The Internal Revenue Service (IRS) has long been matching individual tax returns against information statements to identify under-reporting. It is now using information statements to find under-reporting on business returns.
In September 2012, the IRS started its first information return matching program for business returns Forms 1120, 1120S, and 1065. This program matches business return incomes to the total amounts reported on all information returns.
Business taxpayers began receiving Form 1099-K, Merchant Card and Third-Party Network Payments, which reports amounts received from payment settlement entities such as debit/credit cards and network payers such as PayPal. The IRS does not require taxpayers to separately report amounts from Form 1099-K on returns.
It is, however, questioning businesses with smaller-than-expected income based on its analysis of Form 1099-K reported by the business. The IRS cannot propose specific adjustments to returns, because it cannot match Form 1099-K directly to line items on business returns. Instead, it will contact taxpayers when it thinks that there is a discrepancy. The IRS determines this probability based on the taxpayer’s line of business and a perceived disproportionate share of credit/debit card and third-party payments reported on Form 1099-K, compared with gross receipts from other sources reported on the tax return.
The IRS has indicated it will pursue three compliance initiatives:
- An inquiry that asks taxpayers to review their returns more closely,
- A correspondence audit.
- An under-reporter notice and assessment.
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