Banks, privacy groups, payment processors and small-business owners are fighting an uphill battle to scuttle a provision requiring the credit card industry to report customer financial data to the Internal Revenue Service.

The proposal requires credit card companies, processors and third-party online payment systems such as PayPal to report annual sales figures for every business that uses their services. It’s been popping up in both chambers, approved as a part of the House bill patching the alternative minimum tax and included in the Senate’s housing legislation.

Small-business owners argue that the new mandate would place a significant administrative and financial burden on already tight profit margins.

But such a law would be a boon for tax collectors, who believe they would pick up an additional $9.8 billion over 10 years from previously under-reported income.

And that’s the kind of money that makes a cash-strapped Congress very, very happy.

To comply with congressional pay-as-you-go budgetary rules, all new tax breaks must be offset with funding increases or spending cuts. And Republicans and Democrats alike consider the credit card reporting requirement an easy way to drum up some cash.

The proposal was first suggested in President Bush’s February 2006 budget proposal. Since then, various versions of the legislation have picked up support from key players in Congress, including Senate Finance Committee Chairman Max Baucus (D-Mont.); the committee’s ranking Republican, Sen. Chuck Grassley of Iowa; and House Ways and Means Committee Chairman Charles B. Rangel (D-N.Y.).

But not every member backs the bill. Two weeks ago, Rep. Nydia M. Velazquez (D-N.Y.), chairwoman of the House Small Business Committee, along with 12 other members, sent a letter to the Ways and Means committee urging future reflection on the proposal.

“The hearings before [the House Small Business] committee have made it clear that we cannot afford to focus solely on revenue figures if doing so creates untenable costs for the small firms that drive economic growth,” they wrote.

The American Bankers Association, the National Association of Manufacturers and the Financial Services Roundtable, among other business groups, also have voiced their opposition.

“We are all for people paying their taxes,” said the NAM’s director of tax policy, Dena Battle. “The problem is when the government comes in and says we are going to catch all these cheats by imposing some new requirement that’s burdensome and costly. Then you are punishing everyone that does pay their taxes at the expense of a few people that aren’t.”

The Coalition for Fairness in Tax Compliance, a bloc of 23 trade associations that have a large number of small-business members, is also aggressively combating the proposal.

Credit card companies argue that their processing systems would require massive reprogramming to comply with the new requirements. And those costs would ultimately be passed on to consumers and to businesses using the companies’ services.

Another group of advocates worries about possible privacy violations. The more personal information the government collects and the longer it is stored, the more likely it will be leaked or stolen, they argue.

The legislation forces banks to track merchants using their taxpayer identification numbers, a situation that inevitably increases the risk of improper disclosure. Complicating the situation is the fact that some small businesses and online sellers use Social Security numbers as their tax IDs.

“This bill reduces privacy across America’s payment processing systems and treats every American small business or eBay power seller like a criminal on parole by requiring an unprecedented level of reporting to the federal government,” said former House Majority Leader Dick Armey (R-Texas), who is now chairman of FreedomWorks.

But the most onerous piece of the proposal, say small-business lobbyists, is the withholding requirement. If merchants fail to supply the necessary information or banks do not verify the business’s tax information number, the credit card processor must hold 28 percent of their total credit card cash flow.

Small businesses typically operate on single-­digit profit margins. Holding the money for even a short period could force them to lay off employees or spiral toward bankruptcy.

For some tax experts, the withholding part of the bill raises doubts about how much tax revenue the proposal actually raises. Some of the $9.8 billion estimate invariably comes from the 28 percent withholdings. If that money is refunded, the total windfall from the bill drops. The $9.8 billion figure also fails to account for other types of special discounts and services offered by various merchants, say business lobbyists. One particularly common example is the inflated sales numbers that show up when customers get additional cash back with their purchases, a common service offered at many drugstore chains.

“They’re using income as a proxy to judge how much revenue an institution is making,” said Ken Clayton, managing director of credit card policy for the American Bankers Association. “But that doesn’t really tell you anything other than how much money customers paid.”