Notice 2007-59

This notice provides a proposed revenue procedure that would supersede Rev. Proc. 2004-42, 2004-2 C.B. 121 (August 2, 2004). In general, Rev. Proc. 2004-42, establishes a procedure for a payment card organization to request a determination that it is a Qualified Payment Card Agent (QPCA) for purposes of the regulations under section 3406 and section 6724 of the Internal Revenue Code. A QPCA may act on behalf of cardholder/payors in soliciting, collecting, and validating merchants’ names, taxpayer identification numbers (TINs) and corporate status (collectively referred to as merchant/payee data) and on behalf of merchant/payees in furnishing merchant/payee data to cardholder/payors. Under section 301.6724-1(c) and (e) of the Regulations on Procedure and Administration, cardholder/payors are relieved of certain TIN solicitation requirements for payments made through a QPCA. Section 31.3406(g)-1(f) of the Employment Tax Regulations provides a limited exception from the backup withholding requirements for payments made to certain merchant/payees through a QPCA.

In response to the request in Notice 2005-25, 2005-1 C.B. 827 (April 4, 2005), for recommendations of publication items for the 2005-2006 Guidance Priority List, some businesses subject to the payment card rules and procedures recommended that Rev. Proc. 2004-42 and section 31.3406(g)-1(f) of the regulations be modified to reflect the current electronic business operations of the payment card industry and to permit the use of payment cards by merchant/payees that opt out of the QPCA program. Specifically, they requested the following changes to the procedures in Rev. Proc. 2004-42:

The Service and Treasury Department agree that it is appropriate to modify the requirements of Rev. Proc. 2004-42 and the regulations to reflect the current electronic business operations of the payment card industry. Proposed amendments to the regulations under section 3406 would authorize electronic furnishing of notifications regarding payee status and participation in the QPCA program if certain conditions are satisfied. In addition, the proposed revenue procedure set forth as an attachment to this notice would adopt the first and second recommendations regarding the electronic furnishing of notices. The proposed revenue procedure also responds to the third recommendation by authorizing the electronic furnishing of merchant/payee data reports if both the cardholder/payor and the merchant/payee consent.

The Service and the Treasury Department also agree that a merchant/payee that does not want to participate in the QPCA program should be allowed to opt out of the program by completing and returning a written statement to the payment card organization and should be permitted to continue accepting the payment card even if it opts out of the QPCA program. The proposed revenue procedure would make this change.

Although QPCAs would not act on behalf of nonparticipating payees in furnishing payee data to cardholders, the Service and the Treasury Department have concluded that a QPCA should be required to furnish certain information to cardholders that use the QPCA’s card to make reportable payments to nonparticipating payees. Specifically, the QPCA should be required to inform the cardholder that the payee is not a participant in the QPCA program and is not a qualified payee. Proposed amendments to the regulations under section 3406 would adopt this rule. In addition, the proposed revenue procedure would change the content of the written notice that payment card organizations are required to provide to merchant/payees so that the content is consistent with the proposed regulations relating to payees that opt out of the QPCA program.

The Service requests comments on the proposed revenue procedure. Written comments must be received by September 24, 2007. Comments should be submitted to: CC:PA:LPD:PR (NOT-2007-59), Room 5203, Internal Revenue Service, POB 7604, Ben Franklin Station, Washington, DC 20044. Alternatively, comments may be hand delivered between the hours of 8 am and 4 pm to CC:PA:LPD:PR (NOT-2007-59), Courier’s Desk, Internal Revenue Service, 1111 Constitution Ave., NW, Washington, DC. Comments may also be transmitted electronically via the following email address: Notice.Commments@irscounsel.treas.gov. Please include “Notice 2007-59” in the subject line of any electronic communication.

For further information regarding this notice, contact Michael Hara of the Office of Associate Chief Counsel (Procedure and Administration). Mr. Hara may be contacted at (202) 622-4910 (not a toll-free call).

This revenue procedure modifies the procedures set forth in Rev. Proc. 2004-42, 2004-2 C.B. 121 (August 2, 2004). Rev. Proc. 2004-42 established a procedure for a payment card organization to request a determination that it is a Qualified Payment Card Agent (QPCA) for purposes of the regulations under section 3406 and section 6724 of the Internal Revenue Code (Code). A QPCA may act on behalf of cardholder/payors in soliciting, collecting, and validating merchants’ names, taxpayer identification numbers (TINs) and corporate status (collectively referred to as merchant/payee data) and on behalf of merchant/payees in furnishing merchant/payee data to cardholder/payors. The Regulations on Procedure and Administration relieve cardholder/payors from certain TIN solicitation requirements for payments made through a QPCA. The Employment Tax Regulations provide a limited exception from the backup withholding requirements for payments made to certain merchant/payees through a QPCA.

The requirements a payment card organization must meet to obtain and retain a QPCA determination are modified as follows:

.01 The written notices that the payment card organization must provide to cardholder/payors and merchant/payees may be mailed (the only option described in Rev. Proc. 2004-42) or furnished electronically. If a notice is furnished electronically, a notification that important tax and privacy information is being provided must be included on the subject line of the electronic communication through which the notice is furnished.

.02 The written notices provided to merchant/payees will no longer be required to inform merchant/payees that they will be treated as participants in the QPCA program if they continue to accept the organization’s payment card. Instead, the notice must inform merchant/payees that they may opt out of the QPCA program by completing and returning a written statement to the payment card organization and that they may continue to accept the organization’s payment card even if they opt out of the QPCA program.

.03 The reporting requirements are modified to reflect the fact that a QPCA’s payment card may be accepted by merchant/payees that have opted out of the QPCA program (nonparticipating merchant/payees). Although QPCAs do not act on behalf of nonparticipating payees in furnishing payee data to cardholders, the QPCA is required to furnish certain information to cardholders that use the QPCA’s card to make reportable payments to nonparticipating payees. Specifically, the QPCA is required to inform the cardholder that the payee is not a participant in the QPCA program and is not a qualified payee. In addition, the QPCA must advise the cardholder/payor of the cardholder/payor’s obligation to solicit the name and TIN of a nonparticipating merchant/payee to which it makes a reportable payment.

.04 The reporting requirements are also modified to provide specific authority for furnishing the merchant/payee data report electronically, including by posting on a secure website. Electronic reporting is permitted only if both the cardholder/payor and merchant/payee consent by returning the consent form included with the written notice provided by the QPCA.

.01 Payment card transactions. A payment card transaction is a transaction in which a cardholder/payor uses a payment card (as defined in section 5.05 of this revenue procedure) to purchase goods or services and a merchant agrees to accept the payment card as a means of obtaining payment. A payment card organization (as defined in section 5.06 of this revenue procedure) sets the standards and provides the mechanism for effecting the payment.

.02 Reporting requirements. In general, section 6041 of the Code requires a person engaged in a trade or business and making a payment in the course of the trade or business of $600 or more during a calendar year of fixed or determinable income to file an information return with the Internal Revenue Service (IRS) and to furnish an information statement to the payee. Section 1.6041-3(p) of the Income Tax Regulations provides exceptions to these requirements, including, for example, exceptions for payments made to a payee that is a corporation. Section 6041A of the Code imposes similar requirements with respect to payments of remuneration for services and direct sales.

Section 6109(a)(2) of the Code provides that any payee, with respect to whom a return is required to be made by another person or whose identifying number is required to be shown on a return of another person, must furnish to the other person the identifying number prescribed for securing the proper identification of the payee. Section 6109(a)(3) provides that any person required to make a return with respect to a payee must ask the payee for the identifying number prescribed for securing the proper identification of the payee and must include that number in the return.

.03 Backup withholding. Section 3406(a)(1) requires a payor to withhold on reportable payments (as defined in section 3406(b)(1)) if the payee does not provide a TIN to the payor in the manner required, if the Secretary notifies the payor that the TIN furnished by the payee is incorrect, or if certain other circumstances exist. Section 3406(i) provides that the Secretary shall prescribe the regulations necessary or appropriate to carry out the purposes of section 3406.

Section 31.3406(j)-1 of the Employment Tax Regulations provides that the Commissioner has the authority to establish TIN matching programs through revenue procedures or other appropriate guidance. Under the regulations, a payor or a payor’s authorized agent may participate in a TIN matching program that permits the payor or authorized agent to contact the IRS with respect to the TIN furnished by a payee before the payor files an information return for reportable payments to the payee. The regulations further provide that the IRS will inform the payor or the payor’s authorized agent whether or not the name/TIN combination furnished by the payee matches a name/TIN combination maintained for the TIN matching program. Revenue Procedure 2003-9, 2003-1 C.B. 516, describes the procedures for participation in the IRS TIN Matching Program.

Section 31.3406(g)-1(f) of the Employment Tax Regulations provides that the backup withholding requirements of section 3406 do not apply to payments made through a QPCA if the payments are made to a qualified payee or during a grace period. Section 31.3406(g)-1(f)(3) requires a QPCA to notify the cardholder/payor when payments are made to a merchant/payee who is not a qualified payee. Proposed amendments to these regulations would require a QPCA to notify the cardholder/payor when payments are made to a merchant/payee that does not participate in the QPCA program.

.04 Information reporting penalties and waivers for reasonable cause. Section 6721 of the Code provides that a payor may be subject to a penalty for failure to file a complete and correct information return. Section 6722 of the Code provides that a payor may be subject to a penalty for failure to furnish a complete and correct information statement to a payee. A failure subject to the section 6721 and section 6722 penalties includes a failure to include correct payee TINs.

Section 6724 provides that the penalties under section 6721 and section 6722 may be waived if the filer shows that the failure was due to reasonable cause and was not due to willful neglect. Under section 301.6724-1(e)(1)(vi)(H) and (f)(5)(vii) of the Regulations on Procedure and Administration, a cardholder/payor in a payment card transaction may establish reasonable cause based on its reliance on a QPCA.

This revenue procedure applies to payment card organizations acting or seeking to act on behalf of cardholder/payors in soliciting, collecting, and validating merchant/payee data and on behalf of merchant/payees in furnishing merchant/payee data to cardholder/payors.

The following definitions and related rules apply solely for purposes of this revenue procedure:

.01 Cardholder. A cardholder (or cardholder/payor) is the person that agrees to make the payment through the payment card organization. Thus, in the case of a payment card issued to an employee of a person that agrees to make payments through the payment card organization, the employer rather than the employee is the cardholder/payor.

.02 Merchant. A merchant (or merchant/payee) is a person that has agreed to accept the payment card issued by the payment card organization as payment for goods and services.

.03 Merchant/payee data. Merchant/payee data includes the merchant/payee’s name, corporate status, and TIN, and whether the TIN has been validated through the IRS TIN Matching Program.

.04 Participating payee. A payee is a participating payee with respect to a reportable payment if—

(1) The written notice described in section 6.03(1)(c) of this revenue procedure was provided to the payee before the date on which the QPCA makes the payment; and

(2) At the time the QPCA makes the payment, the payee has not declined the QPCA’s services in the manner prescribed in the written notice.

.05 Payment card. A payment card is a card (or an account) issued by a payment card organization to a cardholder/payor which, upon presentation to a merchant/payee, represents an agreement of the cardholder to pay the merchant through the payment card organization.

.06 Payment card organization. A payment card organization is an entity that sets the standards and provides the mechanism for effectuating payment between a purchaser and a merchant in a payment card transaction. A payment card organization generally provides this payment mechanism by issuing payment cards, enrolling merchants as authorized acceptors of payment cards for payment for goods or services, and ensuring the system conducts the transactions in accordance with prescribed standards. In any case in which a payment card organization acts through a member, affiliate, or licensee, the action is treated for purposes of this revenue procedure (including this definition) as an action by a payment card organization.

.07 Qualified Payment Card Agent (QPCA). A QPCA is a payment card organization that has a current QPCA determination from the IRS. A person acting in its capacity as a QPCA does not act as an agent of the IRS, nor does it have the authority to hold itself out as an agent of the IRS.

.01 Where to apply for QPCA determination. A person authorized to act on behalf of a payment card organization may submit a written request for a QPCA determination to the following address:

Internal Revenue Service
1601 Market Street
20^th Floor
ATTN: TIN Matching Coordinator
SE:S:CCS:CRC:PC&T
Philadelphia, PA 19107

.02 Content of QPCA application. A payment card organization requesting a QPCA determination must include the following in its application:

(1) The name, address, and employer identification number of the payment card organization and a description of its business.

(2) The name of the department or office of the payment card organization that will serve as the information contact.

(3) The name of the department or the names and titles of the officers or employees that will be responsible for the performance of the TIN solicitation activities described in section 7.

(4) A list of the systems, business lines, or card product lines or levels that will be covered by the TIN solicitation activities described in section 7 and that will be covered by a QPCA determination.

(5) An explanation of the account opening procedures and documents the payment card organization uses, or requires its members, affiliates, or licensees to use, to establish merchant account relationships related to the payment card organization’s activities as a QPCA.

(6) The approximate number and the type of merchants (individuals, corporations, etc.) enrolled by the payment card organization.

(7) An explanation of the payment card organization’s systems and controls related to the payment card organization’s activities as a QPCA for—

(a) Obtaining merchant/payee data (including merchant/payee data provided by reputable third-party sources);

(b) Validating the accuracy of the merchant/payee data;

(c) Ensuring the accuracy and reliability of the merchant/payee data;

(d) Maintaining the merchant/payee data; and

(e) Supplying the merchant/payee data to the cardholder/payor.

.03 Requirements for QPCA determination. A payment card organization must meet the following requirements to obtain a QPCA determination:

(1) Authorization to act on behalf of cardholder/payors and on behalf of merchant/payees.

(a) The payment card organization must establish that cardholder/payors have authorized it or its members, affiliates, or licensees to act on their behalf in soliciting, collecting, and validating merchants’ names and TINs and to assist the cardholders in meeting their information reporting obligations under section 6041 and section 6041A. The payment card organization must also establish that merchant/payees have authorized it or its members, affiliates, or licensees to act on their behalf in furnishing their names, TINs, and corporate status to cardholders and to assist the merchants in meeting their obligations under section 6109(a)(2). To satisfy these requirements, the payment card organization must provide the written notice described in section 6.03(1)(b) to each cardholder/payor and must provide the written notice described in section 6.03(1)(c) to each merchant/payee.

(b) The text of the written notice provided to cardholder/payors must be in bold and conspicuous type, and the notice must include the legend: “Important Tax and Privacy Materials.” The notice must state:

The notice may be included in the annual (or periodic) agreement, or amendments thereto, between the payment card organization and the cardholder or in a separate document. The notice may be furnished by U.S. mail or electronically. If furnished by U.S. mail, the outside of the envelope in which the written notice is mailed must contain, in bold and conspicuous type, the legend: “Important Tax and Privacy Materials Enclosed.” If furnished electronically, the subject line of the electronic communication through which the notice is furnished must contain, in bold and conspicuous type, the legend: “Important Tax and Privacy Materials Enclosed.”

(c) The text of the written notice provided to merchant/payees must be in bold and conspicuous type, and the notice must include the legend: “Important Tax and Privacy Materials.” The notice must state:

The notice may be included in the annual (or periodic) agreement, or amendments thereto, between the payment card organization and the merchant or in a separate document. The notice may be furnished by U.S. mail or electronically. If furnished by U.S. mail, the outside of the envelope in which the written notice is mailed must contain, in bold and conspicuous type, the legend: “Important Tax and Privacy Materials Enclosed.” If furnished electronically, the subject line of the electronic communication through which the notice is furnished must contain, in bold and conspicuous type, the legend: “Important Tax and Privacy Materials Enclosed.”

(2) TIN solicitation activities. The payment card organization must establish that it has undertaken, or demonstrate that it will undertake, the TIN solicitation activities described in section 7.

(3) Reliability of merchant/payee data. After obtaining the authorizations required by section 6.03(1), the payment card organization must participate in the IRS TIN Matching Program and must demonstrate, based on the TIN matching results, that its merchant/payee data is sufficiently reliable.

.01 TIN solicitation methods. A QPCA should solicit merchant/payee TINs in a manner described in section 301.6724-1(e)(1)(i) of the Regulations on Procedure and Administration. Alternatively, a QPCA may obtain merchant/payee TINs from a reputable third-party source.

.02 Notification and disclosure requirements. A QPCA must give each merchant/payee for which it acts as agent the written notice described in section 6.03(1)(c) and must give each cardholder/payor for which it acts as agent the written notice described in 6.03(1)(b). In addition, a QPCA must give written notice of its status as a QPCA, and of any change in that status, to any member, affiliate, or licensee that issues payment cards, as well as to the merchant/payees and cardholder/payors for which it acts as agent.

.03 TIN Matching participation. A QPCA must participate in the IRS TIN Matching Program and must match its merchant/payee data relating to reportable payments of participating merchant/payees with IRS within three months after obtaining the merchant/payee’s TIN. A QPCA may seek to cure merchant/payee data that has not previously been validated through the IRS TIN Matching Program. The QPCA must transmit only merchant/payee data that has not previously been validated through IRS TIN Matching.

.04 Providing nonparticipating payee notifications and merchant/payee data to cardholders. The QPCA must provide cardholder/payors with a report containing notifications required by §31.3406(g)(3)(i)(B) (nonparticipating payee notifications) and merchant/payee data within four months of the date on which the QPCA makes the payment to which the notification or data relates. The report may be provided on a quarterly or other regular basis. The report must include the merchant/payee’s name and, if the merchant/payee is not a participating merchant/payee with respect to any reportable payment covered by the report, must include a notification to that effect. If the merchant/payee is a participating payee with respect to all reportable payments covered by the report, the report must also include the merchant/payee’s corporate status and TIN, and whether the TIN has been validated through participation in the IRS TIN Matching Program. A QPCA must furnish the report containing nonparticipating payee notifications and merchant/payee data for transactions occurring on or before December 31 of a calendar year no later than January 15 of the following calendar year.

The report may be furnished by U.S mail or electronically (e.g., by e-mail or posting on a secure website). A QPCA may furnish nonparticipating payee notifications and merchant/payee data electronically only if it has obtained the consents described in the written notices required by section 6.03(1) and the consents have not been withdrawn. If the report is posted on a website, the website must protect the privacy of nonparticipating payee notifications and merchant/payee data and allow access to the nonparticipating payee notification or merchant/payee data relating to a payee only to cardholder/payors that have made a reportable payment to that merchant/payee.

.01 Availability of records. A payment card organization and its members, affiliates, and licensees must respond to any reasonable IRS request for inspection of any books and records that relate to the operation of TIN solicitation activity, including, but not limited to, reports, memoranda, budgets, and computer printouts. The payment card organization and its members, affiliates, and licensees must allow the IRS reasonable access to the merchant/payee TIN data system, including instruction manuals describing the system.

.02 Change in information. The QPCA must promptly notify the IRS of any change in the information described in section 6.

.03 Confidentiality of information. For purposes of this revenue procedure, the payment card organization and its members, affiliates, and licensees must maintain the confidentiality of information obtained through the TIN solicitation activities in accordance with the requirements of section 31.3406(f)-1 of the Employment Tax Regulations. Except as permitted under section 31.3406(f)-1, the payment card organization and its members, affiliates, and licensees may not disclose any such information to any person other than the cardholder/payor without prior written consent of the merchant/payee. The IRS will treat all information provided by a QPCA as return information that is confidential under section 6103.

.01 Term and renewal. In general, a QPCA determination will be effective for five years from the date of the determination. A QPCA may request a renewal of the QPCA determination by submitting an application for renewal to the IRS no earlier than 12 months and no later than three months before the expiration of the five-year term. In the application for renewal, the QPCA must report any change in the information in the original application. Before renewal of the determination, the IRS may review the QPCA’s systems. In addition, the QPCA must demonstrate that the merchant/payee data continues to be reliable. The application for renewal must include the results from participation in the IRS TIN Matching Program during the current five-year term. The IRS will make every effort to issue a decision on a renewal application at least 30 days before the expiration of the current five-year term. In the event that the IRS does not issue a decision on a timely renewal application before the expiration of the existing QPCA determination, the existing determination will remain in effect until the IRS issues a decision on the renewal application.

.02 Revocation of determination. The IRS may revoke a QPCA determination before the expiration of its five-year term if the IRS determines, based on the results of the QPCA’s participation in the IRS TIN Matching Program, that the merchant/payee data is not reliable or if the payment card organization fails to meet any of the requirements in section 6, 7, or 8. A QPCA may terminate its status as a QPCA upon 60 days written notice to the IRS.

These procedures are proposed to be effective on the date they are published as a final revenue procedure.

The principal author of this revenue procedure is Michael Hara of the Office of Associate Chief Counsel (Procedure and Administration). For further information regarding this revenue procedure, contact Mr. Hara at (202) 622-4910 (not a toll-free call).