Tax Lawyer's Blog

In my previous blog post I wrote about the IRS’s issuance of proposed regulations on the new credit card transaction 1099 reporting requirement.

I am dubious of the usefulness of the new reporting requirements because I don’t think they will achieve the IRS’s stated goal of finding unreported income.

Historically corporations have been exempt from the 1099 reporting requirements. The primary reason for the exemption is that a strict reporting requirement would impose an undue burden on businesses (especially large ones) if they had to report everything they paid to their vendors and suppliers during the tax year.

But there is another reason for the traditional corporate exemption from 1099 reporting and it’s one that is especially applicable here: The great majority of businesses accept payment for their services in a combination of the following forms:

1. Cash,
2. Bank drafts,
3. Wire transfers,
4. Barter and
5. Credit card payments’

Let me illustrate with an example:

A corporate taxpayer, Tax Cheat, Inc., has gross receipts in 2011 of $500,000 comprised of the following:

• Cash                   30,000
• Check                300,000
• Wire                    20,000
• Credit Card         150,000

Tax Cheat’s merchant services provider complies with the proposed regulations and files a form 1099-K with the IRS showing the $150,000 of credit card payments it made to Tax Cheat. 

Tax Cheat reports gross receipts on its corporate income tax return of $400,000 instead of the correct amount.

Because the amount reported on Tax Cheat’s return exceeds the amount of credit card receipts reported to the IRS on 1099-K, the IRS’s computer matching program will assume that Tax Cheat properly included the full amount of its credit card receipts on the gross income line of its tax return and the return will not be flagged for audit.

So, as long as the amount of gross receipts corporate taxpayers report on their tax returns is greater than the amount they receive from credit card transactions reported to the IRS on Form 1099-K, they will still be able to get away with understating their taxable incomes.

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