Banks and other payment settlement entities must file Form 1099-K. The 1099-K form has the total gross amount of the year transactions on it. It also includes the name and address of the recipients and the taxpayer’s identification number.
This form will help the IRS by being able to compare the amounts associated with the credit card holder and their income from the tax return filed, thus “reducing the tax gap” according to the IRS.
The IRS will issue letters to any business person who shows an unusually high portion of receipts from card payments and/or other reportable 1099-K transactions.
There will be five different kind of letters sent out by the IRS. Depending on the letter, there will be different instructions given. Follow the instructions and/or talk to your tax advisor.
Taxpayers are warned that “failure to respond may also result in a proposed assessment or further compliance action”.
Keeping good records is very important in the 1099-K compliance process. Talk to your tax advisor for further information and advice regarding this issue.