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You all probably knew this was coming, I didn't. Have you seen anyone that has received a letter?

If you (generic you) are reporting all your sales, I don't see a problem.

The controversial new letter, bearing the heading of "Notification of Possible Income Underreporting," asks recipients to review their last year's tax return to confirm that all of their income was accurately reported. Recipients were selected based on information that the IRS has begun to collect about credit card and debit card transactions. To this point, the IRS acknowledges that it has sent approximately 20,000 letters to employers around the country.

The IRS is aiming to crack down on businesses that have reported a disproportionate share of receipts from card transactions in the belief they have may have omitted cash transactions, which are more difficult to trace and often go unreported. A form attached to the letter requires recipients to explain why the portion of gross receipts resulting from non-card payments appears unusually low for their type of business. It warns that a failure to respond to the request may result in detrimental action...

Beginning in January, 2012, payment settlement entities (PSEs) are required by the Housing Assistance Tax Act of 2008 to report on Form 1099-K the following transactions:
•All payments made in settlement of payment card transactions (e.g., credit card);
•Payments in settlement of third party network transactions IF:
-Gross payments to a participating payee exceed $20,000; AND
-There are more than 200 transactions with the participating payee.
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You all probably knew this was coming, I didn't. Have you seen anyone that has received a letter?

I have not. To my knowledge none of our clients have received it, at least that they've mentioned. I saw an article about it a day or so ago in the Wall St. Journal. They also mentioned the form that's requested to be returned, and I'm equally curious about that.

If you (generic you) are reporting all your sales, I don't see a problem.

The WSJ article mentioned that possible mismatches would occur with businesses that do all, or virtually all, of the sales and/or collections over the internet, where payments are received by credit cards and/or Paypal. (Payment processors such as Paypal are also subject to 1099-K reporting.)

AND if you're in that situation, it could be that the credit cards, Paypal, etc. will exceed 100% of your reportable income, if they include sales taxes and/or shipping or handling charges, and that depends on the businesses' accounting procedures in place. For example, sales taxes collected might be properly credited/posted to an accrued sales tax account. Likewise, shipping/handling charges might be offset against the related expenses.

This wouldn't be the case with most retailers, even most who take credit cards for most of their sales, as there will always be some consumers who pay by cash or check, for anything. But when IRS sees a business whose sales don't even equal the reported credit card or other online payments, they start to get excited. But, in the situation described, the 1099-K gross proceeds could be as much as 106-110% of actual sales. And that could be correct, but be perfectly innocent.

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