EcommerceBytes-NewsFlash, Number 3134 - August 20, 2013     2 of 5

IRS Targets Small Retailers Who Accept PayPal and Credit Cards

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PayPal, credit-card processors and other financial institutions began reporting sellers' monthly sales transactions to the IRS as part of a new law, and now the IRS is using that information to target small retailers.

According to the Wall Street Journal, the U.S. Internal Revenue Service sent 20,000 letters to small businesses based on the new data questioning whether they were under-reporting their business income. And it reports that tax accountants are expecting the program to expand.

But 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 (see this EcommerceBytes news story from January.)

Small-business and tax guru Barbara Weltman, a contributor to EcommerceBytes, said in a post on her blog, "Businesses do not have to reconcile and report to the IRS the amounts reported on these forms with the amounts reported on their returns when they file their income tax returns. But the inquiry is effectively asking for a reconciliation." She called the letters "a waste of time" for honest businesses.

While the regulation requires payment processors to submit Form 1099-Ks for sellers that execute a minimum of 200 transactions in a calendar year totaling at least $20,000 in overall revenue, PayPal and other payment processors may be overly cautious about their liability with respect to reporting requirements and have collected taxpayer information from sellers who are under those thresholds.

The IRS explains the letters on the IRS website. Under a section titled, " How is the IRS going to use this information?" the agency explains:

"IRS uses the information reported from third parties to ensure individuals and businesses meet their tax obligations. The IRS is integrating the new information supplied on the Form 1099-K into a variety of areas, including its compliance efforts, to ensure fairness and address non-compliance.

"All 1099-K activities respect taxpayer rights and provide opportunities for taxpayers and tax practitioners to offer explanations or corrections if they receive a notice or audit related to this effort."

Inquiries to the IRS on Monday went unanswered by press time.

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About the author:

Ina Steiner is co-founder and Editor of EcommerceBytes and has been reporting on ecommerce since 1999. She's a widely cited authority on marketplace selling and is author of "Turn eBay Data Into Dollars" (McGraw-Hill 2006). Her blog was featured in the book, "Blogging Heroes" (Wiley 2008). Follow her on Twitter at @ecommercebytes and send news tips to

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