The IRS requires payment settlement entities (“PSEs”) to report to the IRS the gross dollar amount of card or third-party network payments processed for participating payees. PSEs include credit or debit card issuers (like American Express or Visa) as well as third-party networks (like PayPal and Google Wallet). Thus, businesses and merchants that accept credit card or third-party network payments should receive a 1099-K by January 31st of each year.
Form 1099-K was first required for the 2011 tax year and we know that IRS is conducting a compliance audit program for Form 1099-K for the 2012 tax year to gain an understanding of the differences between gross receipts as reported for tax purposes as compared to gross receipts as reported on Form 1099-K.
Based on regional and industry specific data, if a business’ gross receipts reported on its tax return appear underreported, a taxpayer may receive a notice requesting an explanation of why non-card receipts appear unusually low. The information requested by these notices can be cumbersome and difficult to respond to in the 30 days allowed. Taxpayers should ensure the recordkeeping system they employ for tax purpose supports the ability to respond to these notices quickly. For example, we have recommended monthly reconciliations of PSE statements to gross sales. It may also help to understand your ratio of non-card sales to PSE sales.
Please contact your Dean Dorton representative or Will Booher at wbooher@deandorton.com should you have any questions or receive a notice.