Like a sequel to a cheesy horror flick, Form 1099-K is back and you may see one coming to a mailbox near you. Don’t panic, just send it to us. Form 1099-K is used by third party merchant services companies, such as American Express or Paypal, to report your credit card receipts for the year to the IRS. This amount does not need to be reported on your return for 2012, but it is valuable information.
Last year, there was a line to report 1099-K income on your return with clear instructions from the IRS to leave that line blank. The intention was that this line would be used in the future when the IRS had ironed out their reporting process for 1099-K income. However, last February the IRS decided that it would not reintroduce this reporting line for the 2012 tax season or going forward. With that, the 1099-K reporting nightmare for businesses was averted.
So why are you still getting a 1099-K if you are not required to report that income separately?
The IRS will still be using this number to select returns for audit, or at least for additional questions. For example, if your 1099-K from your third party merchant services companies shows that you took in $500k in credit card payments and you show total income of $450k, the IRS will be contacting you.
In the past, the IRS has used 1099-B, 1099-Div, 1099-Int, etc to match income reported to the IRS with income you report on your personal return. If there is a mismatch, the IRS would send a computer generated CP2000 notice which could require anything from a simple response to an amended return. The concept is the same with 1099-K.
Where might someone have trouble with Form 1099-K?
The obvious answer is if income is under-reported. However, just as with 1099-Misc forms you may have accrual basis related issues or issues where expenses must be broken out in order to report a true gross income figure.
An example of an accrual basis issue might be if you typically receive large transactions and have accrued the income in a prior year. If you don’t receive those payments until the following year and then experience a significant drop in income, you may receive a 1099-K that is overstated because it is reporting income accrued in the prior year.
If you report your credit card income as net of any merchant service charges or other related costs, you may end up reporting a correct figure that is less than what is reported on 1099-K. The best way to avoid these sort of issues is to make sure you forward 1099-K forms to your accountant to ensure that you don’t unintentionally raise red flags for the IRS, even if your figures are correct.