IRS Has Another Way To Levy

You may know that – if you fall behind on your taxes – the IRS may draft your bank account or garnish your wages. These actions are called “levies.”

The IRS has a new revenue source to levy.

If you sell on eBay or Amazon, or accept PayPal, you may have received a Form 1099-K. The 1099-K reports monies paid to you, if you exceed a certain dollar or number-of-transactions threshold.

There are new instructions to IRS revenue officers.

1.      They now have another address at which to contact you, should you have moved and disappeared from their radar.

2.      They now can levy those eBay, Amazon or PayPal payments, if you owe the IRS money and have not entered into a payment plan. They will levy future payments until the taxes are fully paid.

The 1099-K is joining the long-established levy program on W-2s and bank accounts. The levy program on 1099-Miscellaneous (that is, independent contractor) income has also been around for a while.

IRS Small Business Audit Areas

The IRS has announced selected business areas it is prioritizing for audit this upcoming fiscal year. The IRS is increasingly focused on small business underreporting, which it considers responsible for the majority of a $450 billion tax gap. Here are the areas:

1.      Fringe benefits, especially use of company cars

The IRS is finding that employers are not correctly reporting employees’ personal use of company vehicles on Forms W-2.

2.      Higher income taxpayers

The IRS will focus on self-employed taxpayers with gross receipts (that is, before expenses) of more than $1 million.

3.      Form 1099-K matching

Forms 1099-K report payments from credit cards and payment clearinghouses (such as PayPal). The IRS granted a reprieve for 2012, but it announced that it will start Form 1099-K matching in 2013.

4.      The small business employee health insurance tax credit

The IRS wants to make sure that small business employers and tax exempts are complying with credit eligibility requirements.

5.      International transactions

The IRS has announced its third voluntary foreign bank account initiative and intends to look for offshore transactions.

6.      Partnership returns reporting losses  

This is a new area of emphasis. Expect the IRS to look into partnerships reporting large losses.

7.      S corporations reporting losses and reasonable officer compensation

The IRS will be looking at S corporations claiming losses, looking for losses taken in excess of shareholder basis.

The IRS is also interested in profitable S corporations reporting little or no salary to officers.

8.      Proper worker classification

The IRS is interested in employer treatment of worker versus independent contractor status. The IRS thinks there is significant noncompliance in this area.

Form 1099-K Reconciliation Cancelled

The IRS has decided that businesses will not be required to reconcile their gross receipts with merchant card transactions reported on the new 1099-K form.

Steven T. Miller, IRS deputy commissioner for services and enforcement, wrote to the National Federation of Independent Business that no reconciliation will be required on 2012 or future business tax returns. Last October the IRS had earlier said that no reconciliation would be required for only the 2011 tax returns.

In the way of history, the Housing and Economic Recovery Act of 2008 required the IRS to begin collecting a new Form 1099-K from payment-settlement entities, such as credit card companies, for merchant transactions such as credit and debit card payments. The payment settlement entity is required to issue a 1099-K to a merchant if the merchant’s business for the previous year exceeded either $20,000 or 200 transactions.

Why would businesses complain? Well, for one, if the taxpayer identification number and legal name do not match with IRS’s files, there is back-up withholding of 28% of the transaction. How is the business to account for refunds or returns? For sales taxes? How is the 1099-K to be reconciled with accounting systems which are geared to track sales by product or type, not by payment type? How will one account for fiscal years, when the 1099-K’s will all be on a calendar year? And who is going to pay for the accountant to reconcile all this nonsense?

The New 1099 For Credit Card Reporting

It’s been over a year since we talked about the new IRS Form 1099-K. This was part of the Housing Assistance Act of 2008, and it was to – at least partially - “offset” the cost of the first homebuyer’s credit.

This is Congress passing laws, mind you, so the reporting did not apply until sales made on or after January 1, 2011. This means you may be receiving this new 1099 during the 2012 tax filing season.

Let’s talk about the “why” for this form.

Say that you are a vendor on eBay or Amazon. It used to be that eBay or Amazon did not have to send you a tax reporting form. Why would they? They did not pay you; rather, a number of buyers using eBay or Amazon paid you. Let’s use another example. Let’s say that you use PayPal or Google Checkout on your website. As a third party payment network, they did not have to report the transaction. Why would they? They did not pay you; they just processed the transaction whereby some else paid you.

This caught the attention of a Congress that has all but gone through our sofa cushions for the next thing to tax.

So, let’s say that you are selling stuff on eBay or otherwise accepting payment through PayPal. Will you receive a 1099-K? It depends. If you have sales of less than $20,000 a year or fewer than 200 transactions per year, then 1099-K reporting will not be necessary.

The look and feel of Form 1099-K is very similar to Form 1099-INT used by banks to report interest and Form 1099-DIV used to report dividends.

Are we are expecting problems with the new 1099-Ks? Oh yes. The 1099-K will include sales tax and shipping charges, for example. The 1099-K will report the gross amount of payment card and third-party network payments, so one has to be careful with the reporting of refunds. The IRS is already talking about segregating receipts on different lines of the tax forms so that they can match to the 1099-Ks. When you consider that the IRS has a computer-matching program that generates notices without the intercession of human eyes, this may well be a disaster waiting to happen.