If your business accepts credit cards, the credit card companies are now required to report all of your credit card receipts to the Internal Revenue Service using form 1099-K. The credit card companies are also required to send you a copy of this form. In a recent conversation with an IRS auditor, I learned that the IRS is implementing a special project to investigate taxpayer whose tax return gross income does not make sense in relation to the gross receipts reported on form 1099-K.
For example, if you are in the restaurant business and your 1099-K reports $1,000,000 of credit card receipts and your tax return reports $1,050,000 of total income, you may run into a little problem with the IRS. If that happens, and you are unable to convince them that all of your non-credit card receipts for the year are only $50,000, which is not very likely, your little problem may turn into a huge problem.
The moral of the story: be sure to accurately report all of your gross income, and provide copies of all 1099-K forms to your CPA. Then, if you are selected for an IRS audit there will be no surprises.
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