1. Toll Free: 877.880.4477
Phone: 281.880.6525
New IRS Compliance Program
Targeting Businesses
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2. » In an effort to help close the "tax gap," the IRS has launched a new
compliance program targeting the underreporting of income by business
taxpayers that receive Form 1099-K information returns from credit card
companies and third-party transaction networks.
» On its website, the IRS stated the program would involve letters and
notices going out to taxpayers who may have underreported their gross
receipts. If your business receives a Form 1099-K because it accepts
payment cards from customers, you may receive one of these letters.
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3. Background
» Under the Housing Assistance Tax Act of 2008, banks and other payment
settlement entities (such as PayPal) must file the new Form 1099-K
information with the IRS.
» Starting in 2011, Form 1099-K reports the gross amount of reportable
transactions for the calendar year. Listed on the forms will be the names,
addresses and taxpayer identification numbers of merchants and others
accepting credit cards, debit cards, stored value (gift) cards and other
third-party payments.
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4. » The purpose of the new requirement is to create a paper trail so that the
IRS can compare a merchant's card transactions with income reported on
the merchant's tax return.
» An IRS explanation about why the reporting is necessary states: "Third-
party information reporting has been shown to increase voluntary tax
compliance, improve collections and assessments within IRS, and thereby
reduce the tax gap," which is the difference between the amount of tax
money owed and the amount collected.
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5. » Exactly how the new IRS 1099-K compliance program will work is not
known yet since the tax agency has never had this type of information
before. But since the IRS now has the gross amount of reportable
payment card transactions reported on a merchant's Form 1099-K, it can
match the amount against other information reported on merchants' tax
returns.
» This is not the typical IRS matching program since the amount on the
1099-K will not be a direct match to what is reported on a taxpayer's
return. The IRS will be using the information gleaned from the 1099-K
along with information on the tax return.
» Who will receive letters? The IRS will send letters to taxpayers based on
their returns and Forms 1099-K, Payment Card and Third Party Network
Transactions, that show "an unusually high portion of receipts from card
payments and other Form 1099-K reportable transactions," the IRS
stated.
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6. The IRS has posted five different letters on its website, which will be
sent to businesses. The letters inform taxpayers that:
» "Your gross receipts may be underreported. We received Form(s) 1099-K,
Payment Card and Third Party Network Transactions, showing your total
payments from Merchant Card and Third Party Network transactions. The
information from these form(s) and your tax return 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)."
» Each of the letters asks taxpayers to review the Form 1099-K and their
computation of gross receipts for your business as reported on the tax
return in question. Taxpayers are instructed to make sure they "fully
reported receipts from all sources, including card, cash and checks."
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7. Depending on the type of letter received, taxpayers are given various
instructions including:
1 "If you don't find any inaccuracies in your review, no further action is
1
required at this time.“
2 Within 30 days, fill out and return IRS Form 14420, Verification of
2
Income, which is used "to explain why the portion of your gross receipts
from card payments and other Form 1099-K reportable transactions
may be higher than expected.“
3 "If you believe you filed your tax return correctly, please provide a
3
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."
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8. » Taxpayers are warned that "failure to respond may also result in a
proposed assessment or further compliance action."
» As with many other tax requirements, the new 1099-K compliance
program makes it important to keep good records so you can respond to
IRS requests for information. Consult with your tax adviser if you have
questions about payment card reporting or receive a 1099-K letter.
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9. 14550 Torrey Chase, Suite 100 Houston, TX 77014 USA
Toll Free : 877.880.4477
Phone : 281.880.6525
Fax : 281.866.9426
E-mail : info@hrp.net
www.hrp.net

10. 14550 Torrey Chase, Suite 100 Houston, TX 77014 USA
Toll Free : 877.880.4477
Phone : 281.880.6525
Fax : 281.866.9426
E-mail : info@hrp.net
www.hrp.net