- to determine if $600 or more for same supplier

11. Supplier Names and Addresses • Report payments to all types of payees unless you know an exception applies • Exceptions include payments to tax-exempt organizations and government entities • Payee’s legal name--not DBA name -- is the one the IRS wants • Sole Proprietor = Individual’s Name (1040) • Name as shown on SS4 when applied for EIN • IRS wants the legal address (the one shown on taxpayer’s tax return)

12. Accurate TINs • IRS matches Name / TIN combination on information return with master file • The IRS issues a B Notice for an invalid Name / TIN combination • TIN Matching not required, but highly recommended • Frequent cause for a mismatch • DBA name used instead of sole proprietor name • Name misspelled or abbreviated • Missing TIN • TIN not 9-digits long • TIN contains alpha characters or hyphens • Paper reporting IRS scanning errors

13. Confidentiality • Cannot use TIN information for any other purpose • Cannot penalize merchant for failure to provide TIN

14. Backup Withholding • Must withhold 28% of any payment if TIN is not in hand at time of payment • Must also withhold if a B Notice is received • Payor receives if Name / TIN on information return does not match IRS master file • If you receive one, you must get the merchant to sign a Form W-9 or backup withhold on future transactions

15. Deposit Rules • If you withhold, you must deposit according to the same rules used for wage withholding (but done separately); electronic deposits may be required • If withhold is less than $2,500, deposit annually • If withhold is less than $50,000 in base year, deposit monthly by the 15th of following month • If more, deposit semi-weekly (Wednesday and Friday) • If more than $100,000 at any time, deposit next day • File Form 945/Schedule A annually • Penalties • 2, 5, 10 or 15 percent depending upon how late the deposit is (most are 10) • Penalty is in addition to the liability for the backup withholding itself • Penalty may be assessed for timely deposits not done according to the proper procedure (e.g. not using electronic deposits when required)

16. Reporting • Payee Statements • Must be sent to payee by January 31st or penalties apply • Extension of time (EOT) available • May use official form or qualified substitute • Separate penalties may apply • Information Returns to IRS • Due by March 31st if filing electronically, February 28th on paper • Penalties apply for late or inaccurate filing • Questions can be addressed to: • IRS Martinsburg, West Virginia Payor Call Site • (866) 455-7438 or (304) 263-8700 • 8:30am – 4:30pm EST • No Charge for Service • Anonymous

17. Filing Penalties • Legislation in September 2010 changed the penalties effective for 2010 • Now it is $100 per error, maximum of $1.5 million • Reduced to $60 per error, maximum of $500,000 if corrected by August 1st • Reduced to $30 per error, maximum of $250,000 if corrected within 30 days of due date • $250 per error, no maximum if intentional disregard • Separate $100 penalty/$1.5 million maximum for errors associated with sending payee statements

18. Year End Checklist • To meet the current IRS requirements, you need • Merchant’s legal name • Merchant’s full mailing address • Merchant’s TIN • Annual totals • Questions for the payor to ask • When was the payment? • Use transaction date, not posting date • For how much? • Aggregate supplier payments to reach $600 threshold • Card transactions not reportable therefore not included in total • Is the transaction for merchandise or services? • Is the merchant a corporation (except federal agencies) or other exempt recipient?

19. 2012 Check Transactions • Same as before • Plans to expand reporting have been repealed • The repealed expansion would have required • Report payments to corporations • Report payments for merchandise • Will need TINs for all these merchants or backup withhold • H.R. 4, just passed by Congress, takes check reporting back to what is has been all along

20. 2013 Check Transactions • For private sector and small governments, use the same rules as in 2012 • For Federal, State and Large Local Governments, “TIPRA” becomes effective and generally supplants the old rules except for transactions subject to backup withholding • But see next slide

21. Sections 3402(t) and 6041 • Section 6041 contains the “old rules”, and 3402(t) the new rules, but these new rules appear to be “additional rules” not “in stead of rules” in some cases • If a Govt is backup withholding under 6041, then 3402(t) does not apply • But the reverse does not appear to be true. So if a transaction is exempt from the 3402(t) rules (for example, because it is under $10K), nothing in the regs says the old rules do not still apply. In fact, since the regs contemplate that you may be backup withholding under 6041, clearly 6041 continues to apply. • As a result, it appears that if a transaction is not reportable under 3402(t), it may still be reportable under 6041.

22. TIPRA and Checks • Under TIPRA, beginning for 2013 Federal, State, and large local governments are required to report all payments made AND withhold 3% every time, even if they have a good TIN • However, Notice 2010-91 provides relief for card transactions indefinitely since they will be reported by the merchant’s acquiring bank on Form 1099-K • Check transactions (including convenience checks) will be subject to the TIPRA Rules • Some exceptions apply but can be difficult to implement • Tip: to minimize IRS reporting requirements use a card to pay for everything

23. $100 Million Exception • $100 Million Exception • Local governments with annual spend of under $100 million are exempted from these requirements • To calculate spend, either • Look at the “base” year 2 years before the current year (for 2013 look at the spend in 2011), OR • Average 4 of the 5 consecutive years ending with the base year (for 2013, average 4 of the years from 2007 to 2011) • Exclude from the spend calculation anything exempted from the reporting requirements except transactions excluded solely because they are under $10,000 or transactions associated with old contracts • As a result, payroll and retirement benefits are not included in the spend total

24. Exceptions to 3402(t) • Exceptions to 3402(t) • Under Proposed Regulations, Governments will not have to report and withhold under 3402(t) for transactions: • Under $10,000 • Connected to a pre-2013 contract (may be eliminated in 2014) • Connected to classified contracts • Connected to certain welfare programs • Payments to government employees, Indian tribes or other governments • Connected to emergency or disaster situations • For services by non-US persons outside the US • That are rental payments for real property or interest • Payments where backup withholding is already being done under 6041

25. Review of IRS Reporting Rules for 2011, 2012, 2013

26. 2011 and 2012 • No reporting for card transactions begins • Check transactions continue to be subject to current rules • B notices for 2010/2011 transactions • Penalty Notices for 2009/2010

27. 2013 • Card transactions continue to be free of IRS compliance requirements • For certain Government Payors paying by check • Reporting and withholding 3% effective under 3402(t) • File Forms 1099-MISC • For everyone else paying by check • Same rules as for 2011 • File Form 1099-MISC • Penalty Notices for 2011 Forms 1099-MISC

28. Private Sector/Small Local Governments • 2011 and beyond • If paying by check - report using existing rules • Report services, not merchandise on Form 1099-MISC • Report sole proprietors, partnerships, medical and legal corporations • Do not report other corporations, governments, TEOs • Get TIN or backup withhold 28% • B Notices and Penalty Notices • If paying by card - no IRS requirements

29. Federal/State/Large Local Governments • 2011 and 2012 • If paying by check: Report using current rules--see 2010 • Report services, not merchandise on Form 1099-MISC • Report sole proprietors, partnerships, medical and legal corporations • Do not report other corporations, governments, TEOs (Federal agencies report all corporations) • Get TIN or backup withhold 28% • B Notices and Penalty Notices • If paying by card: No IRS requirements • 2013 • Card transactions continue to be free of IRS compliance requirements • For checks, for all transactions (goods and services) to all merchants (except other governments or TEOs) report on Form 1099-MISC and withhold 3% (28% if no TIN) (Some exceptions apply)

30. Impact on Card Clients • After years of turmoil and efforts by Visa to obtain compliance relief for cardholders, the payoff is at hand • After 2010, card transactions are not reportable by card clients, so use your card for everything • After 2012, payments by check get even more complicated for many government agencies as they will have to withhold 3% and report on all check transactions • QPCA will be withdrawn as unnecessary

31. Impact on Merchants

32. Merchant’s Point of View • Form 1099-MISC • Merchants will continue to receive Forms 1099-MISC from AP departments for check payments but not card payments • Exemption for merchandise continues • Non-legal, non-medical corporations will continue to be exempt recipients--payers do not have to send Form 1099-MISC to them • If the payer is a Federal Government agency then the forms will be sent to corporate payees if they are otherwise required • Beginning in 2013, Federal, State and large local governments will report on all check (but not card) transactions (goods and services, corporate or not) and withhold 3% of all check payments as pre-paid taxes

33. Merchant’s Point of View Part II • Form 1099-K • Merchants will receive Form 1099-K for their payment card transactions • No exemption for merchandise • No exemption for consumer cards • No exemption for corporate payees • IRS revising corporate tax return forms to utilize Form 1099-K data

34. Other Considerations

35. State Activity • These are the Federal Rules • Many states have their own information reporting requirements • Some ride in tandem with Federal law and others require legislative action to mirror Federal changes • As a result, although reporting may no longer be required for the IRS, reporting may be required to states where your merchants are located • Each payor should work with their counsel to determine whether they have state reporting duties, and whether the states involved will follow the Federal lead and adopt 3402(t), the anti-duplication rules, and/or the expanded 6041 reporting

36. How Visa Data Can Help With State Reporting • Payee legal name, TIN, address • The incorporation status of the supplier • 1= Sole Proprietor (use the individual’s name; EIN or SSN is OK) • 2= Partnership • 3= Corporation • 4= Medical or Legal Corporation (reportable by all) • 5= Associations/Estates/Trusts • 6= Tax-Exempt Organizations (TEOs) • 7= Governments (Federal/State/Local/Foreign) • 8= International Organizations • 9= Limited Liability Company (LLC)

37. Visa Activities • TIN Matching was done on all merchant records with 2010 transactions; Visa worded with acquirers to resolve IRS TIN mismatches • This resulted in improved data for cardholders for 2010 • Visa will continue to work with IRS and Congress to protect our recent gains and to monitor the development of future regulations

38. Reporting Help • Questions can be addressed to: • IRS Martinsburg West VA Payor Call Site • (866) 455-7438 or (304) 263-8700 • 8:30 – 4:30pm EST • No Charge for Service • Anonymous

39. IRS Numbers • Call Site: 866-455-7438 • Forms and Pubs: 800-777-4778 • Taxpayer Advocate: 877-777-4778, 202-622-3125, or systemic.advocacy@irs.gov • EFTPS: 800-829-4933 • TeleTax: 800-829-4477 • E Help desk at 866-255-0654 • On-line at www.irs.gov/efile

40. Additional Information • IRS Resources • 6041 Regulation Change • http://www.federalregister.gov/articles/2010/08/16/2010-20200/information-reporting-for-payments-made-in-settlement-of-payment-card-and-third-party-network • TIPRA Regulations • http://www.federalregister.gov/articles/search?conditions%5Bterm%5D=TIPRA&commit=Go • TIPRA Notice 2010-91 • http://www.irs.gov/irb/2010-52_IRB/ar15.html

41. QUESTIONS?