If you’ve been receiving more credit card payments in your small business lately, you may soon be getting a notice from the Internal Revenue Service.
Media reports suggest the IRS has sent out 20,000 of these 1099-K notices since fall 2012 mostly to small businesses.
Form 1099-K is the return on which small businesses must report “payment card and third party network transactions” including credit card payments.
The official IRS website explains the reason for the 1099-K notice this way:
You received one or more of these letters and notices because you may have underreported your gross receipts. This is based on your tax return and Form(s) 1099-K, Payment/Merchant Cards and Third Party Network Transactions that show an unusually high portion of receipts from card payments and other Form 1099-K reportable transactions.
Specifically, the IRS is targeting businesses whose ratio of credit card to cash seems unusual for their industry, a CNN report suggests. The agency seems to believe these higher than average credit card reportings mean businesses are underreporting cash receipts.
Trends Show Credit Card Payments Increasing
It’s certainly important for small businesses to accurately report their earnings and pay their fair share. But it’s also possible a simpler explanation exists for high credit card receipts.
Customers in the U.S. are increasingly choosing plastic to make their purchases and small businesses here are eager to accommodate.
According to recent data, point of sale cash payments are expected to decline to just 23 percent by 2017. Over the same period, credit card purchases are expected to climb to 33 percent. They were only 29 percent of point of sales purchases in 2011.
What’s more, 68 percent of consumers between ages 18 and 33 will only shop at businesses that accept multiple forms of payment including credit cards. So this trend is likely to continue.
Tips for Dealing with an IRS Notice
If you receive a notice from the IRS about your 1099-K reporting, don’t panic.
1.) Your income tax return should already include the earnings reported on your 1099-K as part of your business’s gross receipts. So the IRS recommends checking all your tax records to determine whether the agency’s assessment is correct.
2.) The IRS also suggests you talk with your tax professional if necessary for some assistance and to decide how to proceed.
Hiding Cash Photo via Shutterstock