IRS updates its 1099 K matching program

Accounting Today reports the IRS is taking a soft touch to matching busienss income:


The Internal Revenue Service has always been able to match individual tax returns against information statements and propose under-reporter adjustments that come in the form of CP2000 notices.


In September, the IRS started its first information return-matching program for business return Forms 1120, 1120S and 1065. This program matched business return incomes to the total amounts reported on all information returns.
This year, business taxpayers also started receiving Form 1099-K, Merchant Card and Third-party Network Payments, reporting amounts received from payment settlement entities (from debit/credit cards and third-party network payers such as PayPal). To avoid taxpayer burden, the IRS stated in a letter to the National Federation of Independent Business on February 9 that it will not require taxpayers to separately report amounts from Forms 1099-K on returns, and has no plans to do so in the future.
On November 16, the IRS announced that it will start questioning businesses with smaller-than-expected income, based on its analysis of Forms 1099-K reported to the business. Interestingly, the IRS cannot propose specific adjustments to the return because it can’t match Forms 1099-K directly to line items on 2011 business returns. However, the IRS is contacting taxpayers when it thinks that there is a discrepancy. The IRS determines this probability based on the taxpayer’s line of business and a perceived disproportionate share of credit/debit card and third-party network payments reported on Forms 1099-K, compared with gross receipts from other sources reported on the tax return. 
In November, as reported by the National Association of Tax Professionals, the IRS indicated that it is starting three compliance initiatives:

• A soft-touch inquiry that asks taxpayers to review their returns more closely;
• A correspondence audit; and
• An under-reporter notice and assessment, similar to the CP2000 automated under-reporter program used for individual income discrepancy adjustments.

The NATP reported that the IRS will send out about 20,000 letters to small businesses.




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