In order to deal with the tax gap created by those taxpayers who do not file or underreport income, information reporting is quickly becoming a primary focus for the Internal Revenue Service.
Recently, Commissioner Douglas H. Shulman of the Internal Revenue Service highlighted the importance of information reporting, the use of Form 1099 and other related type forms, and noted that the Internal Revenue Service must make better use of the knowledge and intelligence extracted from the information received. Commissioner Shulman stated they must adapt and make better use of technology.
One significant change to information reporting will become effective for calendar years after 2010.
The Federal Housing Regulatory Reform Act of 2008 requires processors of payment card transactions (credit and debit), such as merchant banks and similar organizations, to provide a written statement, as a Form 1099 type item, by January 31, 2012, to each business for which they process payment card transactions. The statement will inform these businesses of the total amount of payment card transactions processed during 2011. A copy of the information will also be sent to the Internal Revenue Service, and each business will be required to report this information as a separate line item on its tax return.
The Internal Revenue Service will use the information to confirm that each business has reported the correct amount on its tax return, and if a difference is determined, a tax notice may be generated to the business.
What does this change require for a business that accepts debit or credit card payments?
Any business that accepts debit or credit card payments should modify their internal accounting information to record debit or credit card receipts by each processor as a separate item on their income statement. This will allow the business to verify the reporting information from the payment card processor, and allow for proper preparation of the business tax return. Because this information reporting change is effective for years after December 31, 2010, the accounting system changes should be made prior to January 1, 2011. In order to test the changes to the accounting system before 2011, it is suggested that the changes be made now.
It is evident that information reporting and gathering will continue to increase and will become more than just about the numbers as the Internal Revenue Service adapts and expands the use of the intelligence available.
As you begin to deal with these expanded reporting requirements, be assured Eide Bailly is available to assist in the modification of accounting system and tax reporting requirements. If you want to learn more, contact your Eide Bailly representative.