The IRS is trying to match up Form 1099-Ks reported by Merchant Service Providers and companies such as PayPal. Like we’ve mentioned before, most of the time, they aren’t going to match.
The IRS has just started sending out very nasty notes to businesses that don’t match, requiring them to do a reconciliation and submit it within 30 days. Congress is pushing the IRS to tone down the accusations, but it doesn’t mean you don’t have to comply.
You will have to do a reconciliation. And you’re going to have to do it fast.
Here are x things to do if you get a notice from the IRS regarding what they think is a mis-reported Form 1099-K.
- Contact your CPA right away. Your CPA should be able to make a phone call and get you a little extra time. Even if your records are impeccable, a reconciliation could very well take longer than the 30 days they’re giving you. Plus, remember it’s 30 days from the date of the letter. Add in time sitting in the IRS mail room and time for delivery, you probably only have an actual 23 days to get the reconciliation done.
- Contact your bookkeeper right away and get working on the reconciliation. Here’s a form we’re using:
A. Form 1099-K reported amount
B. Less refunds and chargebacks
C. Less amount not yet collected
D. Plus amount collected, but not reported on Form 1099-K
E. Total reported sales
- A. This is the total amount reported on the Form 1099-Ks. Remember if you have more than one Merchant Service Provider, you will receive more than one Form 1099-K.
B. This is the total of refunds and chargebacks you had in the year. The Form 1099-K is showing the total gross amount of charges, before any refunds or chargebacks. Show this as a negative amount.
C. This is where you put the total of charges that have not yet cleared. The Form 1099-K will show the total of charges as long as the sale date occrued in the calendar year. It does not show when the amount is actually put in your account. If you’re a cash-basis taxpayer it is not counted as income until it is in your account. This delay can be anywhere from 2 days to 2 weeks, depending on your contract and the merchant service provider’s terms. Show the amount that would show up as a sale for the Form 1099-K, but is not yet in your account as a negative amount.
D. Just like you’ll have sales at the end of the year that have not yet been collected, you’ll have collections at the beginning of the year that were shown as sales in the prior year. Show the total of amounts that were collected, but not reported on the Form 1099-K, as a positive amount.
E. Add up the column. This should agree to the sales you report. If not, it’s time to start digging, hopefully with the help of the bookkeeper you regularly use to help with your books.
There could be some additional items to add into the total for payment amounts received through channels that didn’t report on Form 1099-K.
If you receive the nasty note, don’t ignore it. And don’t call the IRS directly. They’re ready for your phone call and are prepared to pump you for more information. The last thing you want is to get drawn into a longer, more complicated audit.