The IRS Didn’t Forget about Casual Merchants: Expect Underreporting Notices in the Mail
Casual merchants might have some official ‘splainin’ to do. The IRS is taking a good, hard look at the gross receipts of food cart operators, mom-and-pop shops, swap meet participants, and sellers on online auction sites such as Ebay. If there appear to be any discrepancies, the agency will likely send out “soft letters” requesting additional information from those small business taxpayers.
Specifically, the IRS will be checking whether gross receipts – as reported by credit card companies and third-party networks – match up with income stated on tax returns. Since 2011, certain taxpayers have had credit, debit, and certain electronic transactions reported on Form(s) 1099-K, Merchant Card and Third Party Network Payments. A high amount of receipts that appears on this form, but not in income levels on the tax return, is obviously going to raise eyebrows.
Thus, a soft letter means the taxpayer isn’t in trouble (yet), but the IRS wants answers. After all, the IRS knows there are legitimate reasons why a merchant’s numbers might not add up with the third parties’. For example, there could be a difference between parties’ calendar year versus fiscal year accounting systems. Or it could arise from the fact that Form 1099-K does not take into account on sales returns and refunds processed by the merchant, or a merchant’s cost of goods, or other legitimate deductions from gross income.
These valid excuses are exactly why the IRS plans to begin with soft letters of inquiry. If the taxpayer agrees with the assessment of underreporting, the IRS will request that they amend their returns. The goal is not punish taxpayers, but to increase voluntary compliance.
Sufen Wang, M.S.Accountancy
Wang Solutions, Long Beach, CA (562) 856-0793
Wang Solutions 
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Great article. Thanks for the info, you made it easy to understand. BTW, if anyone needs to fill out a form 1099-K, I found a blank form here http://goo.gl/Tw1d5v. This site PDFfiller also has some tutorials on how to fill it out and a few related tax forms that you might find useful.