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Merchant Card Reporting Compliance Raises Its Head Again

Credit card terminalCPAs are well aware of how Form 1099 reporting improves tax return compliance. CPAs are also aware of how the 1099 rules can lead to considerable taxpayer frustration or opposition. For example, during the 2012 filing season, we heard a lot about the difficulties taxpayers had trying to comply with the new cost basis information reporting rules for brokers reporting stock sales; and this particular issue remains a concern of ours. Another major initiative, which until recently seemed like a sleeper issue, is now ripe for taxpayer focus. Merchant card companies are required to report (on Form 1099-K) the gross receipts that a business receives from customers paying with merchant cards during the year. Merchant cards typically include both credit cards and debit cards.

In January and February 2012, many small business organizations protested IRS plans to require businesses to “reconcile” the differences between the merchant card gross receipts reported on Form 1099-K with the firm’s records (on 2011 tax returns). In acknowledging small business concerns about potential compliance burdens associated with this new requirement, the IRS announced on February 9 that businesses would not be required to show a reconciliation on their tax returns – and that the Service did not intend to require a reconciliation on future returns.

<CPA Preparing TaxesDespite the February 9 announcement, CPAs and their business clients should be aware that the IRS has announced a Form 1099-K compliance program.  In a conference call with the AICPA and other stakeholders, the IRS stated that it plans to establish a “small” compliance program in which it will send 20,000 notices to business taxpayers to validate the quality of the merchant card data received by the government.  According to IRS officials, the goal is to ensure that taxpayers are properly reporting their income without requiring them to reconcile merchant card information. The deputy commissioner of the IRS Small Business/Self-Employed Division told Tax Analysts (“IRS Initiating Form 1099-K Compliance Program,” Nov. 28) that the IRS “will make necessary adjustments as we hear back from stakeholders and gain experience from our people."  She acknowledged that the agency will be dealing with a learning curve as this is the first year of handling this information.

AICPA members should watch for Automated Under Reporter notices to business clients regarding mismatches of Form 1099-K information. One type of notice will be centered around outreach and education, asking notice recipients to review their books and records to ensure proper reporting of merchant card information. For these businesses, no formal correspondence with the IRS will be required, but the firm could get a second notice the following year if it did not take steps to correct any problem; the inference is that the taxpayer could become subject to an IRS collection or examination proceeding that following year.

A second type of notice will be targeted at taxpayers who have a high proportion of gross receipts reported on merchant or credit cards and a low portion involving check or cash receipts.  The third type of notice will be a new CP 2030, which will target filers of Form 1120, raising questions about the firm’s tax liability in relationship to the Form 1099-K reporting.

While the IRS’ new Form 1099-K compliance program is relatively small in scope, the AICPA will keep the membership informed of any further developments in the program. Moreover, we would welcome feedback from members who have clients that receive notices involving merchant card reporting (send email to irsppc@aicpa.org). 

Benson Goldstein, J.D., Senior Technical Manager – Taxation, American Institute of CPAs. Benson serves as the AICPA's liaison before the IRS's four operating divisions regarding examination, collection, and other compliance matters; and as staff liaison on tax administration and compliance policy issues to the AICPA's IRS Practice and Procedures Committee.  He has a law degree from the State University of New York at Buffalo.

Credit card terminal and CPA preparing taxes images via Shutterstock

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