Under pressure from retailers and Congress, the Internal Revenue Service confirmed on Feb. 9, 2012, it will not require merchants to reconcile actual gross transaction receipts reported on their 1099-K forms with the aggregate gross receipts they report on their taxes.
The Housing and Economic Recovery Act of 2008 requires merchants to report the gross amount of yearly transactions to the IRS on form 1099-K. The reporting requirement went into effect Jan. 1, 2012. In October 2011, the IRS added a line to business tax returns requiring merchants to reconcile actual gross receipts with the aggregate gross receipts on their 1099-K report.
The National Federation of Independent Business strongly objected to the new reporting requirement because small businesses often don't have the sophisticated accounting systems needed to reconcile the gross receipts reported on the 1099-K form with the actual gross sales. For example, the NFIB noted that merchants often give cash back to customers using a credit or debit card. Gross receipts in this case may be overstated by the difference between the actual sale and the cash back. In another example, merchants often give customers cash reimbursements for returned merchandise. The gross receipt would not account for the returned item and refund.
Legislation introduced by Rep. Aaron Schock, R-Ill., and Rep. Bobby Schilling, R-Ill., on Feb. 1, 2012, would prohibit the IRS from requiring merchant transaction reconciliation. Mirror legislation was subsequently introduced in the Senate by Sen. John Thune, R-S.D., and Sen. Maria Cantwell, D-Wash.
"This is an unnecessary IRS requirement that will only lead to more accounting headaches for businesses," Schock said. "My concern is that the IRS is asking for flawed information from small businesses by requiring them to reconcile their internal numbers with that of third-party entities. When you take into consideration all of the types of merchant transactions that occur between a customer and a small business, all this adds up to unnecessary administrative costs, a new accounting burden and more time away from growing their business." Sen. Thune added, "The overreaching and unnecessary 1099-K tax reporting requirement will create a paperwork nightmare for small businesses already struggling in a weak economy."
Steven T. Miller, IRS Deputy for Services and Enforcement, responded to the concerns of the lawmakers and the NFIB in a Feb. 9 letter to Susan Eckerly, NFIB Senior Vice President for Public Policy. "There will be no reconciliation required on the 2012 form, nor do we intend to require reconciliation in future years," Miller wrote. "Our intention is that the reporting of gross receipts and sales on the 2012 income tax forms will be modeled on the 2010 income tax forms. No other changes to these forms related to payment card reporting are contemplated."
After the IRS backed down, Steve Dutton, a spokesman for Rep. Schock, said, "Overall this is a step in the right direction, but we won't know for sure until we see the 2012 draft forms that come out this summer. Businesses still need certainty that this issue won't emerge again sometime in the future. The Schock/Schilling and Thune/Cantwell bills provide a legislative fix to prevent this from ever becoming a reality." NFIB CEO Dan Danner said, "This is a small, but important victory for small business, and we appreciate the IRS working to alleviate the concerns of small-business owners on this issue. While NFIB was able to achieve this victory by working directly with the IRS, we were also closely working with the offices of senators Thune and Cantwell and congressmen Schock and Schilling to permanently remove this requirement."
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