Freed from the Burden

Understatement of the year — the tax code is complicated. Have you ever looked at the instructions to most tax forms? The IRS prints an estimate of the amount of time required to complete the form – or as they call it on the Form 1040 an “estimated average taxpayer burden.” The 2011 Form 1040 estimates a burden of 22 hours and an average cost of $290. No joke!

Not content to leave well-enough alone, a new form was developed for the 2011 filing year – the Form 1099-K. If Form 1099-K is not familiar to you, it is an information form requiring companies that process credit and debit cards, including third party network payment providers such as PayPal , Amazon and Google, to report to merchants the total transactions that they processed. There are exceptions – fewer than 200 transactions and less than $20,000—but lots of businesses have received these forms this year for the first time. By businesses, I mean big businesses, small businesses, nonprofits, and sole-proprietors.

So if getting new information forms wasn’t bad enough, the IRS had proposed requiring businesses to reconcile the amounts reported on Form 1099-K to their tax returns. Why is this a bad thing? Well, first the payment processors only have information about what amount of cash was transferred to settle the transaction. They don’t know anything about returns, sales tax, tips, store credits, etc. Second, tax reporting has never much cared how a business was paid – check, credit card, debit card, PayPal, cash, etc. In order to properly reconcile, I would assume that you need to split your receipts based on how the customer paid. Not fun!

The National Federal of Independent Business (NFIB) fought this proposal tooth and toenail. So this week’s announcement that the IRS will abandon its plan to require reconciliation should get a big “YEEHAW” from business owners – and maybe a thank you note to the NFIB. Despite the good news, caution is still in order. You may not have to formally reconcile on your return, but large discrepancies between receipts and Form 1099-K will likely trigger an inquiry from the IRS. So, use the information from the Form 1099-K to do a reasonableness check on your gross receipts.

Your tax burden just got a little lighter — quick step on the scales before the next IRS announcement that might not be as favorable!

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