Wrong amount on 1099 form will this cause a problem?

[Anonymous]

My business got a 1099-K form from our credit card processing company. It shows $1,024,000 in revenue for 2021. But we only had $524,000 in revenue. My bank statement deposits add up to the $524,000. Assuming I cannot get a  hold of anyone at the cc company to fix this, what should I do? If we report $524,000 income on the tax return the IRS computers will see the $1,024,000 on the 1099 form. I don't want to get one of those auto generated letters from the IRS 3 years from now saying we owe tax on the phanton $500k revenue. What should I do?

[LudwigVan_fan]

First and foremost, get in touch with the CC processing company.  Be persistent and get a corrected 1099-K issued.

If that cannot be done, when you file your return, include the amount on the 1099-K, then take a deduction to arrive at the corrected amount.  Attache an explanation as to the reason for the deduction.

You could put the amount in gross receipts, then a deduction in returns and allowances.

My opinion is that without a corrected 1099-K, there will be an inquiry from IRS.

[SweetieJean]

Also see:

Understanding Your Form 1099-K | Internal Revenue Service (irs.gov)

[SweetieJean]

Exactly $500,000 in phantom revenue strikes me as too convenient.  Any chance that your account was compromised?  You might want to check your credit reports.

[Anonymous]

What would I categorize the desuction as?

[LudwigVan_fan]

I would put it on the returns and allowances line.   Line 2 on Sch C

But try and get the corrected 1099 so IRS would have a copy of the corrected amount.  That would be the best solution.

Also, as @SweetieJean said, check your credit reports, etc. for possible hacking.

Definitely let the issuer of the 1099-K that it is wrong.  Perhaps they have a systemic problem and other 1099-Ks issued as wrong too.

[Opus 17]

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@Anonymous wrote:

What would I categorize the desuction as?

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The 1099-K is informational only.  I don't think you have to enter the 1099-K at all.  If you are filing a schedule C, you must report your gross sales.  I imagine some of your gross sales come by cash or check, so they wouldn't match the1099-K even if the 1099-K was correct.  I would report your gross sales, your expenses, and so on, as they were.  If the IRS sends a letter asking why did you get a 1099-K for $1M when you reported gross sales less than that, you will respond with your proofs (copies of credit card statements, PNL, copies of letters to the credit card processor, etc.)  

I'm not convinced you are better off by reporting $1M of gross sales and then $500K of phantom expenses.

But, for even $500K of gross sales, I would strongly consider hiring a tax professional instead of doing it yourself on Turbotax. 

[Rick19744]

I agree with @LudwigVan_fan in that I would recommend reporting the amount on the 1099-K and adjusting the amount in CGS to agree with your books and records.

I also agree it is in your best interest to be persistent in following up to determine how that amount was determined.  Once you understand this, you can determine the next step(s); impact for 2021 and going forward.

While the 1099-K is an informational return, so are the following:

Form W-2 (series, excepting Form W-2G)
Form W-3 (series, excepting Form W-3(C)PR)
Form 1096
Form 1098 (series)
Form 1099 (series)
Form 5498 (series)

Just because it is an informational form does not mean you can ignore what is being reported.  Avoid any letter writing campaigns with the IRS.  You minimize this by reporting the amount on the 1099-K.

This taxpayer is not reporting "phantom" expenses.  This is an adjustment to what the taxpayer states is what his actual sales were.  No different than making adjustments on Schedule D.  This is not any adjustment invented for fraud or something that doesn't exist.  The taxpayer is stating that they believe the amount is incorrect and they have financial records to prove the amount being ultimately reported is accurate.

[LudwigVan_fan]

As a former IRS agent, unless the 1099-K is somehow addressed on the return, a $500K difference between the 1099 & gross receipts will trigger at a minimum inquiry from IRS.

It may trigger an audit.  I know IRS is short staffed these day, but $500K discrepancy is a lot of money for IRS to overlook.

That is why I strongly suggest pursuing a corrected 1099-K...so IRS gets a copy of of the error.

If no corrected copy is issued, then somehow/somewhere on the return, the incorrect 1099 needs to be modified.  That is why I suggested reporting it, then deducting returns and allowances, and providing an explanation in the return.  Try and minimize contact with IRS and waste everyone's time.  This is all based on the premise that his records are accurate and the 1099-K is wrong.

When we looked at returns and 1099s, if reported amounts were equal or greater than the 1099 amounts, we generally passed unless there were other reasons for inquiry/audit.  However, if 1099 amounts were greater than reported amounts, that triggers inquiries/audits.

[Anonymous]

I just spoke with the credit card processing company (Square). After 30 mins on the phone and explaining everything, they acknowledged the error. However, they told me it is there policy NOT to correct 1099k forms. They told me I had to address it with a tax professional. So the option to get a corrected 1099k form is out.

As far as a letter of explanation do I just write a letter and put it as the last page on the tax return?

[Opus 17]

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@Anonymous wrote:

I just spoke with the credit card processing company (Square). After 30 mins on the phone and explaining everything, they acknowledged the error. However, they told me it is there policy NOT to correct 1099k forms. They told me I had to address it with a tax professional. So the option to get a corrected 1099k form is out.

As far as a letter of explanation do I just write a letter and put it as the last page on the tax return?

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You can't attach explanations to tax returns using Turbotax or Turbotax business.  This seems to be a policy decision by Intuit to not allow attachments in their consumer-level products because PDFs can be attached when using Intuit's ProSeries software. 

An attachment to a paper return may become lost.

I repeat my suggestion to have your return filed by a tax professional and let them deal with it for you. 

I also suggest that you go back to Square and (a) get their refusal to issue a corrected 1099-K in writing, and (b) take your business elsewhere.

[LudwigVan_fan]

RE:   "However, they told me it is there policy NOT to correct 1099k forms."

I would report them to IRS.  There are penalties for not correcting F1099-K

[Rick19744]

I would call them back and ask to speak with the next level up.

Explain to them that you had previously called, Square admitted the mistake, but would not provide you a corrected form 1099-K.

You should then explain to them that they are required by law to issue a corrected form and if they do not you will notify the IRS of their noncompliance.

This should most likely get the ball moving.