Recently, the Treasury Inspector General for Tax Administration (TIGTA) advised the Internal Revenue Service (IRS) that it was losing billions of dollars in tax revenue due to unreported and underreported 1099-K income. A report released on December 30, 2020, explained the methods TIGTA used to find unreported 1099-K income, TIGTA’s recommendations, and the IRS’s plans to address this part of the tax gap.
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If you have 1099-K income, you need to understand what is happening. Here is a breakdown of the essentials.
What Is the 1099-K?
The 1099-K is an information return used to report payment transactions from payment cards and third-party network transactions. Designed to help reduce the tax gap, this form was rolled out in 2012 for payments received during the 2011 tax year.
Payment settlement companies must issue this form to anyone who receives over $20,000 in payments and over 200 transactions during the tax year.
To give you an example, if someone receives $30,000 in payments in 100 different transactions, they will not receive a 1099-K. However, if someone receives $25,000 in 400 different transactions, they will receive a 1099-K. You must meet both conditions for this form to be issued.
TIGTA Discoveries About 1099-K Income
TIGTA discovered several issues related to unfiled returns or underreported income from individuals and businesses that received 1099-K forms. Take a look at some of the group’s key observations:
314,586 business taxpayers with a total of $335.5 billion in 1099-K income did not file tax returns but were not identified as nonfilers by the IRS.
62,087 individuals with $575 million in 1099-K income did not file tax returns but were not identified as nonfilers by the IRS
325,060 business non-filers with $203 billion in 1099-K income were not contacted by the IRS
103,991 individual non-filers with $3 billion in 1099-K income were not contacted by the IRS
The IRS did not work cases from 45,169 businesses that had at least a $10,000 discrepancy between the amount reported on their form 1099-K and the amount reported on their tax return, leading to $73 billion in unreported income
According to TIGTA, the IRS could recoup $5 billion in taxes just by focusing on cases related to businesses with over $1 million in 1099-K income and individuals with over $100,000 in 1099-K income.
TIGTA made seven recommendations and the IRS agreed with the following three:
1. Re-evaluate start date criteria for reviewing newly created entities
The IRS’s current start date criteria allow businesses that opened during the tax year to slip through the cracks, but if the agency re-assessed the information it uses to establish start dates, it could find new businesses that received 1099-K income for a portion of the year.
TIGTA estimates that approximately 36,028 businesses with nearly $4 billion in 1099-K income fell into this category. Even if the IRS only focused on the 509 new businesses that received over $1 million in 1099-K income, it could recoup taxes on $1.41 billion of income.
2. Define high-income business non-filers.
In 2018, the IRS created a new strategy for dealing with nonfilers, but although the strategy defines high-income individual non-filers, it does not define high-income business non-filers. To improve its nonfiler strategy, the agency has agreed to define this category.
3. Work a percentage of the individual nonfiler cases identified by TIGTA
TIGTA identified 770 high-income individual non-filers with 1099-K income of $100,000 or greater. The IRS said that it was not working on these cases because the adjusted gross income (AGI) of the majority of these taxpayers was under $100,000.
However, TIGTA argued that at least a percentage of these cases should be worked as they almost all showed AGIs of over $92,000. The IRS has agreed to work on a percentage of these cases.
What Does This Mean for Taxpayers?
To put it simply — the IRS is paying attention to 1099-K income. If you or your business has not been reporting 1099-K income, consult with a tax professional, and report this income.
Reaching out to the IRS is always better than waiting to be contacted. By making the first move, you put yourself in a position to minimize fees and penalties as much as possible.
If you regularly report 1099-K income, make sure that you have records supporting any discrepancies between the amount reported on your 1099-K and the amount noted on your tax return.
Discrepancies With 1099-K Income
In addition to being a relatively new tax form, the 1099-K can be confusing because it often contains income that has been reported on a 1099-misc form.
To explain, imagine that you sell items online and process payments through PayPal. Over the course of the year, you receive $25,000 in payments in 500 different transactions. At the same time, you also do freelance work for a company that pays you through PayPal. That organization pays you $10,000 in 10 different transactions through the year and it sends you a 1099-misc detailing the $10,000.
In this scenario, the payment processing company will issue you a 1099-K showing the total of all the payments ($35,000) you received over the 510 transactions. However, if you report the full amount from the 1099-K as well as the full amount from your 1099-misc, you end up reporting $45,000 even though you only received $35,000.
To rectify this issue, you need to report less than the amount shown on your 1099-K, but of course, the standard tax return has nowhere for you to explain the discrepancy. This can lead to confusion for both you and the IRS.
In the past, the agency has reached out to taxpayers who have underreported income from a 1099-K and assessed the entire tax liability related to the income noted on this form. To ensure you don’t face this issue, save all paperwork related to this income so you can easily protest the IRS’s assessment.
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