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To Match or Not to Match? 1099-K Notices Bewilder Taxpayers

Confused-womanDo you have tax clients who run small businesses or decided to sell their household items on eBay this past year? Or perhaps you are a CPA who accepts credit card payments from your clients? If so, you may have already received a notice from the IRS or should be aware of the latest updates on the IRS push for information matching with Form 1099-Ks (Payment Card and Third Party Network Transactions). Some AICPA members have received 1099-K mismatch notices assessing thousands of dollars in penalties.  

Less than a year ago, the AICPA raised the topic in a blog post about a major initiative that requires merchant card companies to report gross receipts on Form 1099-K. At the time, the IRS was carrying out a compliance program that sent notices to small business taxpayers in order to match their sales information with merchant provided Form 1099-K reports. The program was used to ensure business taxpayers were reporting adequate income from their credit card receipts. A driving force behind this decision was the growing US tax gap, as IRS data indicated that a major source for the gap was related to underreporting of business income on individual tax returns. (See Narrowing the Tax Gap for Tax Reform)

As a result, many taxpayers, especially self-employed Schedule C filers, are beginning to receive notices related to Form 1099-Ks. In these notices, the IRS is providing basic instructions such as “Read the notice thoroughly and complete any worksheets” and “gather tax records including the 1099-Ks that were received and determine accuracy of the notice about the underreporting of gross receipts.”

According to the IRS, these notices are being sent to taxpayers who “may have underreported their gross receipts” or their Form 1099-Ks show an “unusually high portion of receipts from card payments” that do not match the receipts reported on their filed tax returns. However, back in October 2010, the IRS stated it would not require businesses to reconcile their gross income with third-party receipts.  These notices seem to be a direct contradiction to that statement.

CPA and business owner Jonathan Horn (chair of AICPA’s Individual and Self-Employed Tax Technical Resource Panel), explains: “The IRS is on record saying they are not going to ask people to reconcile, but now they ask taxpayers to prove why their numbers are right… these (underreporting) notices imply ‘we think you’re wrong, prove that you’re innocent.’”

Horn points out there are many obstacles and issues the IRS would face if it attempted to match third-party receipts to 1099-K reports. For example, some businesses allow customers the option for cash back on credit cards, but the Form 1099-K does not account for cash back and gross sales amounts separately. This creates a situation where a credit card may show $200 in receipts, while only $100 resulted from the actual sale of merchandise and the other $100 was cash back to customers.

Many small business owners are self-employed Schedule C filers with very few accounting resources. It is clear that the matching of gross receipts on individual returns to information reported by merchant card companies is a growing issue for them. While the IRS continues to develop and release guidance in this area, the AICPA will monitor this issue and keep our members updated on new information and resources through our Individual Income Taxation Resources web page. We welcome comments from members that have clients who receive notices involving merchant card reporting and any further questions.

For more information:

Amy Wang, CPA, Technical Manager - Tax, American Institute of CPAs. Amy serves as the technical manager for the Individual & Self-Employed Tax Technical Resource Panel, as well as the Exempt Organizations Tax Technical Resource Panel and related task forces. She also sits on the planning committee for both the AICPA Not-for-Profit Industry Conference and the Conference on Tax Strategies for the High-Income Individual. She has public accounting experience in federal and state taxation and holds a BS in Accounting with a Minor in International Business from Penn State University.

Confused woman image via Shutterstock

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