Starting in January 2012, businesses that accept credit and debit cards when making sales to customers will receive an IRS tax form 1099-K from their credit card processing company. The 1099-K will report the total payment transactions for the year 2011. The new reporting requirement is part of on-going government efforts to increase collection of income tax.
The New Form
The IRS tax form 1099-K was created as part of the Housing and Economic Recovery Act of 2008 to increase compliance in reporting sales income by merchants. Because the IRS also gets a copy of the form, it will help the agency to determine whether or not business owners are reporting correct sales figures on their tax returns. Other legislation affecting reporting requirements was detailed in a May 1, 2011 article for Accounting Today titled, “1099 repeal eases some requirements, but leaves new ones for 2011.”
Regarding 1099-K reporting requirements, authors George G. Jones and Mark A. Luscombe said, “The reporting threshold is an aggregate value of third-party network transactions for a merchant of $20,000 or more for the calendar year and aggregate transactions of 200 or more. This reporting requirement is effective for sales made on or after January 1, 2011. Some taxpayers are also seeking waivers from these requirements.”
Not only must banks and credit card processing companies comply with the new reporting requirement, third-party networks such as PayPal and eBay, Inc. must also report total credit card transactions to their business customers who use their services to process online sales. Compliance may prove to be a major adjustment for these entities. PayPal, a subsidiary of eBay, Inc., generated more than $31 billion in total net payments in 2009, according to eBay’s annual report for that year.
Not every merchant will receive a form 1099-K; only those who generated both a minimum of 200 transactions and $20,000 or more in sales. Casual sellers should keep in mind that even though they may not receive a 1099-K, their sales income is subject to income tax and must be reported on their tax return. Knowing whether your online “garage sale” qualifies as a business in the eyes of the IRS can be tricky. According to writer Tom Herman, even an experienced IRS employee was found to have underreported her eBay earnings. In a May 30, 2010 online Washington Post article titled, “IRS wants a cut of online sales on eBay, Craigslist” Herman said, “As the IRS points out, income from auctions that resemble a garage or yard sale ‘generally’ isn’t required to be reported. But if an online garage sale turns into a business with recurring sales and purchases of items for resale, ‘it may be considered an online auction business.’ And the complexities can be manifold.”
Closing the Gap
According to Jones and Luscombe, the 1099-K filing requirement is just one method being looked at by Congress to close the tax gap — that is, the gap between the tax revenues that the government should be collecting and the actual collections. Another IRS form 1099 that some merchants may receive is the form 1099-MISC which is used to report payments made to independent contractors when total payments for the year are at least $600. In addition to income taxes, independent contractors must also pay their own Social Security and Medicare tax at a combined rate of 15.3 percent of their net self-employment income.
How big is the tax gap? According to a May 11, 2011 article for Reuters Money titled, “Do higher taxes encourage tax avoidance?” the IRS isn’t sure of the exact figure but the amount is significant. According to the article, “the Internal Revenue Service doesn’t have specific figures on the revenue lost each year to tax avoidance, but nearly a decade ago it reported a tax-gap of $345 billion, the vast majority of which was lost to under-reporting. That figure hasn’t been updated since 2001, though the IRS says plans are underway to release more current stats.”