New IRS form emphasizes need for precise record keeping

A new form introduced by the Internal Revenue Service this year might have had some Auctioneers scratching their heads.

The form, though, won’t change the taxes you or your clients owe. It’s simply a reporting form designed to help the IRS collect more of the taxes taxpayers owe.

Effective with the 2011 tax year, Form 1099-K — Merchant Card and Third-Party Network Payments — is issued to anyone who has more than $20,000 in sales through credit cards or third-party payers and who conducts more than 200 such transactions per year, says Gil Charney, principal tax research analyst for the Tax Institute at H&R Block, Kansas City, Mo.

“An Auctioneer could receive as well as send a 1099-K,” he says.

Auctioneers receive the form from a bank that is a settlement processor for credit card payments if they meet the $20,000/200 transactions threshold, Charney says.

At the same time, you’re required to issue the form to your client sellers who meet the threshold and to send a copy to the IRS. That means it’s more important than ever to keep accurate records.

“Auctioneers must make sure accounting records, bank accounts and bookkeeping are sufficient to be able to identify sales by seller, by volume and by month,” Charney says. “If the seller’s volume exceeds the threshold, it’s up to the Auctioneer to issue the 1099-K. They will not know that unless they keep track.”

Since you might be required to issue a 1099-K form, it’s important to collect your clients’ tax identification numbers, Social Security numbers or other required identification numbers, Charney emphasizes.

“If the seller does not provide that information, he is subject to backup withholding,” he says, meaning you might be required to withhold proceeds from the seller.

But that provision won’t take effect until the 2013 tax year for payments made after Dec. 31, 2012.

Charney points out that merchants won’t be taxed on the amount shown on the 1099-K form, which reflects total gross proceeds received from credit card transactions.

“They’re going to be taxed on what is shown on their business tax returns,” he says. “It’s up to the one who receives the 1099-K to report deductions, allowances and so on.”

The 1099-K form is an attempt to eliminate taxable transactions that go unreported to the IRS, Charney says.

“This is a way of narrowing the $400-billion tax gap — the difference between what taxpayers should be paying and what they do pay,” he says.

The deadline for sending the forms to sellers whose volume exceeds the thresholds is Jan. 31 each year. The information must be received by the IRS on Feb. 28.

The requirement could have been much worse.

Originally, the IRS planned to require merchants to reconcile the amount of credit card sales shown on the 1099-K form with the amount of total sales shown on their tax form.

“IRS just recently relented because of pushback by organizations that the record keeping would be horrible,” Charney says.

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