A few years ago, Congress got the idea that businesses could be more accurate in reporting all of their income. The concern was that there was a significant gap between taxable income and income reported on tax returns.
To respond to this concern, Congress added a provision to the tax code to require credit-card companies and other payment processors to submit information returns to the IRS about those payments. These information returns are filed using Form 1099-K; the business for which the payments were processed also receives a copy.
In this post, there is one key reminder we want to make: If the income you reported on the tax return for your business doesn’t match up closely enough with information on your gross receipts that the IRS has from 1099-K filings, it may be a red flag that leads to a tax audit.
In other words, the income you report is too far out of alignment with what the informational returns indicate, you are asking for trouble with the IRS.
To be sure, there are many nuances and technical aspects regarding these requirements. For example, the formal term for the third parties that must file 1099-Ks is “payment settlement entities (PSEs).
There are also many questions about whether or how 1099-K reporting applies to ride-sharing companies and other services in the sharing economy.
We will try to devote an upcoming post to that topic.
For now, however, we remind you of our main point: 1099s submitted by third-party payment processors can lead to a tax audit if the income you report doesn’t reflect what the 1099s lead the IRS to expect. We discuss this point at greater length in our article on the new Form 1099-K requirements.
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