Use of Credit Card Data to Trigger Tax Audits

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On behalf of Silver Tax Group posted in IRS Tax Audits on Wednesday, October 11, 2017.

Reasons for tax audits

There are already lots of reasons why the IRS audits returns of taxpayers. This can include irregularities in accounting, willful and even non-willful mistakes, failure to submit proper forms, and questionable deductions.

There is also another reason for tax audits. In 2008, Congress passed legislation requiring reportage of payment card transactions. Such transactions involve credit cards, debit cards and stored-value cards.

Form 1099-K

As a result of this legislation, taxpayers fill out Form 1099-K for documenting these transactions. Payers need to report payment transactions on this form. More importantly, the law requires those receiving payments also receive the same information.

Form 1099-K allows the IRS to make comparisons between sales from payment cards to the receipts reported on tax forms. This includes payments through PayPal and other third-party networks. When discrepancies arise between the payments recorded on Form 1099-K and income reported on returns, this can lead to an IRS tax audit.

When reviewing samples of taxpayers filing a 1099-K, the Treasury Inspector General for Tax Administration (TIGTA) found many discrepancies. In 20,881 instances, there was a discrepancy of more than $10,000 between reported income and amounts on the 1099-K. Determining why such discrepancies exist may be difficult, however. According to a TIGTA official, the only means for determining such discrepancies may be through an audit.

Michigan taxpayers will want to avoid tax audits if at all possible. Audits lead to fines, penalties and criminal charges. And if already facing an audit, legal representation is highly recommended to mitigate the consequences.

With legislation such as this, we are likely to see more tax audits in the future.

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