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Information Document Request for Interchange and Merchant Discount Fees - Retailers

Interchange and Merchant Discount fees can best be illustrated by a typical 4-party transaction involving the purchase of an item using a typical VISA/MasterCard type general-purpose credit card issued by a bank.  When a Cardholder purchases a $100 item from a Merchant using a typical VISA/MasterCard type credit card, the Merchant passes on the $100 charge to its Merchant/Acquiring Bank in exchange for $98.00, pursuant to the Merchant’s contract with the Merchant/Acquiring Bank.  The Merchant/Acquiring Bank submits the $100 charge into the VISA/MasterCard system and receives $98.50 from the customer’s credit card Issuing Bank (less a small processing VISA/MasterCard fee) in accordance with the VISA/MasterCard rules.  The Issuing Bank eventually receives $100 from the Cardholder when the credit card charge is paid.  Under this scenario, the Merchant/Acquiring Bank keeps a net “Merchant Discount” fee of $.50 ($98.50 - $98.00), while the Issuing Bank receives an “Interchange" fee of $1.50 ($100 - $98.50).  These fees combined are sometimes referred to as a “Merchant Discount” fee.  In some instances, the structure of the transaction changes slightly, but the ultimate economic effect is the same.  In addition, the same entity may act as both the Issuing Bank and the Merchant/Acquiring Bank in the same transaction.  In the context of proprietary (store) cards issued by Retailers, the same related financial institution may act as both the Issuing and Merchant/Acquiring Bank when store cards are used to purchased goods and services from the Retailer.  

With the above description in mind, please provide the following information:

I.  Please identify each entity in the consolidated group that acted as an Issuing Bank, a Merchant/Acquiring Bank or both during the years under examination, along with the years each entity acted in which capacity.

II.  For each entity identified above, please respond to the following questions in A through D to the extent applicable for each year under examination:

A.  In General:


1. Please provide the differences, if any, between how income from the following fees was reported for book and tax purposes for each year under examination:

a) Interchange or similar fees
b) Merchant Discount or similar fees

2. Please provide schedules illustrating how income from the following fees was computed for book and tax purposes for each year under examination:

a) Interchange or similar fees
b) Merchant Discount or similar fees

3. Please provide a list of all accounts used to record revenue and expenses, including original issue discount (OID), for credit cards and Merchant/Acquiring Bank activities.
 
4. How are Interchange fees or similar fees determined for all credit card transactions processed through the VISA and/or MasterCard system – Were fees determined based on average credit risk, volume of business, payment history of customers, etc.?

5. How are Interchange fees or similar fees determined for all other credit card transactions, which do not clear through the VISA and/or MasterCard processing system – Were fees determined based on average credit risk, volume of business, payment history of customers, etc.?

6. Please provide copies of any agreements with VISA and/or MasterCard in effect during the years under examination.

7. How are Merchant Discount or similar fees determined for all credit card transactions - Were fees determined based on Interchange fees, Merchant Discount fees paid to unrelated parties, etc?

B.  Accounting Method:

1. Did the entity file a Form 3115 for any credit card fees, Interchange fees, Merchant Discount fees or similar fees based upon the application of IRC § 1272(a)(6)(C)(iii) dealing with “any pool of debt instruments the yield on which may be affected by reason of prepayments”?

a) If yes, for which taxable years were the Form(s) 3115 filed?
b) Please furnish copies of all Form(s) 3115 filed involving IRC § 1272(a)(6).

2. Please reconcile the difference, if any, between the IRC § 481(a) adjustment reflected on the Form 3115(s) filed and the amount reflected in the tax return filed for the year of change (and for any amended tax return filed for the year of change).

3. Has the entity made any modifications, alterations, refinements, etc. to either the methodology or the type of transactions incorporated into the methodology used to compute the amount of deferral under IRC § 1272(a)(6) in any intervening/subsequent filed tax return?  If so, please explain.

C.  Issuing Bank Activities


1. If the entity acted as an Issuing Bank during the years under examination, what type of credit cards (e.g. VISA) did the entity issue during each year under examination.

2. Please provide representative samples of the credit card agreements in effect with Cardholders, including all related amendments, for each type of credit card issued during the years under examination.

3. Please list all standard journal entries associated with a single credit card transaction for each type of credit card issued during the years under examination.

4. How much of the Interchange or similar fees related to credit card transactions were accrued and included in book income for each of the years under examination?

5. Did the entity defer credit card Interchange or similar fees under I.R.C. § 1272 (a)(6) or another authority for tax purposes for the years under examination?  If so, please specify the amount of the deferral and the authority for each of the years under examination.

6. Please provide the differences, if any, between how the Interchange or similar fee income from credit card transactions was reported for book and tax purposes for each year under examination.

7. Please provide schedules showing all Schedule M entries for the Interchange or similar fees related to credit card transactions for each year under examination.  These schedules should include the current portion of the Schedule M adjustment, the amount from prior years being “accreted” in the current year, and rollover adjustments due to prior IRS examinations. 

D.  Merchant/Acquiring Bank Activities:

1. Did the entity act as a Merchant/Acquiring Bank during the years under examination?

2. Please provide representative samples of contracts with Merchants setting Merchant Discount or similar fees when a credit card was used for purchases, including all of the related amendments, that were in effect during the years under examination.

3. How much of the Merchant Discount or similar fees related to credit card transactions were accrued and included in book income  for each of the years under examination?

4. Did the entity defer Merchant Discount or similar fees under IRC § 1272(a)(6) or another authority for tax purposes during the years under examination?  If so, please specify the amount of the deferral and the authority for each of the years under examination.

5. Please provide the differences, if any, between how the Merchant Discount or similar fee income from credit card transactions was reported for book and tax purposes for each year under examination.

6. Please provide schedules showing all Schedule M entries for the Merchant Discount or similar fees related to credit card transactions for each year under examination.  These schedules should include the current portion of the Schedule M adjustment, the amount from prior years being “accreted” in the current year, and rollover adjustments due to prior IRS examinations.

7. Does the entity process any transactions in which it acts as both the Issuing Bank and the Merchant/Acquiring Bank?  If so, please explain the differences, if any, as to how these transactions are processed as compared to transactions in which the entity acts as only the Issuing or Merchant/Acquiring Bank.

E.  Merchant Activities

For each entity in the consolidated group that acted as a retail Merchant (Retail Entity) and accepted proprietary (store cards) during the years under examination, please respond to the following questions to the extent applicable for each year under examination:

1. How much in credit card Merchant Discount or similar fees did the Retail Entity accrue for book purposes for each of the years under examination?

2. How much of those Merchant Discount or similar fees were deducted from book income for each of the years under examination?

3. Did the Retail Entity defer any recognition of these Merchant Discount or similar fees as an expense for tax purposes during the years under examination?  If so, please specify the amount of the deferral for each of the years under examination.

4. Where these Merchant Discount or similar fees reported as a deduction by the Retail Entity in the consolidated return?

5. Please provide a summary of the book and tax reporting of  these Merchant Discount or similar fees for each year under examination.


IDR Discussed with Taxpayer:   _________________________                  
Response Date: _________________
Receipt acknowledged By Company: __________________
                                                             (Initials)               (Date)
Date received by Examination Team: ___________________
                                                                (Initials)     (Date)

Page Last Reviewed or Updated: 29-Nov-2013