The IRS has started mailing notices to businesses that
basically accuse them of underreporting their income. They are comparing 1099-Ks reporting payments
businesses have received from credit card and debit card firms (such as PayPal)
to the total income shown on the taxpayers’ returns. The IRS is mailing the notices to businesses
it believes may have underreported cash receipts.
The form (see the attached sample link
to PDF of form) includes the following threatening language:
Gross Receipts may be underreported.
Your tax return and Form(s) 1099-K, Merchant Card and Third Party
Network Transactions, show an unusually high portion of gross receipts from
card payments and other Form 1099-K reportable transactions. Your type of business consistently has a much
lower portion of gross receipts from card payments and other Form 1099-K
reportable transactions, and a higher portion of gross receipts from other
sources (e.g., cash and checks).
It goes on later in the notice to say:
you believe you filed your tax return correctly, please provide a written
explanation telling us why the portion of your gross receipts from card
payments and other 1099-K reportable transactions may be higher than expected.
What the heck does this notice mean? Is the firm being audited? What does the IRS expect to receive as proof
that the business is not underreporting income?
Congress is now pushing the IRS to modify the language of the notices.
A major problem with the 1099-K matching program is that it
isn’t precise. The 1099-K reports
receipts for a calendar year, which causes a problem if the business reports on
a fiscal year. Mismatches may be
triggered in cases involving employee tips, cash back for customers on debit
card transactions, refunds to customers, and more than one business sharing a
credit card machine. These are some of
the reasons the IRS had decided not to require firms to separately report
amounts shown on 1099-Ks on their income tax returns.
It is obvious that these forms have very limited use as a
method of detecting underreporting of income.
They appear to be another waste of business owners’ time and money.