Have you ever wondered if the IRS double checks your work with the banks? Wonder no more. Since 2012, banks, credit card companies, and other third-party organizations that settle transactions have been required to file informational returns with the IRS that reported a business’s credit and debit card transactions and other electronic types of reportable income. The form used to file that information with the IRS is the 1099-K. If your business has credit or debit card transactions, then you, along with the IRS, have received this form in the past.
The information provided on the Form 1099-K allows the IRS to determine the business’s gross income from credit and debit card sales and makes it easier to segregate credit/debit card sales from cash sales.
With Form 1099-K, the IRS is in the position to see if the credit card dollar figure reported on the tax return matches the bank’s information return; the form will also allow them to see if a business’s other sales from cash and check payments makes sense in the context of the firm’s overall business.
As expected, the IRS has developed a program to match reported income on the income tax returns filed by businesses to the income reported on the 1099-Ks. The IRS’ analysis includes comparing the percentage of income a specific business reported as coming from credit/debit cards and cash sales, for example, to what the typical percentage is for other businesses in the same industry. If you receive a letter from the IRS related to the 1099-K, then the IRS’s computer thinks you underreported your business income and the agency is requesting an explanation for the discrepancy.
Do not procrastinate or ignore the letter. Procrastinating will only make matters worse.
If you receive one of these letters, it may be appropriate for you to seek professional assistance with preparing a response. Get in touch with us at Dagley & Co. (our information at the bottom of this blog post page) if you need help settling.
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