IRS Relaxes Treatment of 1099-K

The IRS relaxed its approach regarding the new 1099-K, which has instilled both relief and confusion for merchants with respect to their credit card payment processing.

First, a disclaimer: I am not a tax accountant or a tax expert, and I didn’t even stay at a Holiday Inn Express last night. Please consult a true tax expert to get a comprehensive assessment of the impact of the new 1099-K. With that out of the way, I will share some recent news from the IRS.

What changed?

Previously, the IRS had modified tax forms so that merchants could report the amounts from the 1099-K. For example, both the 1120 and Schedule C have a new line 1a, “Merchant card and third party payments.” However, the IRS recently issued guidance to essentially ignore this new line. Businesses are now instructed to enter zero for line 1a, and include all income, regardless of how it was received, on line 1b, “Gross receipts or sales.”

In other words, merchants are not required to report the exact amount from their 1099-K. This is good news because merchants won’t have to reconcile potential discrepancies between the 1099-K and their own accounting records. However, the IRS still has a copy of the 1099-K, so they will no doubt notice any major differences.

Why did it change?

I don’t know the official reason, but I suspect the IRS has realized the enormous complexity involved in the new 1099-K, and the confusion it has created. The largest payment processor had to request an extension from the IRS because it could not produce the 1099-K on time for its merchant services customers.

While we delivered our 1099-Ks on time, I can attest to the fact that it was extremely complicated and has caused considerable confusion among merchants. Because of the arcane rules for the data reported on the 1099-K, some of our merchants think their 1099-K is wrong even though it accurately complies with the IRS requirements.

I believe the IRS feared a backlash from confused businesses and tax preparers across the country, and decided at the last minute to relax its approach for 2011. The new treatment should reduce the stress level for business owners and tax accountants who are not sure how to handle the new 1099-K.

What will happen next year?

A recent FAQ posted by the IRS hinted that they may not require reconciliation of the 1099-K in future years. If that holds true, then I wonder if the IRS will remove the new line 1a from the tax forms. In addition, it’s possible that the IRS could further postpone backup withholding and penalties regarding the 1099-K, each of which are scheduled to take effect next year.

For now, businesses can breathe a sigh of relief regarding the tax treatment of their credit card payment processing. Stay tuned for additional updates from the IRS.

Are you getting questions from your merchants regarding the 1099-K? Is your merchant services provider helping to educate you and your merchants about these evolving IRS requirements? Please tell us about your experience.