Merchants preparing for a busy holiday season take heart. You may have just received some extra time before withholding penalties related to the new IRS reporting requirements take effect.

I'm referring to the temporary relief recently granted on the introduction of backup withholding related to the payment transaction reporting requirements introduced under Section 6050W of the 2008 Housing Assistance Tax Act. Regular readers of First Data Advisors’ analyses will recall that Section 6050W legislation mandated that information returns be generated for the first time by certain payors with respect to payments made in settlement of merchant payment card transactions and third party payment network transactions. In other words, for the first time, the IRS is requesting that payment entities report information related to merchants’ payment card and other payment transactions. To support this change, the IRS is introducing a new document—the 1099-K—to serve as the reporting document officially used to report these results.

As originally characterized, both backup withholding and any associated penalties for filing inaccurate information returns were to be introduced in early 2012. But, citing feedback from merchants and the payments industry pertaining to the complexity of the new reporting requirements, the IRS has imposed transitional relief from both backup withholding and for filing inaccurate information returns and payee statements for reportable payments made in calendar year 2011.

What does this mean? As outlined in two recent IRS notices, it means two things

The first notice—IRS Notice 2011-88—postpones the effective date for backup withholding for one year, and will now apply only to Section 6050W payments made after December 31, 2012. As a result, for merchants it means that a one-year grace period in the introduction of backup withholding related to the new reporting requirements has just been granted.

The second notice—IRS Notice 2011-89—introduced reporting penalty relief to obligated reporting entities for 2011 reporting. With this notice, the IRS grants impacted obligated reporting entities a one year delay before penalties will be assessed, assuming a "good-faith effort" has been made to file accurate and complete information on the 1099-K.

As mentioned in my recent analysis on the topic, Mastering Form 1099-K: Merchant Strategies to Benefit From the New IRS Reporting Requirements, the new requirements require reporting entities to begin to track and report gross dollar sales amounts for payments made to their merchant customers using payment cards and certain other forms of payment. The change applies to credit and debit card payments, as well as some gift/stored value cards, as well as payments handled by a third-party network payments provider. Third party networks who settle on behalf of merchants are not required to report for a payee whose aggregate transactions do not meet the minimum threshold of 200 transactions or $20,000 in transaction volume in a year, but other electronic payment card transactions have no minimum reporting amount.

These two notices do not bring merchants additional time in which to prepare for the new reporting requirements. They do, however, bring more time before affected merchants will likely have to worry about financial impacts, such as backup withholding.

Our recommendation: put your best efforts in between now and year's end to provide your payor with your TIN and tax filing name (TFN) if missing or invalid and, if everything turns out not to be just-so, get any loose ends squared away as completely and rapidly as possible thereafter. And of course, validate your TIN or TFN before year’s end. This small step alone will save significant potential hassle in the future.