Credit card surcharge compliance mistakes could draw IRS scrutiny to practices

Credit card processing fees are a thorn in the side of medical practices. To offset these fees, many offices will pass them directly to patients through a process called surcharging.

Though surcharging seems like an easy solution to capture lost revenue, practices often overestimate the ease of implementing it into their payment system. If rolled out incorrectly, surcharging mistakes can be costly, leading to compliance failure penalties, financial damages and IRS scrutiny.

When approaching surcharging, it can be helpful to view the practice through the lens of risk management and operational strategy. All too often, practices will treat surcharging as a simple line-item addition, overlooking how small mistakes can add up, triggering compliance issues and an avalanche of problems.

Where practices slip up

Surcharging compliance can be complex, with various moving parts and regulations. Mistakes can happen at every stage, from transaction details to record keeping, and everything in between.

For example, mixed-payment transactions can be particularly tricky. If a patient splits their transaction between credit cards, insurance and cash, the surcharge should only apply to the card portion and not to the full total. If the surcharge is applied to the entire transaction, it’ll lead to a difference between revenue and tax reporting, resulting in a massive headache on tax day and potential IRS involvement.

Another area ripe for mistakes is the split between processor income reporting and internal accounting. Processors report gross transactions and surcharges on 1099-K forms. If their records don’t line up with the ones that practices keep, it’ll show up as misreported revenue, potentially triggering IRS intervention.

Insurance contract interactions are another area that can trigger compliance issues. Depending on the agreement, there may be a limit on additional fees or specific payment processing methods. If a practice implements a surcharge that violates this contract, it could affect reimbursements or even jeopardize the relationship.

Keep up to date

Surcharging laws vary state-by-state. Like any other process, it’s best to research the laws in your specific area to stay informed. For example, New York has a cap on surcharges equal to the cost of processing and mandates transparent disclosure of the process. Colorado limits surcharges to 2% regardless of the processing fee. Massachusetts and Connecticut prohibit surcharging entirely, while Florida only allows it with transparent disclosure.

On the enterprise side, card networks also have their own compliance requirements. For instance, Visa and Mastercard prohibit surcharging when applied to debit cards. They also must be disclosed at the point of sale and on receipts. Failure to comply will result in fines, increased processing costs, and possible account termination. One of the most common violations is not registering properly with card networks entirely.

Best practices

Though surcharging presents a mountain of risks, it also provides a plethora of benefits. The key to navigating the maze of regulations is a structured, proactive approach that melds compliance into daily operations. One helpful method can be to run simulation scenarios before rollout. Sample transactions can expose gaps in split payments, insurance adjustments, discounts and high-volume procedures.

Accurate internal reporting is another important aspect of surcharge implementation. Surcharges must be tracked as offsetting expenses instead of additional revenue, with records regularly checked against processor statements. To reduce errors, front-office staff should be trained to navigate common problem scenarios, including card splits, bundled services and recurring payments.

Carefully reviewing insurance agreements and other key contracts also ensures that surcharges comply with all requirements. Along with the aforementioned state laws, card network policies, and IRS regulations are always shifting, meaning practices should keep a watchful eye on transactions where surcharges might be misreported, such as during high-volume periods or complex payment scenarios. Understanding surcharge policies, tax reporting requirements and operational workflows is the best way to ensure full compliance.

Why does any of this matter?

Credit card processing fees are higher than ever, cutting into key revenue for small practices. Surcharging offers a way for businesses to recapture revenue, but only if they can navigate the complex minefield of regulations and compliance issues that come with implementation. However, if practices slip up, discrepancies can form, leading to penalties and IRS audits. Only practices that put in the effort to simulate transactions, reconcile records, properly equip staff and carefully review contracts will capture the true benefits of surcharging. Done right, it minimizes risk and maintains control. Done wrong, it may multiply compliance issues and create big problems down the line.

Eric Cohen is the CEO of Merchant Advocate, a consultancy that helps businesses optimize payment processing. In this role, Cohen works with businesses of all sizes to analyze payment processing statements and identify hidden or unnecessary fees. He regularly advises clients on how pricing structures and surcharge programs affect both merchant costs and consumer experience.