IRS PLR: No Reporting Obligation for Facilitator of Tax Refund Payments

In PLR 201622011, the IRS ruled that a company (the “Taxpayer”) whose primary business is to assist tax return software providers, transmitters, and tax professionals by helping their clients (individual taxpayers) obtain refunds has no reporting obligation under either Section 6050W or 6041 of the Code. The IRS’s analysis of the reporting obligations under both Sections 6041 and 6050W emphasizes that the Taxpayer’s lack of control of the funds, as well as the Taxpayer’s contractual relationship to the other parties in the transaction, is a critical element of each provision.

The Taxpayer enters into agreements with various commercial banks and issuers of prepaid/stored value cards, which allows the Taxpayer to offer the clients several ways to receive their tax refunds. Under the agreement, the banks set up a temporary deposit account for each client that holds each client’s tax refund. The client may elect to have the bank fees and fees for the bank’s and tax preparer’s services directly deducted from the refund once it is deposited into this account. The Taxpayer receives a processing fee for each transaction, which the bank remits to the Taxpayer on a monthly basis—this is the Taxpayer’s sole source of revenue. The Taxpayer’s connection to the funds in each account is essentially limited to instructing the banks on the proper amount to disburse to the clients.

Section 6050W

Section 6050W imposes information reporting requirements on “payment settlement entities,” including third party settlement organizations (TPSOs), aggregated payees, and electronic payment facilitators with respect to payments made in settlement of reportable payment transactions. The IRS ruled that the Taxpayer was not obligated to file an information return under Section 6050W because it was not a TPSO, aggregated payee, or electronic payment facilitator. According to the ruling, the taxpayer was not a TPSO because it did not guarantee the payments. The Taxpayer was also not an aggregated payee because it neither received payment from a payment settlement entity nor distributed payments to the clients. Finally, the Taxpayer was not an electronic payment facilitator because it facilitated payments on behalf of the clients (the individual taxpayers), and not on behalf of payment settlement entities.

Section 6041

The IRS analyzed the Taxpayer’s participation in the underlying payment transactions, and it concluded that the Taxpayer had no reporting obligation under Section 6041 because the Taxpayer “is not making a payment” but is instead merely “submitting instructions to the Bank on how a particular Client’s refund should be disbursed.”