It's here: Form 1099-K business income matching

How to respond: This notice has the potential for an IRS underreporter assessment or audit. Respond to the IRS with one or more of the following actions, depending on your client’s situation:

• A description of inaccurate Form 1099-K information listed on the notice
• An amended return filed for additional gross receipts
• An explanation that the return and the Form 1099-K information shown on the notice are accurate, and an explanation for why the business’s gross receipts from card payments are higher than expected

Deadline: 30 days; the IRS provides a fax number for responding

Possible next actions by the IRS: The IRS does not specify its possible next actions with this notice. However, Publication 3498-A, The Examination Process (Examinations by Mail), is attached, indicating that if your client doesn’t respond to this notice, a discrepancy adjustment notice or a mail examination could result.

Letter 5039

Actions requested by the IRS: Review the accuracy of the information shown on the notice and the filed return. Complete Form 14420, Verification of Reported Income.

How to respond: This notice has the potential for an IRS underreporter assessment or audit. The IRS requires a completed Form 14420 in your response.

Deadline: 30 days; the IRS provides a fax number for responding

Possible next actions by the IRS: The IRS states four possible next actions:

• The IRS will contact your client if it needs additional information.
• The IRS might propose an adjustment to the taxes due.
• The IRS might send a letter stating that no further action is required.
• If your client doesn’t respond to the notice, the IRS might propose an additional tax assessment, underreporter assessment or audit.

Letter 5043

Actions requested by the IRS: Review the accuracy of the information shown on the notice and the filed return. File an amended return, if necessary.

How to respond: This notice has the potential for an IRS underreporter assessment or audit. Respond to the IRS with one or more of the following actions, depending on your client’s situation:

• A description of inaccurate Form 1099-K information listed on the notice
• An amended return filed for additional gross receipts
• An explanation that the return and the Form 1099-K information shown on the notice are accurate, and an explanation for why the business’s gross receipts from card payments are higher than expected

Deadline: 30 days; the IRS provides a fax number for responding

Possible next actions by the IRS: The IRS states four possible next actions:

• The IRS will contact your client if it needs additional information.
• The IRS might propose an adjustment to the taxes due.
• The IRS might send a letter stating that no further action is required.
• If your client doesn’t respond to the notice, the IRS might propose an additional tax assessment, underreporter assessment or audit.

Completing Form 14420, Verification of Reported Income

The IRS provides a new two-page form to reply to Letter 5039: Form 14420, Verification of Reported Income. The form requests:

• Verification of the accuracy of Forms 1099-K filed under your client’s name
• Estimates of gross sales by Form 1099-K reportable transaction categories (such as online, phone or catalog, gift cards, lottery tickets) to explain why the portion of gross receipts is higher than expected
• Information on other individuals or businesses that shared a card terminal with your client and would have received merchant card receipts reported on your client’s account

The IRS estimates that it will take three to six hours to prepare, copy and send Form 14420 to the IRS. The IRS expects to use Letter 5039 and Form 14420 in 5,600 pilot cases for 2011 returns. This could be a costly letter for your clients, when you consider the time needed to analyze your clients’ records used to prepare the return.

Business Information Matching May Resemble CP2000

Business information matching, including Form 1099-K matching, is a pilot program for the IRS. The IRS has released the letters on its website, but it hasn’t provided any details on how it will propose additional assessments.