1099-K Business Return Reconciliation Eliminated

The Housing and Economic Recovery Act of 2008 required third-party payment entities, such as credit card companies, to begin filing informational returns with the IRS reporting merchant card transactions, such as credit and debit card payments. The purpose was to give the IRS the ability to match a business’s credit and debit card sales with the amount the business reported on its tax return.

This reporting requirement began for the 2011 tax year using the new IRS Form 1099-K. In addition, the IRS added a line to the various 2011 business returns to separately report income from credit and debit transactions. However, for the 2011 tax year the IRS instructed businesses to leave that line blank. This allows a one-year grace period for your clients to modify their bookkeeping and recordkeeping to enable them to reconcile their income between credit and debit card income and other sources of income such as checks and cash for 2012.

This reconciliation requirement added a substantial bookkeeping burden to businesses, especially small businesses, and many trade and business associations across the nation have been lobbying the government to drop the 1099-K reconciliation requirement.

On February 9, in a letter to the National Federation of Independent Businesses, Steven Miller, Deputy IRS Commissioner, stated that the 1099-K entry line will be dropped from the 2012 and all future business returns, eliminating the need for businesses to reconcile their incomes with the 1099-K informational reporting.

You can now advise your clients that they need not worry about reconciling the differences. However, make them aware the IRS is still receiving 1099-Ks reporting the business’s credit and debit card income.

On a cautionary note, the IRS is expected to develop models of various business types so they can extrapolate the credit and debit card income and arrive at estimated gross income for various types of businesses. This will help them select their audit targets.

  • Lee Reams Sr.

  • Lee T. Reams is the Chief Technical Officer of ClientWhys. He is also an Enrolled Agent having managed a 600-plus client tax practice. Educated as an engineer, with a Bachelor's Degree in Mechanical Engineering, Lee left his engineering career in 1975 to expand his part-time tax practice into a full-time career.

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