The Senate Committee on Finance, which has jurisdiction over tax matters, acknowledged that the provision is designed to bail out the housing sector by helping the IRS more efficiently collect the taxes it is owed, but said no small merchants will be hurt by the legislation.

The finance committee, in a news release, said the reporting provision won't be detrimental to small businesses because it requires the banks to do the additional reporting, not the merchants. In addition, the committee said only the IRS will have access to the data that is reported.

"This proposal asks for the same type of personal taxpayer information that other information reports currently required by the IRS contain," the statement said. "Merchants voluntarily enter into credit card arrangements with banks and voluntarily provide private information during that process. Banks are subject to their own privacy laws and policies. Existing law already strictly protects the privacy of taxpayer records."

Nevertheless, privacy groups, like the CDT, and small business groups remain concerned.

Privacy advocates say it will allow the government to create and maintain a federal database of all the transactions made by millions of small businesses via credit cards or through eBay, PayPal, Amazon, or Google Checkout. These groups say that the database, as well as the systems set up by the electronic payment processing companies, will also be fertile ground for identity thieves because it will contain the Social Security numbers of those small merchants.

"So the gathering of this information is definitely something we are worried about because there is no information about how the privacy of these merchants is going to be protected, and there's no information about who's going to have access to that information," said Brendan Steinhauser, director of federal and state campaigns for FreedomWorks, an organization that advocates lower taxes, less government and more economic freedom.

FreedomWorks is also concerned because there was no debate on the provision in the Senate. "It was just buried in the bill, and we want to find out more about it," Steinhauser said. "And we will continue to try to derail this."

Dodd's office did not respond to a request for comment.

An eBay spokeswoman said the online auction company is also concerned about the implications of the electronic payments reporting provision.

"We believe that IRS proposals to collect additional information about electronic payments, including the 'merchant card reporting' provision recently attached to legislation being considered in the House and Senate, should be crafted in a manner that does not discriminate between payments models and should not burden the smallest entrepreneurs with new tax compliance demands, nor inappropriately raise reporting requirements on persons who are not merchants," said Kim Rubey, a spokeswoman for eBay, which owns PayPal, in an e-mail.