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If You’re Running a Small Business and are sloppy with administrative processes, get ready to clean up your books.

Buried deep in the Housing and Economic Recovery Act of 2008 (also known as “the housing bill”) is a provision that will require all electronically processed merchant payments to be reported to the IRS. The bill was passed by Congress and signed by President Bush in July.

The reporting mechanism, which will go into effect in 2011, is intended to help the IRS identify unreported or under-reported sales. Basically, it enables the IRS to quickly verify that you’re paying tax on all your credit card receipts and other electronic transactions (and if you’re not, you’ll probably face an audit).

The measure applies to merchants who earn more than $20,000 and make more than 200 transactions annually. It requires only the gross total receipts for the year to be reported, not individual transactions. It also applies to other electronic payment services like PayPal.

The bill is expected to generate about $9.8 billion over the next 10 years — additional revenue that will be used to help offset the cost of the ambitious housing bailout bill. A merchant’s credit card processor, or “acquiring bank,” will be responsible for reporting the electronic sales data to the IRS.

But the measure has raised objections from some small-business groups who say it will place an undue administrative burden on merchants and their acquirers. They also say it could increase the risk of identity theft.

How? Small merchants who use their Social Security numbers as tax identification numbers will have to turn those over to the credit card processors, which in turn will furnish them to the IRS, says Bill Rys, tax counsel for the lobbying group National Federation of Independent Business (NFIB). This creates additional repositories of sensitive information that hackers will be tempted to break into.

“It’s also the fact that mistakes can be made along the way,” Rys adds. “Certainly, we’ve seen incidents in the past year or two where personal information held by the IRS has been exposed — there have been snafus, such as laptop computers being stolen, which can open up personal information.”

So how do the acquirers feel about the measure? Tom Litle, president of third-party payments processor Litle & Co., says he doesn’t exactly relish the idea of becoming an “agent for the government.”

“I want to focus on helping merchants grow their business,” he says. “But what this does is put me at odds with my customer, in that I become a regulatory body.”

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