Payment Card and Third-Party Payment Transactions (Code Sec 6050W)
Payment settlement entities (e.g., a bank) have to make an annual information report in settlement of reportable payment transactions (e.g., a credit or debit card transaction) and transactions settled through third-party payment networks, such as third-party organizations (e.g., PayPal or Google Pay (previously Google Wallet)) that settle online transactions to the merchant and the IRS stating the gross amount paid to the merchant during the previous calendar year. Form 1099-K is used for this reporting.
We can probably expect IRS to develop statistics for various types of businesses related to the ratio of cash payments to credit payments as a means of imputing cash payments for merchants that do not report a reasonable amount of income over and above that reported by the payment processors.
TIGTA Report: IRS is Underutilizing Form 1099-K Data to Identify Tax Returns for Audit
| According to a September 2017 report from the Treasury Inspector General for Tax Administration (TIGTA), an IRS pilot program that used merchant card third-party reporting for the assignment of productive audits failed to detect the more obvious examples of noncompliance, and the IRS missed opportunities to audit tax returns with large discrepancies between payments reported on Forms 1099-K and the income reported on taxpayers’ tax returns. The IRS generally agreed with recommendations made by TIGTA that the IRS consider implementing compliance projects to test the use of Form 1099-K data to identify certain types of tax returns for audit. TIGTA also recommended that the Service identify and address the reasons tax returns with large discrepancies between income reported on tax returns and the amounts reported on Forms 1099-K were not selected for audit or other treatment. The IRS disagreed with TIGTA as to the magnitude of the issues. (TIGTA Reference Number: 2017-30-083) |
Currently, there is no requirement to separate the 1099-K amounts from cash receipts when entering gross income on Schedule C, E or F.
IRS Guidance When a Form 1099-K Is Incorrect
Taxpayers may receive a Form 1099-K for the sale of personal items, or Form 1099-K may have been issued in error – such as for transactions between friends and family, or expense sharing. If the information is incorrect on Form 1099-K, taxpayers should contact the issuer immediately. Taxpayers should keep a copy of all correspondence with the issuer for their records. If a taxpayer receives a Form 1099-K in error and the taxpayer cannot obtain a corrected Form 1099-K, the taxpayers should follow the IRS' updated guidance at Understanding Your Form 1099-K.
Currently, there is no requirement to separate the 1099-K amounts from cash receipts when entering gross income on Schedule C, E or F.
Payment Card
A payment card, as defined under the regulations, includes, but is not limited to, credit cards, debit cards, and stored-value cards (e.g., gift cards or similar cards with a prepaid value). A payment card also includes the acceptance as payment of any account number or other indicia associated with a payment card. A payment card issued in connection with a flexible spending arrangement or a health reimbursement arrangement is not exempted from the reporting requirements. The final regulations also clarify that the withdrawal of cash from an automated teller machine and the use of a payment card to obtain a loan or cash advance do not constitute payment card transactions. (Reg. 1.6050W-1(b))
Backup Withholding
If a merchant fails to provide his correct tax ID number and other required information for reporting, the merchant may be subject to 24% (28% before 2018) backup withholding on any payments forwarded to the merchant. (Notices 2011-88 and 2011-89) The lower 24% rate is a result of the revised tax brackets in the TCJA of 2017. Backup withholding that was made is reported in box 4 of the 1099-K.
On-line Business Transactions
If clients sell their merchandise through eBay accounts or other on-line businesses, they can expect transactions for those accounts to be reported.
Reporting Threshold
(Note IRS Notice 2023-74 on November 22, 2023 altered the thresholds)
For years before 2024 - No reporting is required by a third-party settlement organization with regard to a specific business unless the aggregate payments to the business from third-party network transactions exceed $20,000 and the aggregate number of transactions is 200 or more in the calendar year. This exception does not apply to payments in settlement of payment card transactions.
For tax year 2024 - The IRS is planning for a threshold of $5,000 for tax year 2024 as part of a phase-in to implement the $600 reporting threshold enacted under the American Rescue Plan (ARP).
For tax year 2025 - $2,500 (Notice 2024-85)
For tax year 2026 and subsequent years - $600 (Notice 2024-85)
Crowdfunding Campaigns
A crowdfunding website or its payment processor is not required to issue 1099-Ks, even if the $600 threshold is exceeded, if the contributors to a specific crowdfunding campaign did not receive goods or services for their contributions. (IRS Fact Sheet FS 2022-20 posted March 2022 on IRS.gov)