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The Tax Practice of IIT Chicago-Kent College of Law
The Tax Practice of IIT Chicago-Kent College of Law


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New IRS Matching Program: Form 1099-K

Posted on in Internal Revenue Service

Form 1099-K, IRS, Chicago Tax LawyerBusiness tax preparation is becoming increasingly complicated each year.

According to a recent initiative by the IRS, all businesses that take credit card payments must now complete Form 1099-K: Payment Card and Third Party Network Transactions. This requires businesses to list, month by month, how much receipts they brought in through third-party payment methods, such as  credit cards, debit card swipes, and PayPal invoices. If the IRS believes, after analysis, that the amounts you are reporting on Form 1099-K are too small relative to your industry or business size, they will contact you and ramp up the inquiries.

Analyzing a 1099-K

Of course, there doesn't seem to be a lot to analyze in a form that essentially asks you for a monthly total of your third-party payments and little else, but the IRS is, of course, a step ahead.  For example, they have created a massive database of Taxpayer Identification Numbers (TINs) and real names, which is used in the analyzing process. A business owner submits his company’s transaction records (which include records of the names on each card swiped/payment made) and those records are potentially 'matched' with the receipts turned in under each of those individual TINs.

The idea here is that, by comparing what you're reporting as your income vs. what each individual customer is reporting as their outflow, the IRS will be able to more accurately determine who is misreporting and who is not. Of course, it's not as black-and-white as that for a number of reasons - the most obvious being that transaction records don't keep track of how much of a debit card transaction was 'cash back' that didn't actually provide any income to the business.

Which 1099-K Letters Should I Worry About?

Business owners all over the country are getting a variety of letters from the IRS about their 1099-Ks, and the letters are not always clear as to what the IRS expects you to do in response. Here is a quick summary:

  • Letter 5035: No response is necessary; simply review the information on your return.
  • Letter 5039: Review your return and complete (attached) Form 14420, Verification of Reported Income. You are at risk for audit if you do not reply within 30 days.
  • Letter 5043: Review your return and file an amended return or explanation of your existing return as necessary. Again, you risk an audit if you do not reply within 30 days.

Completing Form 14420

If you receive Letter 5039, get ready for an afternoon of work; filling out Form 14420 is estimated to take 3-6 hours to complete. During that time, you'll be asked to break your 1099-K income down into transaction categories (online, phone/catalog, gift cards, etc.) and explain why any given category is higher than might be reasonably expected.

The Form 1099K matching program impacts numerous businesses, particularly restaurants, and even some small online merchants and freelancers that accept compensation through vendors such as PayPal.

If you are uncertain about how this program affects your business and/or you need help with form preparation and completion, Chicago-Kent Tax Clinic offers low-cost tax preparation and audit assistance for individuals and small businesses. For further information and/or a free consultation with one of our experienced Chicago tax attorneys, contact our office today at 312-906-5041.


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