Form 1099-K Reporting Issues

The Form 1099 series is used by the IRS to match income reported by payers to the income tax returns of taxpayers in an effort to combat under reporting.  There are 17 different types of 1099s, plus other information reporting forms such as W-2s, K-1s, 1098s, 5498s, etc.  For example, Form 1099-INT is used to report interest income and Form 1099-MISC is used to report payments to non-employees.  The IRS developed new Form 1099-K to be used for the first time in 2011.  Form 1099-K was developed to require merchant card companies (issuers of credit and debit cards) and third party e-commerce facilitators (e.g. PayPal) to report the gross receipts received by businesses from customers paying with credit or debit cards or engaging in e-commerce transactions.  The 2011 business income tax forms included a special line for businesses to report the portion of their receipts coming from credit or debit card charges.  Small businesses complained to the IRS about the heavy burden they would experience if they had to reconcile their gross receipts with Forms 1099-K.  In response, the IRS announced that the special reconciliation line on the 2011 income tax return forms for Forms 1099-K should be left blank, and that the IRS did not intend to require reconciliation on future income tax returns.

Nevertheless, Form 1099-K is still required to be completed by merchant card companies and e-commerce facilitators.  Form 1099-K does not need to be filed on a business if the total gross amount of payments during the calendar year to the business is $20,000 or less and if the total number of transactions is 200 or less.  Despite its assurances above, the IRS announced plans to establish a small compliance program in which it will send notices to some businesses to determine whether taxpayers are properly reporting all of their income.  Businesses should expect IRS scrutiny if total Form 1099-K receipts are higher or represent a high percentage of reported gross receipts.  Absent receiving a notice from the IRS, businesses do not need to reconcile the Forms 1099-K on their 2012 income tax returns.