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What is IRS Form 1099-K?

Form 1099-K is used to report transactions from third party networks as well as payment card processors such as Paypal. The IRS made 1099-K information returns a new requirement in order to increase compliance and improve the reporting of online transactions. The IRS has said that information reporting improves tax compliance as well as collections.

Merchants with gross sales over $20,000 or 200 transactions per year must have 1099-K forms issued for them by their payment settlement entities (PSEs). Paypal and other banks are PSEs, and sometimes PSEs will issue Form 1099-K for merchants with just a few transactions. A copy of Form 1099-K is sent to both the merchant and to the IRS.

The merchant has a strong incentive to report the correct information to the IRS in order to reduce the chance of an audit or notice. Prior to 1099-K reporting requirements, many merchants did not report accurate income to the IRS since online transactions were difficult to verify except by bank statements. Now, eBay sellers and other online merchants will have their annual income from PayPal and/or other PSEs reported to the IRS. Prior to the 1099-K form, similar transactions were reported on a 1099-MISC form, however the 1099-K Form should now only be used by PSEs for reporting.

Some merchants have expressed concern over the new reporting requirement. This is because transactions are reported sometimes without including charge backs, returns, customer adjustments, and allowances. The merchant is required to keep track of those separately. Once a merchant receives a 1099-K form it should be sent to their tax preparer along with other transaction records so that charge backs, returns and allowances can be included.

The IRS may send a notice related to Form 1099-K if gross receipts are thought to be underreported. If a notice is received, the IRS recommends completing any worksheets related to the notice, consulting a tax professional, and gathering records. Notices also come with IRS contact information if the individual wishes to contact the IRS. It is possible that discrepancies can be explained through issues like chargebacks and returns, but a tax professional should be consulted in any case.

The requirement for 1099-K reporting began in January of 2012 as a part of the Housing Assistance Tax Act of 2008. 1099-K forms must be sent to merchants by January 31 and paper 1099-K forms must be sent to the IRS by the last day of February. Electronically filed 1099-K forms are due by the last day of March, and can be filed through the FIRE option.

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Erich J. Ruth

Erich J. Ruth provides technical support for National Software which is the parent company for 1099FIRE. 1099FIRE develops and markets a comprehensive range of products that enables any size of business or institution to effectively manage and comply with year-end filing requirements. 1099FIRE is an employee-owned company located in Phoenix, Arizona.

If you have any questions or comments about our software, feel free to contact us at any time.

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