(7) Income Taxes

We account for income taxes pursuant to the provisions of ASC 740 “Income Taxes.” Under this method, deferred tax assets and liabilities are recorded to reflect the future tax consequences attributable to the effects of differences between the carrying amounts of existing assets and liabilities for financial reporting and for income tax purposes.

As of June 30, 2012, iPayment and its consolidated subsidiaries and Holdings and its consolidated subsidiaries have net income taxes payable of $3.8 million and $0.9 million, respectively.

iPayment and its consolidated subsidiaries and Holdings and its consolidated subsidiaries have an income tax expense of $0.1 million and income tax benefit of $1.3 million, respectively, during the second quarter of 2012, compared to income tax benefit of $4.0 million and $4.6 million, respectively, in the comparative period in 2011. Full year forecasted effective tax rates are 49.6% for iPayment and its consolidated subsidiaries and 2.3% for Holdings and its consolidated subsidiaries with the difference resulting from a portion of Holdings’ interest expense. The difference between the statutory federal rate of 34.0% and the 49.6% is attributable to expenses not deductible for income tax purposes. We are subject to interest deductibility limitations with respect to interest accruing on the 15.00%/15.00% Notes, which constitute an “Applicable High Yield Discount Obligation” for U.S. federal income tax purposes. Consequently, almost one-half of the interest expense under the 15.00%/15.00% Notes is non-deductible by Holdings.

iPayment and its consolidated subsidiaries and Holdings and its consolidated subsidiaries each have an income tax benefit of $0.6 million, during the first six months of 2012, compared to income tax expense of $0.4 million and income tax benefit of $0.2 million, respectively, in the comparative period in 2011. During the first six months of 2012 income tax expense was benefited by $0.7 million of adjustments related to the prior year.

During the first six months of 2012 and 2011, we accrued less than $0.1 million of interest related to our uncertain tax positions. As of June 30, 2012, our liabilities for unrecognized tax benefits totaled $1.5 million and are included in other long-term liabilities in our consolidated balance sheets. Interest and penalties related to income tax liabilities are included in income tax expense. The balance of accrued interest and penalties recorded in the consolidated balance sheets at June 30, 2012 was approximately $0.3 million.

We file federal income tax returns and various state income tax returns. With limited exception, we are no longer subject to federal, state and local income tax audits by taxing authorities for the years prior to 2007.

At June 30, 2012, we had approximately $0.6 million of federal net operating loss carryforwards that will be available to offset regular taxable income through 2020, subject to annual limitations per year. We had state net operating loss carryforwards of approximately $29.6 million as of June 30, 2012.