The IRS and Merchant Card and Third Party Network Payments

Remember a couple of years ago when the IRS and Congress mandated that all Charge Card Processors must issue a 1099-K for Merchant Card and Third Party Network Payments? And these charge card sales were to be listed on a separate line on the business tax return?  Then Congress and the IRS reversed that decision and said we didn't have to list the charge card sales separately and we all released a sigh of relief.

Did you think that was the end of it?  Did you think that small business had made such a fuss on this issue that the IRS and Congress caved on this issue?  Well, think again.  We still don't have to report the charge card sales separately on the tax return but the charge card processors have to report card sales to the merchants and the IRS on Form 1099-K.

Guess what.  The IRS, or more specifically the Underreporting Department of the IRS, is taking the 1099-K information, tabulating it by taxpayer and comparing the total charge card sales to the total sales.  From there, they are sending out letters to taxpayers in question announcing that gross receipts may be underreported compared to other businesses of similar type and suggesting that the taxpayer in question may want to amend their tax return and report more sales.

If the Underreporting Unit does not receive a response to their original notice they send out, a follow-up notice where they threaten to issue a Statutory Notice of Deficiency or to conduct a tax audit if they do not receive a satisfactory explanation within 30 days of why the taxpayer's charge card deposits are not out line, will be sent.

Beware small business owners!  The IRS is watching your deposits closer starting in 2011 than previously.