IRS prodded to use credit card payment data to do more tax audits

The Internal Revenue Service could be auditing more tax returns where it sees big discrepancies in the payments reported on the Form 1099-K and the income reported on tax returns, according to a new report.

The report, from the Treasury Inspector General for Tax Administration, pointed to legislation that Congress passed in 2008 requiring reporting of payment card transactions, such as from credit cards, debit cards and stored value cards. In response, the IRS developed Form 1099-K, Payment Card and Third Party Network Transactions, which payment settlement entities began submitting to the IRS in 2012. The law requires payers to report annual gross payment transactions to the IRS and send a written statement containing the same information to the participating payees that received the payments.

The IRS uses the Form 1099-K to help compare gross receipts from payment card sales to gross receipts reported on a taxpayer’s return. The requirement includes not only payments via credit cards, debit cards, and stored-value cards, but also through third-party networks such as PayPal.

TIGTA reviewed a sample of taxpayers with one Form 1099-K (although it noted some taxpayers have more than one) and found a total of 20,881 taxpayers with discrepancies of more than $10,000 between the income reported on their tax returns and their Form 1099-K amounts (and reporting less than 90 percent of the amount on the Form 1099-K). The tax accounts for these taxpayers showed no indication the IRS had audited them.

“Without contacting taxpayers through a notice or initiating an audit, the IRS cannot determine the reasons for discrepancies between amounts reported on Form 1099-K and income reported on tax returns,” said TIGTA Inspector General J. Russell George in a statement. “The IRS needs to take appropriate action at all times, and particularly when the discrepancy is large.”

Andrew Harrer/Bloomberg

TIGTA recommended the IRS consider implementing compliance projects to test the use of Form 1099-K data to identify certain types of tax returns for audit. The IRS should also identify and address the reasons why tax returns with large discrepancies between the income reported on tax returns and the amounts reported on Form 1099-K were not selected for audit or other treatment, TIGTA suggested. The IRS agreed with the recommendations in the report and intends to take action, but it also disagreed with TIGTA on the magnitude of the issue.

“With respect to TIGTA’s sample cases, we not only identified the same discrepancies, but for the vast majority of those cases also identified the reasons why we did not ultimately select cases for additional treatment, e.g. additional available information indicated that they would not be as productive as they otherwise appeared,” said Mary Beth Murphy, commissioner of the IRS’s Small Business/Self-Employed Division, in a statement. “Of the 20,881 discrepancy cases identified by TIGTA, we identified the reason why 18,053 were not selected for audit or other treatment.”