The IRS implemented a new program for taxpayers who process a significant amount of transactions from credit cards and other third party vendors (such as PayPal). Such businesses are now required to submit a Form 1099K: Payment Card and Third Party Network Transactions. This give the IRS more detailed information about their electronic transactions. If after analysis, the IRS believes your reported transactions are too low; they notify the taxpayer about the discrepancy.

Individuals and businesses affected by the 1099K matching program are those who meet certain criteria:

• Gross electronic payments must exceed $20,000, and…

• The payee must receive more than 200 reportable transactions during the tax year.

A “reportable” transaction is one which is a payment card (such as a gift card or credit card) is accepted or a payment is processed electronically through a third party vendor. Electronic checks may be reportable, but traditionally drafted checks and cash transactions are not.

Many individuals and small businesses meet the criteria for 1099K reporting. Examples include restaurants, professional offices that accept credit cards (such as doctors, dentists, lawyers, architects, etc.) and many freelance contractors, affiliates and eBay sellers who accept credit cards, debit cards and PayPal for payments.

IRS 1099K Letters to Taxpayers

Individuals and small businesses throughout the country are receiving letters from the IRS regarding the information provided on their Form 1099K. These letters fall into four general categories:

• Letter 5035 Notification of Possible Underreporting: This is basically just an informational letter stating that the IRS believes there could be underreporting on your Form 1099K. You are asked to review the information on the form, and if it is accurate, no further response is needed. If inaccurate, you may need to file an amended return.

• Letter 5036 Notification of Possible Underreporting: In this letter, the IRS asks you to review the information on your Form 1099K and, if accurate, respond within 30 days with a written explanation as to why there is a discrepancy with your reported transactions and the information the IRS has. If inaccurate, you may need to file an amended return.

• Letter 5039 Notification of Possible Underreporting: This letter comes with an attached Form 14420 Verification of Reported Income, which must be completed and returned within 30 days to help explain the perceived discrepancy in your reported income. If the IRS is satisfied with your explanation, they will notify you letting you know no further action is required.

• Letter 5043 Notification of Possible Underreporting: Similar to Letter 5036, the IRS asks you to review the information on your Form 1099K and, if accurate, provide a written explanation within 30 days for the perceived discrepancy. If inaccurate, you may need to file an amended return.

The latter three letters must be responded to within the time frame allotted (30 days). Otherwise, you risk further action by the IRS in the form of a proposed underreporting assessment, additional tax owed assessment and/or an audit.

If you have received a letter from the IRS regarding the information reported on your Form 1099K and you are not sure how to proceed, it is important to seek professional advice so you can ensure full compliance. Speak to a professional tax accountant about your letter and the best path forward to squaring this matter with the IRS.