1099-K and Business Income Matching

by Kenneth Hoffman in , ,


In September, the IRS launched its first information return–matching program for corporate entities filing Forms 1120, 1120S and 1065. This program will match business return incomes to separately reported Form 1099-K receipts, in order for the IRS to see if companies are reporting all of their income correctly.

This year business taxpayers also started receiving Form 1099-K (merchant card and third-party network payments) to report amounts received from payment settlement entities (debit/credit cards and third-party network payers such as PayPal). For 2012 business returns, the expectation should be to separately report Form 1099-K receipts as line items on their returns.

On November 16, the IRS announced that it will start questioning businesses with smaller-than-expected income, based on its analysis of Form 1099-K amounts reported to the business. For 2011, the IRS cannot propose specific adjustments to the returns because it can’t match Forms 1099-K directly to line items on 2011 business returns. However, the IRS is contacting taxpayers when it thinks that there is a discrepancy.

Last week the National Association of Tax Professionals (NATP) reported that the IRS is starting three compliance initiatives with regards to Form 1099-K reporting:

  • A soft-touch inquiry that asks taxpayers to review their returns more closely
  • A correspondence audit
  • An underreported notice and assessment

The NATP reported that the IRS will send out about 20,000 letters to small businesses before year-end. If your company is in receipt of IRS Letters 5035, 5036, 5039 or 5043, Notification of Possible Income Under-reporting, you may have under-reported gross receipts. The IRS is comparing the amount in gross receipts reported on tax returns to the amount in receipts from merchant card payments on Forms 1099-K. Based on the IRS’s analysis of your industry, the IRS calculates whether it thinks you may have more income than what is reported on the filed tax returns.

Depending on the letter you receive, your next steps may vary. Contact me immediately at 954.591.8290 if you receive such a letter.

Kenneth Hoffman counsels Entrepreneurs, Professionals and Select Individuals in taking control of their taxes, and businesses. Discover how I can help you overcome your tax and business challenges. To start the conversation or to become a client, call Kenneth Hoffman at (954) 591-8290 Monday - Friday between 8:30 a.m. to 1:00 p.m. for a no cost consultation, or drop me a note.

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