Historically, the revenues that small businesses receive through credit card payment processors have not been readily visible to the IRS. That’s going to change starting in 2011.
Starting in 2011, the gross amount of payment card and third-party network transactions will be recorded on a new IRS form, form 1099-K. In rolling out the new 1099-K form, the IRS is attempting to improve voluntary tax compliance by business taxpayers.
Currently, the tax system is more of an honor system than most might like to admit. Without visibility into a small business’ credit card revenues, the IRS must take the business owners word that they are reporting all taxable revenues.
In lieu of the IRS having access to information about credit card revenues and other electronic payment processing revenues, the IRS only has one tool to combat tax cheats who underreport revenues: an IRS audit. However, this is not a foolproof system because it requires scarce human resources to conduct a thorough IRS audit.
“Time and time again, we have seen that better information reporting helps the tax system work better by ensuring that everyone pays what they owe,” said IRS Commissioner Doug Shulman.