Tax-refund facilitator had no payment-reporting duty

Plain-English summary

A company helped banks disburse clients' tax refunds and instructed banks to deduct tax-preparation fees from refunds and send them to return preparers. The company did not own or control the client accounts, guarantee the preparers' fees, or pay a fee when a refund was insufficient. The IRS concluded that the company was not a third-party settlement organization, aggregated payee, or electronic payment facilitator under IRC § 6050W. It also was not making payments in its own trade or business, or on behalf of clients, for purposes of IRC § 6041. The company therefore had no information-reporting obligation under either section for the preparer fees routed from client refunds.

Ruling snapshot

• Question: Did the refund-disbursement facilitator have to report tax-preparation fees under IRC § 6050W or § 6041?
• Outcome: Approved, no reporting obligation
• Key authorities: IRC §§ 6041 and 6050W; Treas. Reg. §§ 1.6041-1 and 1.6050W-1

Full text (IRS public release)

Internal Revenue Service                                  Department of the Treasury
                                                          Washington, DC 20224

Number: 201622011                                         Third Party Communication: None
Release Date: 5/27/2016                                   Date of Communication: Not Applicable
Index Number: 6050W.00-00, 6041.00-00
                                                          Person To Contact:
------------------------------                            ------------------------, ID No. ----------------
-------------------------------                           Telephone Number:
-------------------------                                 --------------------
---------------------                                     Refer Reply To:
                                                          CC:PA:02
-------------------------                                 PLR-129506-15
---------------------------                               Date:
------------------------                                  February 29, 2016
------------------------




Legend

Taxpayer: ----------------------------------------------------, a subsidiary of ----------------------------
--------------------------------.

Clients: Customers of tax return preparers who enter into an agreement with Taxpayer
to use Taxpayer’s disbursement products for receiving their federal and state tax
refunds.

Providers: Tax return preparers who enter into an agreement with Taxpayer to offer
Taxpayer’s disbursement products to tax return preparers’ clients.

Dear ------------------------------ and Subsidiary:

This is in response to your ruling request submitted by your authorized representative
concerning the federal income tax reporting requirements for Taxpayer under sections
6050W and 6041 of the Internal Revenue Code (Code) and the regulations thereunder.
Specifically, Taxpayer requested a ruling that it does not have an information reporting
obligation under section 6050W or section 6041 with respect to certain tax preparation
fees deducted from individual Clients’ refunds and paid to Providers who utilize
Taxpayer’s refund disbursement services.

FACTS

Taxpayer is in the business of providing financial product management, marketing,
training, and technology services to banks, and assisting banks with developing and
PLR-129506-15                                 2

coordinating relationships with certain tax return software providers, transmitters, and
tax professionals. Taxpayer’s primary business purpose is to provide services to
Providers to assist their Clients with obtaining refunds, although it has recently
expanded its services to banks in support of electronic transaction services.

Agreement with the Bank

In order to facilitate the disbursement of tax refunds, Taxpayer and several FDIC-
insured commercial banks and issuers of prepaid/stored value cards (the Bank) have
established partnership relationships, governed by an agreement (the Program).

The Program allows Taxpayer to offer three methods by which Clients can receive their
tax refunds: (1) prepaid/stored value ----- card; (2) direct deposit into a personal bank
account; or (3) paper check. Each method is priced differently and results in different
bank product fees payable to the Bank; Clients may choose to have this costs deducted
from their refunds. Additionally, Clients may choose to pay their tax return preparation
fees to their Provider by having those fees deducted directly from their refund along with
any bank product fees.

In order to facilitate the payment of refunds, the Bank sets up temporary deposit
accounts on behalf of each Client for purposes of receiving and disbursing tax refunds
issued by federal and state taxing authorities to Clients. These accounts are owned by
the Bank and the funds in these accounts are treated as deposit funds of Clients at all
times.

When Taxpayer learns of an upcoming transfer of funds on behalf of a Client, Taxpayer
calculates the appropriate Bank and Provider fees for that Client and compiles
disbursement components. When the transfer is made to the Client’s account,
Taxpayer sends electronic instructions to the Bank for disbursement of the Client’s
refund. The Bank uses these instructions to disburse a portion of the refund to the Bank
for any Program fees, to Taxpayer for any processing fees, to the Provider for any tax
preparation fees that were authorized by the Client, and finally to the Client in the
manner selected by the Client.

The Bank disburses the net refund due to a Client according to the method selected by
the Client: by issuance of a Bank check if the Client elected to receive its net refund by
check, by electronic transfer of funds to a specified bank account if the Client elected to
receive its net refund by direct deposit, or by transfer of funds to a card processor if the
Client elected to receive its net refund by prepaid/stored value card. The card
processor ultimately sends a prepaid or stored value ----- card to the Client.

Under the terms of the agreement between Taxpayer and the Bank, the Bank is entitled
to collect and receive all revenue from the Program. Taxpayer generates revenue
solely through its receipt of a monthly marketing fee from the Bank.
PLR-129506-15                                 3

Agreement with Providers

In addition to its relationship with the Bank, Taxpayer establishes relationships with
Providers, who market the products offered through the Program to Clients.
Taxpayer’s relationship with Providers is established through an annual ---------------------
--------------------------- (the ------ Agreement).

Under the ------ Agreement, Taxpayer agrees to provide a platform to facilitate the
disbursement of Clients’ federal and state refunds by one of the options provided in the
agreements pursuant to the Program.

In addition, Taxpayer agrees to facilitate and administer the payment of any current year
tax preparation fees owed to the Provider. Taxpayer’s duties and obligations with
respect to the tax preparation fees are set out in the -------Agreement. The --------
Agreement states that Taxpayer shall direct the Bank to transfer payment of tax return
preparation fees to the Provider by an automated clearinghouse credit to the account
designated by the Provider during its enrollment in the program. Taxpayer only
instructs the Bank to send the fees the Provider after the Client’s refund has been
deposited with the Bank.

The -------Agreement does not provide for any compensation from the Provider to
Taxpayer or from Taxpayer to the Provider in exchange for the services provided by
each party. Rather, each party benefits economically through its interactions and
agreements with third parties. The -------Agreement allows Taxpayer to fulfill its service
obligations with the Bank and earn revenues under the program. Providers benefit
because they can offer Clients bank products provided by Taxpayer and because they
allow Clients to forego paying the Provider for its services at the time they are rendered.

Taxpayer does not have any control over the fees Providers charge Clients. Moreover,
Taxpayer does not have direct ownership of or control over Clients’ funds; the Bank
owns and controls all accounts related to the receipt and disbursement of funds.
Furthermore, Taxpayer does not have any obligation pursuant to an agreement with the
Bank, Providers, or Clients to make payment of fees owed to the Provider in the event
that a Client’s refund is not sufficient to cover those fees. Taxpayer’s only function with
regard to the tax preparer fees is to inform the Bank that the refund has been received,
the amount of the Provider fee to be deducted from the refund, and provide the
Provider’s account and routing numbers so that the Bank can transmit the fee to the
Provider by automated clearinghouse transfer. The Bank is not a party to the --------
Agreement and has no obligations under it.

Agreement with Clients

Taxpayer also enters into an agreement with Clients regarding Clients’ use of
Taxpayer’s refund disbursement products (the ------------Agreement). ----------------------
Agreement informs Clients of their options for receiving their tax refund. The
PLR-129506-15                                4

Agreement states that once a Client’s account is funded with a tax refund, Taxpayer will
direct payment from the account of (1) fees owed to the Provider, (2) fees owed to
Taxpayer, and (3) any other fees that the Client previously approved. Once these fees
have been paid, the balance of the account is transferred to the Client in the manner
selected by the Client. The agreement informs Clients that if a tax refund is not
received by the Bank and placed in the Client’s account, then funds will not be available
to pay the appropriate fee to the Provider. In the event that any part of an anticipated
refund is disallowed or offset, or if the Client directly receives a refund check from a
taxing authority, the Client is required to notify Taxpayer immediately and promptly pay
the Provider any fees owed.

LAW AND ANALYSIS

Section 6050W

Section 6050W of the Code, as enacted by the Housing Assistance Tax Act of 2008,
requires payment settlement entities to file an information return for each calendar year
with respect to payments made in settlement of reportable payment transactions.
Section 6050W covers two types of transactions: (1) payment card transactions and
(2) third party network transactions. A payment settlement entity in the payment card
context is a merchant acquiring entity; in the third party network context, it is a third
party settlement organization (TPSO). I.R.C. § 6050W(b)(1).

The Code and regulations define a merchant acquiring entity as the bank or other
organization with the contractual obligation to make payments to participating payees in
payment card transactions. A payment card transaction is any transaction in which a
payment card is accepted as payment. I.R.C. §§ 6050W(b)(2)-(3), 6050W(c)(3); Treas.
Reg. § 1.6050W-1(b)(1)-(2).

The Code and regulations define a TPSO as the central organization that has the
contractual obligation to make payments to the participating payees of third party
network transactions. I.R.C. § 6050W(b)(3); Treas. Reg. § 1.6050W-1(c)(2). A third
party network transaction is any transaction that is settled through a third party payment
network. I.R.C. § 6050W(c)(3). A third party payment network is any agreement or
arrangement that (i) involves the establishment of accounts with a central organization
by a substantial number of providers of goods or services who are unrelated to the
central organization and who have agreed to settle transactions for the provision of
goods or services with purchasers according to the terms of agreements; (ii) provides
standards and mechanisms for settling the transactions; and (iii) guarantees payments
to the providers of goods and services in settlement of transactions with purchasers.
I.R.C. § 6050W(d)(3); Treas. Reg. § 1.6050W-1(c)(3).

The Code and regulations also provide special rules for two types of intermediaries who
are required to report under section 6050W: aggregated payees and electronic payment
facilitators.
PLR-129506-15                                5


An intermediary is required to report under section 6050W if it qualifies as an
aggregated payee. According to the Code and regulations, where an intermediary
receives payments from a payment settlement entity on behalf of one or more
participating payees and distributes these payments to one or more participating
payees, that intermediary is treated as (1) the participating payee for purposes of
determining reporting obligations of the payment settlement entity with respect to such
transactions, and (2) as the payment settlement entity with respect to the settlement of
these transactions with the participating payees. I.R.C. § 6050W(b)(4); Treas. Reg.
§ 1.6050W-1(d)(1).

Moreover, where a payment settlement entity contracts with an electronic payment
facilitator or other third party to make payments in settlement of reportable payment
transactions on behalf of the payment settlement entity, that electronic payment
facilitator or third party (a Facilitator) must file the annual information return under
section 6050W in lieu of the payment settlement entity. A Facilitator is not required to
have any agreement or arrangement with the participating payee. Moreover, these
rules apply even if the payment is not made directly from a Facilitator’s account; a
Facilitator need only submit instructions to transfer funds to the account of the
participating payee in settlement of the reportable payment transaction. A Facilitator is
liable for any applicable penalties for failure to comply with the information reporting
requirements of section 6050W. I.R.C. § 6050W(b)(4)(B); Treas. Reg.
§ 1.6050W-1(d)(2).

Section 6050W Analysis

Taxpayer is not required to report under section 6050W with respect to fees routed from
individual Clients’ refunds to Providers because it is not a TPSO, aggregated payee,
electronic payment facilitator, or other entity that is required to make returns of
information relating to payments in settlement of payment card and third party network
transactions.

      Third Party Settlement Organization

As discussed above, a third party settlement organization is a central network that has
the contractual obligation to make payments to the participating payees of third party
network transactions. A third party network transaction is a transaction that is settled
through a third party payment network. A third party payment network is any agreement
or arrangement that requires, among other things, that the TPSO establish accounts
with a substantial number of providers of goods and services who are unrelated to the
TPSO and who have agreed to settle transactions for the provision of goods and
services, and that the TPSO guarantee payments to the providers of goods and
services in settlement of transactions with the purchasers of the goods and services.
PLR-129506-15                                 6

Here, Taxpayer does not guarantee a payment to the Provider for the services provided
to its Clients. Rather, Taxpayer merely agrees to provide instructions for the transfer of
funds from a Client’s account, if available, to the Provider to cover tax return preparation
costs. Taxpayer does not provide instructions to the Bank to transfer funds to a
Provider until a Client’s refund has been deposited with the Bank. Taxpayer is under no
obligation to satisfy a Client’s obligation to its Provider if the amount deposited in the
Client’s account is insufficient to cover the fees owed to the Provider. Thus, Taxpayer
does not guarantee payments to the Providers within the meaning of section
6050W(d)(3)(C).

Moreover, Taxpayer does not agree to settle transactions between the Providers and
their Clients. Taxpayer agrees to provide instructions to the Bank to transfer funds in
payment of the Provider’s services, if such funds are deposited into a Client’s account
by a federal or state taxing authority. Taxpayer does not, however, agree to fulfill all
obligations and complete the transaction between the Providers and Clients. The
agreement between Taxpayer and Clients makes clear that if the amount of a Client’s
refund deposited into their Bank account is insufficient to cover the fees owed to the
Provider, then the Client is required to notify Taxpayer and directly pay the Provider any
amounts owed. The service that Taxpayer provides is focused on providing instructions
to facilitate the movement of funds, when they are available, rather than settling a
transaction between Providers and Clients.

For the reasons stated above, Taxpayer has not established a third party payment
network and thus is not a TPSO.

       Aggregated Payee

The aggregated payee rules require reporting under section 6050W if a person receives
payments from a payment settlement entity on behalf of participating payees, and then
distributes such payments to those participating payees. Taxpayer is not an aggregated
payee because it is neither receiving payments from a payment settlement entity nor
distributing payments to participating payees. The amounts deposited in Clients’
accounts are not received by Taxpayer on behalf of Clients; rather, these funds are held
on Clients’ behalf by the Bank. When Taxpayer learns that a deposit was made to a
Client’s account, Taxpayer sends electronic instructions to the Bank regarding the
disbursement of the Client’s refund. At no time does Taxpayer either receive Clients’
refunds or disburse such refunds to other parties; Taxpayer merely provides instructions
to the Bank on how to disburse the funds. Accordingly, Taxpayer is not an aggregated
payee.

       Electronic Payment Facilitator

Under the electronic payment facilitator rules, when a payment settlement entity
contracts with an electronic payment facilitator or other third party to make payments in
settlement of reportable payment transactions on behalf of the payment settlement
PLR-129506-15                                7

entity, that electronic payment facilitator or third party has the obligation to file the
required information return under section 6050W. These rules apply even if the
payment is not made directly from the electronic facilitator’s account; it need only submit
instructions to transfer funds to the account of the participating payee in settlement of
the reportable payment transaction to incur a reporting obligation.

Taxpayer does not have an obligation to file returns under section 6050W as an
electronic payment facilitator because it is not contracting with or making payments on
behalf of a payment settlement entity. The person on whose behalf Taxpayer is
submitting instructions for transfer of funds is the Client, an individual customer of a
Provider. As discussed above, a payment settlement entity is defined as is a merchant
acquiring entity (in the payment card context) or a third party settlement organization (in
the third party network context). An individual taxpayer is not a merchant acquiring
entity or a third party settlement organization. Accordingly, Taxpayer cannot be acting
as an electronic payment facilitator within the meaning of section 6050W(b)(4)(B) and
Treas. Reg. § 1.6050W-1(d)(2).

In conclusion, Taxpayer is not a TPSO, an aggregated payee, or an electronic payment
facilitator and thus does not have a reporting obligation under section 6050W.

Section 6041

Section 6041(a) of the Code provides that all persons engaged in a trade or business
and making payment in the course of such trade or business to another person of rent,
salaries, wages, premiums, annuities, compensations, remunerations, emoluments, or
other fixed or determinable gains, profits, and income of $600 or more in any taxable
year, shall render a true and accurate return setting forth the amount of such gains,
profits, and income, and the name and address of the recipient.

Treas. Reg. § 1.6041-1(d)(2) states that “fees for professional services paid to
attorneys, physicians, and members of other professions” are required to be reported
under section 6041 if they are “paid by persons engaged in a trade or business and paid
in the course of such trade or business.”

Section 6041 also provides rules requiring reporting by a party who makes payment on
behalf of another party. According to Treas. Reg. § 1.6041-1(e)(1), when a person
makes a payment in the course of a trade or business on behalf of another person, the
payor is required to make an information return if the payor (1) performs management
or oversight functions with respect to the payment, or (2) has significant economic
interest in the payment.

Section 6041 Analysis

Taxpayer does not have a direct reporting obligation under section 6041 because
Taxpayer is not making a payment in the course of a trade or business. Rather,
PLR-129506-15                                  8

Taxpayer is submitting instructions to the Bank on how a particular Client’s refund
should be disbursed. Taxpayer does not control the funds in the account or directly
make any payment. Although payments for fees for professional services are generally
reportable under section 6041, because Taxpayer is not the party making payment,
Taxpayer does not have a reporting obligation under the general rules of section 6041.

Moreover, Taxpayer does not have an obligation to report under section 6041 for
making payments on behalf of Clients. As discussed above, Taxpayer does not own or
otherwise have control over the funds in Client’s Bank accounts. Accordingly, when
Taxpayer submits instructions to the Bank on disbursement of the funds, it cannot be
considered to be making a payment on behalf of Clients. Therefore, Taxpayer is not
subject to reporting under section 6041 with respect to the transfer of funds from
Clients’ accounts to the Providers to compensate the Providers for their return
preparation services.

CONCLUSION

Based exclusively on the information provided and the representations made, we have
determined that Taxpayer does not have a reporting obligation under section 6050W or
section 6041.

This letter ruling is directed only to the taxpayer who requested it. Section 6110(k)(3) of
the Internal Revenue Code provides that it may not be used or cited as precedent.

In accordance with the Power of Attorney on file with this office, a copy of this letter is
being sent to your authorized representative.


                                       Sincerely,



                                       Adrienne Griffin
                                       Senior Technician Reviewer
                                       (Procedure & Administration)




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