IRS Form 1099 Enforcement Program - Another Fishing Expedition?

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[authors:  Stephen M. Moskowitz, Esq., LLM & Chris Housh, Enrolled Agent

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IRS Form 1099 Reporting: What You Need to Know
November 27, 2012
San Francisco, CA
Holiday Inn San Francisco International Airport North, 275 South Airport Boulevard

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Priority code: 15999

The Housing Assistance Tax Act of 2008 included a new IRS mandate that requires certain companies that settle payments for merchants and other payment processors to report the gross sales of the transactions to the IRS each year.   This reporting form was generally targeted towards closing the tax compliance gap for online commerce by having companies like PayPal, Amazon, Credit Card Merchants, etc. report to the IRS all gross ‘sales’ or other transactions.    Starting in 2011, the gross amount of payment cards and third-party transactions were recorded on the 1099K.     This reporting is just another ‘loophole’ the IRS has closed for individuals who were not reporting their online sales businesses for tax purposes. 

Now that the IRS has the data, as practitioners of tax law defense, we can anticipate the corollary impact of reporting programs on taxpayers such as, double reporting problems when duplicate forms are filed for the same transactions, erroneous forms being reported to the IRS, mismatched tax forms when merchant data does not match the taxpayer data, and unfortunately, the IRS utilizing its access to this new data for investigations of civil and criminal tax crimes.    

True to form, it has come to our attention that the IRS is now embarking on an enforcement program for Forms 1099K by utilizing the data collected from the credit card companies, Pay Pal and similar companies to, in the IRS’s own words,  “make sure taxpayers are compliant."  This new 1099K enforcement program will allow the IRS to ‘fish for information’ regarding the 1099K data in regards to efforts to further combat tax evasion or under-reported income as well as how to better collect delinquent taxes from individuals. 
 
It is our understanding that the IRS will begin issuing notices to individuals which will:

  • Request information regarding the accuracy of the 1099K; or,
  • Request that taxpayer’s provided a worksheet and answer questions regarding the transactions indicated on 1099K; or,
  • Issue Matching Notices requiring a response or face imputed income and therefore an  additional tax assessment. 

The Form 1099K will have the credit card company or payment processing company inform the IRS how much you grossed in sales or other transactions on a monthly basis.  The IRS will then assume that all of those funds that are reported should be in the same Schedule C.  However, if you sell material on eBay, and then have a friend put his share of the nice meal out on the town into your PayPal account, the IRS will treat it as taxable income that you should report on your business.

We also anticipate that if your business has a customer that does some purchases by check and some by credit card, and that customer issues a Form 1099-MISC at the end of the year for all of the purchases, the IRS can respond that the portions that were paid by credit cards and show on the 1099-K are not reported in an effort to increase your taxable income.  Keeping strong records on your sales and how people pay you will be an important part of your business going forward.

Moskowitz LLP is a Tax Law Firm representing clients in all aspects of tax disputes with the federal, state and local tax authorities. We have 30 years of experience in representing individuals and businesses in audits, coordinated exams, administrative appeals, and both civil and criminal tax cases.

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Disclaimer:  Because of the generality of this blog post, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations. Prior results do not guarantee a similar outcome. Furthermore, in accordance with Treasury Regulation Circular 230, we inform you that any tax advice contained in this communication was not intended or written to be used, and cannot be used, for the purposes of (i) avoiding tax related penalties under the Internal Revenue Code, or (ii.) promoting, marketing, or recommending to another party any tax related matter addressed herein.