Responding to an outcry from small-business concerns, the Internal Revenue Service has eliminated what the National Federation of Independent Business (NFIB) called an “onerous and unnecessary extra step” regarding how credit- and debit-card payments are accounted for on tax returns.
The Housing and Economic Recovery Act of 2008 currently requires companies to explain any disparities between their own records of receipts for payment-card transactions and the numbers that their payment-card processors report to the IRS. Starting this year, it also requires payment processors to report the sum of transactions for each of their merchants in monthly increments on 1099-K forms.
Beginning next year, the IRS would have required companies to explain the differences between the 1099-K numbers and their own internal records on their tax returns. This new process was an attempt “to increase voluntary tax compliance, improve collections . . . and thereby reduce the tax gap,” said the IRS.
But after meeting with the NFIB and other industry groups, the IRS has agreed to strike the requirement that companies reconcile the two numbers. The agency has no intention of requiring reconciliation, either in 2012 or in future years, IRS deputy commissioner Steven T. Miller said in a February 9 letter to the NFIB.
Business groups had protested the rule, saying it would increase the administrative burden on businesses. A company’s internal record of gross receipts would rarely match the amount its payment processors would report on 1099-K forms, because the 1099-K figure could include cash refunds, sales tax, tips, and other fees that merchants would not consider part of gross receipts.
Payment processors will continue to submit 1099-K forms, which means that companies may have to change the way they keep their records, according to Lewis Taub, tax director at McGladrey & Pullen LLP. Variance between gross receipts on merchant tax returns and the numbers on payment-processor forms could raise red flags and possibly trigger an audit, Taub warns.