The IRS has said that it will start analyzing Form 1099-K and questioning businesses with smaller than expected income based on those figures. This year the IRS has been making several changes to improve the system, prevent fraud and curb identity theft and the under-reporting of business income is on the list.
Form 1099-K is the form that reports to the IRS the total or “gross” credit/debit transactions for a merchant, but it doesn't show discounts, charge-backs, returns and other allowances. It's up to the merchant to keep track of these and be able to prove them, to reduce the gross figure. This new action underscores why it’s important for detailed record keeping and bookkeeping to be an integral part of your business processes.
The National Association of Tax Professionals reported that the IRS will be sending out approximately 20,000 notices to small businesses who take credit/debit cards where it thinks there is a discrepancy in their 2011 returns. In a previous article, “IRS removes 1099-K reconciliation requirement: Relief or still a headache? “ It was noted that the requirement to reconcile the 1099-K had been removed but to be wary and be sure to keep accurate records. Now, the IRS has come up with an analysis and verification process for the IRS to hypothesize how much the merchant “should” have netted with regards to the amount reported on the 1099-K. Some of the data used in the analysis is based on the merchants industry and the proportion of credit/debit transactions in relation to other sources of income.
Since the IRS can’t match the data on Forms 1099-K directly to line items on 2011 business returns, the IRS has developed notices to contact businesses. There are four tiers of letters going out that question business returns with possible unreported income. The letters range from a simple request to review for accuracy to a request for verification and explanation of the reported income.
As you receive your 1099-K forms, be sure to look them over for accuracy and be prepared to resolve any differences in the gross reported from your net. Make sure you have accurate records on those differences, so you can reconcile what is shown on the 1099-K form and what you show as net income.