Form 1099-K is an information return, which is provided to the merchants who have 20,000 or more transactions and summing more than $ 200,000 during the tax year through debit or credit cards, else through electronic payments like Paypal.
Financial institutions like a bank will process the payments and send a copy to the Internal Revenue Service. The IRS has started utilizing the information on the Form 1099-K to question if the merchants are reporting their income properly. Last season, IRS started to send the mails with the label “Notification of Possible Income Underreporting” to various small business owners asking them to give the explanation and the emails are continued to be delivered in this tax season also.
Understanding the IRS notice
The IRS started to analyze about the shortfall of about $ 450 billion government’s revenue as the majority of the tax due is from the small businesses who fail to report the income. Hence the IRS uses the 1099-K form to cross-check the overall income of the taxpayers. This notice from the IRS can be an audit or cannot be. When the response to the IRS queries is settled by the taxpayers, it can be a pre-audit. Else it can be a correspondence audit that is an audit through mail. In other cases, the notice could be an assessment for underreported income.
How to respond for the IRS mails?
When you get a mail from the IRS, it never feels good except the refund check. Though you have put hard efforts to report your income by complying with the tax law, you can still find some mails from the IRS. If you receive one, let us see what are the actions to take and respond to the mail.
- Inform your tax advisor or CPA, regarding the mail from the IRS. Because you need professional assistance to respond to the mail in order to respond clearly and avoid additional inquiries.
- Accumulate all your records to show your income so that you can remove discrepancies in 1099-K form. The 1099-K shows only the gross amount of transactions processed but they do not reduce the amount of income that needs to be reported. Hence you can produce the proof to clarify your income.
- You can respond to the mail by completing the worksheets, by providing explanations for the income. There are various types of notices that are sent from the IRS and different actions need to be performed based on the notice.
How to move forward?
As a merchant, if you have received a notice or escaped from the first round of notices, the necessary actions that need to be taken in the future is:
- Double check the received 1099-K in order to ensure that the merchant code is correct.
- Double check the amounts that are reported on 1099-K to ensure whether they square with the actual numbers.
- Check whether the accounting system can be modified hence you can code items effectively in the future. This could help to respond to the notices from the IRS.
A 1099-K notice issued from the IRS will make you panic, but you need to stay calm and get the assistance needed to resolve the inquiry. This may need spending some time and to pay the professional fees, but it is just a cost of doing the business.