How to answer or reply to IRS Letter 5036 regarding 1099K?

By Jeffrey Brooks, CPA, CFP, MBA for Jbrooks Wealth Advisors, PC, a Professional CPA and CFP Firm  jeff@jbrookswa.com  602-292-2009  Please consult with your professional tax CPA regarding your specific circumstances!

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Notice 2013-56 provides transitional relief from penalties for a filer reporting incorrect taxpayer identification number (TIN) information on information returns (Form 1099-K) and payee statements filed. The relief provided by this notice is available for certain errors on information returns and payee statements required to be filed or furnished in 2013, based on payments made in calendar year 2012. Relief also applies to certain returns and statements that are required to be filed or furnished in 2014, based on payments made in calendar year 2013. The IRS will grant relief provided the filer makes a good faith effort to accurately file the appropriate information return and the accompanying payee statement.

In addition, IRS notices informing payers that payee name and TIN combinations are incorrect (CP2100/CP2100A notices) will not be sent based on incorrect name and TIN combinations on 1099-K forms due before January 1, 2014. The notices with respect to payments subject to §6050W will be sent in late 2014 based on incorrect name and TIN combinations on 1099-K forms filed in 2014 for calendar year 2013 payments.

 

Like last year, the IRS once again is sending letters to small businesses questioning the possible underreporting of income. The letter contains the header “Notification of Possible Income Underreporting” and begins “Your gross receipts may be underreported.” The IRS matched the information reported on Form 1099-Ks that were sent to the business with income reported on the tax return. Last year, Letter 5036 and Letter 5039 were sent to small businesses and required the recipient to provide a written explanation, or a completed Form 14420, Verification of Reported Income, telling the IRS why the portion of the gross receipts from credit card payments and other 1099-K reportable transactions was higher than expected. One of the letters noted that failure to respond might result in a proposed assessment or further compliance action.

 

What do you have to do?  You will need to prepare an Excel spreadsheet that reconciles between those sales that went through credit card processing and those sales that did not such as cash payments. One of the reasons for the differences will be timing differences.  For example, the credit card processing might reflect a sale as in one year, while the revenues were recorded by you in another year. 

Here is what the letter looks like:

 

Dear

Your gross receipts may be underreported. Your tax return and Form(s) 1099-K, Merchant Card and Third Party Network Transactions, show an unusually high portion of gross receipts from card payments and other Form 1099-K reportable transactions. Your type of business consistently has a much lower portion of gross receipts from card payments and other Form 1099-K reportable transactions, and a higher portion of gross

receipts from other sources (e.g., cash and checks).

Listed below is the information reported to us:

 

 

Letter 5036 (9-2012)

Catalog Number 59960D

Department of the Treasury

Internal Revenue Service

Date:

Taxpayer Identification Number:

Form:

Tax period(s) ended:

Person to contact:

Contact telephone number:

Contact hours:

Fax number:

Notification of Possible Income Underreporting

Why you are receiving this letter

Your reported gross receipts are: $

Your gross amount of merchant card and third party network payments from Forms 1099-K

are: $

Below are the Form(s) 1099-K we received for your business and the corresponding Gross Merchant Card and

Third Party Network receipts for each form:

Form 1099-K Filers Reported 20 Gross Amount of Merchant Card and Third Party

Network Payments (Box 1)

Letter 5036 (9-2012)

Catalog Number 59960D

Sincerely yours,

 

Please review the information above.

If the information above isn’t accurate, notify us in writing of any inaccurate Form(s) 1099-K. Review all information used in preparing your tax return to ensure that you are reporting receipts from all sources, including card, cash, checks and other sources. Based on your review, if you want to amend your

Form to report additional gross receipts, complete and submit the attached Form .

If you believe you filed your tax return correctly, please provide a written explanation telling us why the portion of your gross receipts from card payments and other 1099-K reportable transactions may be higher than expected.

Return your response within 30 days from the date of this letter in the envelope we provided.

For additional information regarding Form 1099-K reporting, you can refer to the information available at

www.irs.gov by searching key words “Third Party Reporting Center.”

If you have questions, you can call us at the number shown above.

Thank you for your cooperation.

What you need to do

Enclosures:

Form 1040X, Amended U.S. Individual Income Tax Return and Instructions

Form 1120X, Amended U.S. Corporation Income Tax Return and Instructions

Publication 3498-A, The Examination Process (Examinations by Mail)

Copy of this letter

Return Envelope

 

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About Jeffrey Brooks

Jeffrey Brooks, CPA, CFP, MBA since 1976 has specialized in helping clients save significant taxes, help businesses increase their cash flow, revenues and profits while increasing their control and satisfaction. Jeff and his accounting firm sincerely cares about the happiness of his clients.

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