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10/30/2007

Update On Third-Party Record Keeping For Barter Exchanges

(The following is an open letter to BarterNews from Ron Whitney, IRTA Executive Director. He was appointed by the IRS to serve on the IRPAC representing the interest of the commercial barter industry.)

Bob: Greetings!

Last week IRPAC (Information Reporting Program Advisory Committee) rolled out their report to the IRS which included various suggestions as to tax changes for small and large businesses, as well as issues related to individual taxpayers. The full report is attached. (See below.)

I am pleased to report that IRPAC did embrace the barter industry's non-matching TIN/back-up withholding issue, and that section is listed below for your review.

Thanks, and best regards,

Ron Whitney
Executive Director, IRTA
Cell: 610-299-6381
Fax: 585-424-2964
Skype: ron.d.whitney
E-mail: ron@irta.com

Barter Exchange Backup Withholding and B-Notice Requirements For Name-TIN Mismatches

Background

Barter Exchanges are defined as third-party record keepers under The Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA) and are grouped together with financial brokerage companies for purposes of Form 1099-B reporting and subsequent B-Notice solicitation requirements for name-TIN mismatches.

Subject to certain exceptions, Section 3406 requires that B-Notice form letters be sent to payees appearing on the CP2100/2100-A. The language in the B-Notice specifically states that �the law requires us to backup withhold on interest, dividends, and certain other payments that we make to your account.�

Barter Exchanges are unable to comply with the backup withholding requirements of Section 3406 because they are not in possession or control of any cash accounts for their clients. Barter Exchanges only control barter/trade accounts which hold �trade dollars,� not cash.

Consequently, the backup withholding language of the B-Notice makes an assertion that withholding may occur, when it is impossible for Barter Exchanges to backup withhold, as a matter of fact. Barter Exchanges are then subject to 972CG penalties for the name-TIN mismatches.

In order to argue successfully for waiver of the penalty, payers must establish, pursuant to Section 6724, reasonable cause for the failures referenced on the Notice 972CG. In order to establish reasonable cause, payers must explain the manner in which they satisfactorily met the B-Notice solicitation requirements.

While Barter Exchanges are able to send the appropriate B-Notices, they are unable to effect backup withholding on the accounts of any recipients who fail to respond. Often, this practice results in a denial of the waiver request, even though all other reasonable cause requirements are met.

Consequently, Barter Exchanges must then pursue the appeals process for the denial of the penalty waiver, an undue hardship that results simply from the Barter Exchanges� inability to effect backup withholding on non-cash accounts.

Recommendation

There are several methods of alleviating the problem including increased barter industry education, the creation of a revised B-Notice that would be specific to barter exchanges, or legislation to exempt barter exchanges from backup withholding for name-TIN mismatches.

Discussion

First, we recommend that the IRS educate the barter industry on the Form W-9 solicitation and Section 3406 backup withholding requirements through outreach programs that will be effective to reduce 972CG penalties in the future.

Second, we request that the language in the current B-Notice be amended to provide language that would be more pertinent to the barter industry. This recommendation could be accomplished by adding the words �to the extent feasible� before the words �the law requires us to backup withhold.� If modifications to current B-Notices are not possible, we recommend the creation of a B-Notice specific to Barter Exchanges that includes the aforementioned language.

Third, we suggest that Section 3406 be amended to exempt Barter Exchanges from the backup withholding requirement, since it is impossible for them to comply with the requirement as they are not in control of any payee cash accounts.

Finally, we recommend updating IRS Publication 1281, Backup Withholding for Missing and Incorrect Name/TINs, if any changes are made to the B-Notice solicitation procedures reflecting the issues unique to the barter industry.

Benefit to Payers

The barter industry would be relieved of the undue burden of unnecessary penalties for failure to comply with a requirement that is impossible to comply with on its face.

Benefit to IRS

Internal IRS education on the issue would reduce campus burden. Amending the B-Notice to provide a barter specific B-Notice would increase compliance in the barter industry, thereby reducing the need for 972CG penalties, waiver requests and appeals. The exemption of backup withholding for Barter Exchanges would further reduce IRS burden by eliminating a backup withholding requirement that on its face cannot be effected.

In addition, modification of the B-Notice to exclude reference to the backup withholding requirement, or to include a reference that backup withholding will be effected to the extent feasible, increases the credibility of the solicitation, which is currently diminished as the result of reference to an action (backup withholding) payees understand would be impossible to take.

Moreover, it is now industry standard for Barter Exchanges to use the IRS TIN Matching Program at account set-up to ensure that the proper name and TIN are obtained. Accordingly, most of the accounts appearing on the CP2100/CP2100-A have long been closed and those account holders are no longer doing business with the Barter Exchange.

Consequently, granting such an exemption or modification would not represent a significant loophole, since Barter Exchanges already require current W-9s from all their clients before proceeding to conduct business.

Benefit to the Taxpayer

Both education of the barter industry and/or amended B-Notice language specific to the industry will result in more compliance. The exemption of Barter Exchanges from backup withholding requirements would not increase taxpayer non-compliance, as the barter industry, through use of the IRS TIN Matching Program, already insists on proper Name-TIN matching as a prerequisite of doing business with the taxpayer.


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