Yet another new compliance task is now confronting AP and tax departments around the country. That being handling new IRS notices sent out to information reporters when filed Forms 1099-K may lead the IRS to believe that your organization has underreported, or when the IRS may have "other questions" about the returns your organization has filed in recent weeks.

What is the main trigger point for an IRS decision to issue a notice to your organization? It's really quite simple as these questions typically come when the IRS determines that your tax return and the Form 1099-K that your organization received demonstrate together that your organization has an unusually large portion of its receipts from card payments and other Form 1099-K reportable transactions.

Before we get into further details about the new notices remember that IRS Form 1099-K "Merchant Card and Third-party Network Payments" is a relatively new information return that reports payment card and third party network transactions. Your organization has been receiving such information returns for the past couple of years. However, it has only been recently that the IRS has begun firing up a new compliance regime aimed at helping to further close the tax gap by leveraging the information the IRS is now learning about your organization via filed Forms 1099-K. To that end, in 2012 the IRS started looking at business return Forms 1120, 1120S and 1065 for purposes of matching up business return income reported on those forms with what is reported on Form 1099-K. From there, and in November 2012, the IRS began actively questioning Form 1099-K recipients whose income reported fails to match IRS expectations based upon an IRS analysis done stemming from what was reported to them on the Form 1099-K. 

This questioning takes many forms, but most likely those being targeted can expect to receive IRS inquiries; potentially including new IRS Letters 5035, 5036, 5039 or 5043 - all of which relate to the possibility of an IRS finding that your organization under-reported. Each letter requires a particular response under the law; some require a response that includes a particular and detailed set of information that you will have to research and provide - others do not. Is your accounts payable and/or tax team trained and ready to respond? For instance, does your team know which notices not only need to be responded to, but what information needs to be included with the response, how the response is to be made, and how much time you have to repond to the IRS?

If your organization's AP and/or tax department require additional training or has questions regarding effectively processing such notices and setting up systems to better handle the increased compliance load then please note that our TIR Answer Center is a unique subscription service providing you with your very own on-call corporate tax attorneys who answer all your questions in two business days or less. We are already helping our current subscribers answer questions regarding such notices. Also note that TIR Answer Center subscribers enjoy substantial discounts off our customized training programs when more detailed instruction on changes in the law is needed. For more information please do not hesitate to ask!