January 26, 2018 | Posted in:

Do credit card transactions increase audit risks?

Time to get serious about Form 1099-K.

Small business owners beware: the IRS may more closely scrutinize reporting of credit card transactions after it was criticized for lax enforcement.
The IRS’ overseer, the Treasury Inspector General for Tax Administration (TIGTA), recently said the IRS had been missing opportunities to audit tax returns that had large discrepancies between income and the card payments reported on Forms 1099-K.

“The TIGTA could be considered the IRS auditor,” explains Associate Partner Ren Cicalese III, CPA, MST. “The TIGTA reviews and reports on the policies and procedures in place at the IRS. The TIGTA will often make recommendations on how to improve efficiency within the IRS.”


This means small businesses that accept credit, debit or gift card payments can expect to draw the attention of IRS auditors if there are material differences between what is reported on their tax returns and what is on their 1099-Ks.

Tax gap concern driving the scrutiny


TIGTA has estimated an underpayment of more than $450 billion in income taxes every year. In an effort to close this “tax gap,” it recommended the IRS focus on some of the larger or more obvious sources of underpayment.

One area TIGTA identified was on Forms 1099-K, where more than 20,000 taxpayers who received them had discrepancies of more than $10,000 on their returns. Calculating from these minimum numbers, there was at least a $200 million underpayment.

“Unfamiliar with Form 1099-K?,” asks Ren III. “It’s a form that is provided to you by any payment processor. A 1099-K breaks down the amount of money you’ve received through card payments throughout the year. These forms are provided to the IRS, so they have the ability to match up your tax return with the information on this form.”


Who is impacted

If you have a business that accepts payment cards like debit cards or credit cards, you will probably receive a Form 1099-K from your payment processor. The form is also required for anyone who has $20,000 in card payments and 200 transactions or more per year. Examples of those who would receive Forms 1099-K include users of PayPal, sellers on Etsy, cab drivers and any small business that accepts card transactions as a form of payment.

Here’s how you can prepare

Receiving a Form 1099-K and reporting it in such a way that the IRS is satisfied can be complicated. You could easily double-report your revenue from 1099-Ks out of an excess of caution. Or, you may be not be disclosing your correct reporting of card income in a way that IRS audit programs are able to identify.

“If you receive a 1099-K, it is important that you provide this information to your CPA,” stresses Ren III. “He or she will use to report the correct amount of revenue on your tax return. Remember, the IRS will receive a copy of the 1099-K so the will be looking for this information.”


It’s often best to get professional guidance to ensure your return does not stick out when the IRS tries to comply with the TIGTA request for more oversight.

Manager Chris Cicalese, CPA offer the following advice: “One thing to look out for is for credit card sales that never hit your bank account. These may get overlooked and not reported in your sales, which could appear as if you are underreporting sales. A common reason for this would be if you obtained some form of merchant loan with a credit card. In this instance, when your processor receives the payments they may be directly sent to the credit card carrier rather than transferred into your bank account to be paid to the carrier.”


For more tips on credit card best practices and ensuring compliance, contact an Alloy Silverstein team member today.

The information contained in this newsletter is of a general nature and should not be acted upon in your specific situation without further details and/or professional assistance. For more information or for assistance with any of your tax or business concerns, contact our office at 856.667.4100.


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