False Profits: The Chargeback Lessons Learned by Businesses This Tax Season
Your customer service staff, as well as your accounting and legal departments, should be working to insulate you against the financial impact of chargebacks throughout the year. However, there’s one specific period — tax season — in which chargebacks take on a new dimension.
It’s true that chargebacks filed against your business in 2022 are in the rearview mirror. What you may not know, however, is the best way to report losses and the resulting fees to the Internal Revenue Service (IRS).
This can often be an area of contention, especially as the deadline for tax filing approaches. In this post, we’re going to help you and your accountants find the best method to report chargebacks to the IRS. We’ll also look at some preventative measures that you can take to eliminate this problem next year.
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The Chargeback Cycle is a Long, Drawn-Out Process
Chargebacks are most commonly issued between 45-60 days after an initial transaction. Then, the chargeback process itself can carry on for several weeks — or even months — after the initial dispute is filed.
Cardholders generally have 120 days after the transaction (or order fulfillment, depending on the reason code) to file a chargeback. Once filed, you must respond and either accept the chargeback, or compile and present your evidence to the issuing bank, typically within 30 days. The bank will then make a ruling in the dispute.
Of course, if the bank rules in your favor, the cardholder may still be able to escalate to arbitration. They may even be able to file a second chargeback if there is new evidence to consider.
In other words: if you’re dealing with a chargeback filed for in response to a purchase made during the 2022 holiday season, it could be early June before the issuing bank notifies you that you’ve ultimately lost that money. And, if the chargeback process for transactions made in 2022 carries on after the tax filing deadline, this could lead to a situation in which you end up reporting more revenue than you actually received.
“End-of-year purchases can cause new year's headaches for many merchants,” explains Chargebacks911® Founder Monica Eaton. “While businesses do everything in their power to prevent transaction disputes, many chargebacks — oftentimes fraudulent or invalid — make their way to the retailer. It’s important to know how to report chargebacks to the IRS to keep your company’s books accurate, as well as best practices to prevent these chargebacks from being filed in the first place.”
Four Key Points for Chargeback Tax Accounting
Looking at chargebacks from a tax accounting perspective, there are four critically important points to keep in mind:
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Collaborate First, but Fight When Necessary
The points outlined above are best practices for filing tax returns. However, there are two critical strategies that you can deploy throughout the year to help reduce the number of chargebacks levied against your business: collaboration and confrontation.
“Retailers can collaborate with financial institutions by using products offered by card schemes that alert merchants to a potential chargeback before it’s ever filed,” Monica elaborates. “This allows them to review the transaction and, if necessary, offer a refund rather than incur a chargeback. These products include both Order Insights and Rapid Dispute Resolution for Visa transactions, as well as Ethoca Alerts, to name just a few.”
Collaboration between merchants and financial institutions will be a vital component of any long-term solution for chargebacks. In the meantime, though, you need to take a hard line against chargeback abuse in order to protect your revenue.
“Merchants also need to confront and challenge any chargeback they see as possibly fraudulent or illegitimate,” Monica continues. “Not only does this recover revenue lost in the chargeback process, but it shares valuable information with issuing banks to help both sides see emerging trends when it comes to friendly fraud and misuse.”