Another IRS form to deal with - Form 1099K (PDF). This IRS form is the result of the 2008 housing reform bill. The purpose of the form is to double-check that merchants are reporting all income from credit and debit card transactions and from use of third party organizations like PayPal. The IRS says the form is supposed to "increase voluntary tax compliance, improve collections and assessments;" in other words, to catch those businesses who don't report income.
The 1099-k forms are sent out by banks and other organizations after year-end to the IRS, with a copy to the business owner. Although the 1099-k is voluntary for smaller businesses (those with less than $20,000 in receipts and fewer than 200 transactions), many merchant card organizations send out 1099-k forms for just a few transactions.
The Wandering Tax Pro, Robert Flach, recently discussed the most important issue with Form 1099-K. That is, the form reports to the IRS the total sales transactions for that retailer, but it doesn't show discounts, chargebacks, returns and allowances. It's up to you to keep track of these and be able to prove them, to reduce your income. Flach says, "with the Form 1099K rules it is more important than ever for the small business owner to keep super-detailed records of all receipts and disbursements." AMEN!
TaxGirl Kelly Phillips Erb also discussed the issues with the 1099-k a while back, noting that it may be difficult to argue with a large banking institution about the amount of reported income on this form.
So, what does Form 1099-k mean for your business?
1. When you get 1099-k forms in early 2013, look them over for accuracy and put them with your other tax records for your tax preparer.
2. Make sure you have excellent records on all reductions to income via credit/debit card or other in-store and online transactions, so you can verify any differences between what is shown on these 1099-k forms and what you show as net income.
More details on Form 1099-k and Your Business Tax Return
More on Regulations for Merchant Account Reporting from William Perez at Tax Planning.