Sellers Can Expect Closer IRS Scrutiny of 1099-K Forms This Year
By Kenneth Corbin
By Thursday, online sellers should have received a tax form from each of their payment processors indicating the gross transaction volume processed in 2012. Once those 1099-K forms arrive, sellers should take a close look, because they can be confident that the IRS will.
Payment providers first had to issue the 1099-K forms for the 2011 tax year, but in consideration of the novelty of the form and the significant confusion about the new reporting requirements, the IRS was willing to give small businesses a pass in the event of minor discrepancies. Not this year.
"Last year what they said was that it's the first year of the form, so they weren't going to use that data," said Steven Aldrich, CEO of the Web-based bookkeeping service Outright.com. "Now they've said the first year's under our belt, let's go ahead and use this data to make sure the information's accurate and complete."
"They're going to plan on using it this year to ensure that businesses are reporting their revenue accurately," he added.
Under IRS rules, electronic payment processors such as PayPal, Google and Amazon are required to submit 1099-K forms for every seller that uses their services to process 200 or more transactions in a year totaling at least $20,000. Both the volume and revenue thresholds must be met to trigger the reporting requirement.
The reporting requirements also apply to credit card providers and other third-party payment services. Third-party payment providers covered by the rules will send copies of the 1099-K to sellers and the IRS.
The form, which dates to a 2008 law but only came into use for the 2011 tax year, was created in response to concerns over mounting discrepancies between the amount of revenue generated from online transactions and what sellers were reporting.
"As more and more transactions ... move to electronic form from checks or from cash, the IRS was asked by the government a couple years ago to start finding ways to make revenue more accountable," Aldrich said. "The 1099-K came into being because of this shift to electronic payments and electronic commerce."
Sellers using Schedule C this tax season will notice a key difference from last year. For the 2011 tax year, the form included a line for sellers to enter the amount that payment providers reported on their 1099-Ks. This year, the IRS has done away with that line, and instead will be cross-checking the amount that sellers report as their gross revenue with the 1099-K information they receive from payment providers.
An important note about the 1099-K reporting: Payment processors report gross transaction volume, not net. That means that any refunds, shipping costs, sales taxes or other adjustments that would be deducted on a seller's tax return will still be reported to the IRS on the 1099-K forms the payment providers issue.
"The tricky thing there is just the amount that's generally recorded on the 1099-K is, from the seller's perspective, probably different from what they would normally expect to get from a PayPal or another processor," Aldrich said. "There's still a fair amount of confusion among small businesses about how the number's derived, how they can cross-check that number."
In addition to the confusion over the adjustments that are included in the gross revenue totals, some sellers might find discrepancies in the timing of the reported transactions. Payment providers will report transactions based on the date they were processed, while some sellers keep records organized by the date they received the funds, according to Aldrich.
Cloud-based bookkeeping applications such as the services Outright and other firms offer can automate the process, gathering and sorting transaction information as sales are processed.
"It comes down to making sure the small business owners who have the means of staying on top of this information digitally do so," Aldrich said. "This is another push for small businesses I think to move off the tried and true pencil-and-paper method of managing their business."
He advises sellers to analyze their 1099-K forms promptly, and notify their payment providers if they find discrepancies, so that, if necessary, those companies can issue a corrected form to the IRS.
Unlike last year, when the IRS generally gave sellers a pass on reconciling the revenue reported by third-party payment providers, sellers can expect closer scrutiny of their returns this tax season. Specifically, IRS examiners will be comparing the gross revenue that sellers report on their returns with the transaction totals on the 1099-K forms.
Sellers who gross revenue of an amount less than what the various payment providers file on the 1099-K forms could receive a letter from the IRS asking for an explanation, and possibly find themselves the subject of an audit, according to Outright.
"Common sense stuff that we've talked to sellers about - and sellers have suggested - is if your gross revenues are going to be wildly different from your 1099-K form, they probably shouldn't be wildly under," Aldrich said. "I would focus on that top line on the form."
"Common sense prevails," he added. "Make sure that your gross income is at the appropriate level relative to your 1099-K form."
About the author:
Kenneth Corbin is a freelance writer based in Washington, D.C. He has written on politics, technology and other subjects since 2007, most recently as the Washington correspondent for InternetNews.com, covering Congress, the White House, the FCC and other regulatory affairs. He can be found on LinkedIn here.
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