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December 15, 2012
Firms cautioned about IRS ID numbers

Exact match of the firm name and federal tax ID number is required to avoid the chance of a penalty

By Gary Blankenship
Senior Editor

Lawyers who accept payments via credit cards into their trust or operating accounts are being encouraged to check that the federal tax identification number and firm name their credit card processing company uses is exactly the same as the firm uses for IRS reporting.

According to the IRS, an exact match of the law firm name and federal tax identification number on file with the IRS is required to avoid the chance a withholding will be made from the payment.

The issue comes from a change to Section 6050W of the tax code effective as of January 1, 2013. It requires banks and other credit card processing companies to match the depositing lawyer’s tax identification number and legal name when they submit Form 1099-K on credit card payments with information the IRS has on the law firm. If the information does not match exactly, the company is required to withhold and send to the IRS a 28 percent withholding penalty — including on deposits made to trust accounts.

If the client then seeks access to the trust funds while the 28 percent is being withheld, the lawyer could face ethical problems.

According to The Florida Bar Foundation, lawyers in some states have mistakenly given their credit card processor the federal tax identification number of their IOTA account.

“It’s a simple mistake to use the IOTA account’s federal tax identification number because that’s the number on your IOTA account. But that number belongs to the Foundation and will cause a mismatch at the IRS,” said Foundation Executive Director Jane Curran.

In most cases, banks handling credit card payments and credit card processing companies are supposed to contact the lawyer if there is a mismatch of information, but the IRS says that may not happen in all cases. The agency is encouraging lawyers to check with their credit card company to make sure the information does match and to correct the information if there is a mismatch.

Who handles a law firm’s credit card payments also makes a difference.

“If a law firm is using traditional merchant account services through a regular bank [to handle credit card payments], the perennial problem has been commingling,” said Judy Equels, director of the Bar’s Law Office Management Assistance Service.

“That is, the law firm routinely accepts credit card payments intended for either the trust account(s) or the operating account into the one merchant account. Firm personnel sweep the account daily and move the money to the proper bank account — either trust or operating.

“New merchant account services, such as LawPay, have come along in the last few years to resolve this issue/problem. Basically, these services ‘hold’ the money until the law firm tells the service where to place the money: trust or operating. For those firms that do not use services such as LawPay, i.e., the law firms who use traditional merchant account services, should set up two merchant accounts — one for operating and one for trust. That’s more paperwork, but this arrangement avoids commingling and complies with our trust accounting rules.”

Patricia Chin, executive director of Dean, Mead, Egerton, Bloodworth, Capouano & Bozarth, P.A, in Orlando, and a public member of the Bar’s LOMAS Advisory Board, said it’s straightforward and quick for law firms to check for potential problems. Dean Mead uses two banks for credit card processing, and Chin said it took her about five minutes.

Although card processors are supposed to contact their customers if there’s any question about the tax ID number or name, Chin said, “there is an obligation to ensure that the bank or credit card company had the correct name and ID from the firm, because they are going to be filing the [IRS form] 1099-K on behalf of the firm.”

She added: “We have two banks that we work with, and I contacted both of them. Both said, yes, they had verified the exact name of the firm and the [firm’s] federal ID number, and I confirmed that with them. Once that information is correct within your bank, unless you change your bank or credit card processing company, you should be good from there forward.”

Larger law firms that use contracted services, such as cleaning or lawn maintenance, will be familiar with the process, Chin said. Just as law firms must fill out 1099-K forms for those contractors, so must the credit card processors fill out the form for payments to law firms.

One other thing to check is that Form 1099-K allows only 25 to 35 characters for identifying the law firm. If the firm’s name with the IRS is longer than that, Chin said the firm must make sure the abbreviated name used by the credit card processor exactly matches the first 25 to 35 characters of the firm name registered with the IRS.

Bar Ethics Counsel Elizabeth Tarbert said lawyers have to be concerned if money intended for a trust account is diverted even temporarily to the IRS.

“It would be a problem for any trust account because of the IRS withholding issue. The lawyer could end up costing the client time and money, because it would have to be withheld for the IRS, then the money would then not be immediately available for the client to use,” Tarbert said. “This will also affect IOTA trust accounts, because a portion of the money is withheld and not earning interest for IOTA.”

LawPay, which is a participant in the Bar’s Member Benefits Program, has prepared an article for lawyers about the changes to Section 6050W, which can be found at www.lawpay.com/news/irs60502.pdf.

[Revised: 07-08-2014]