The internal Revenue Service has always been able to match individual returns against information statements and propose under-reporter adjustments that come in the form of CP2000 notices. But things are changing, and a new era is upon us.
Now, the IRS is using information statements to find under-reporting on business returns. In September, the IRS started its first information return-matching program for business return Forms 1120, 1120S and 1065, matching the income to the amounts reported on all information returns.
On November 16, the IRS announced that it will start questioning businesses with smaller-than-expected income, based on its analysis of Forms 1099-K. Interestingly, the IRS cannot propose specific adjustments to the return because it can’t match 1099-Ks directly to line items on 2011 business returns. However, it is contacting taxpayers when it thinks that there is a discrepancy. The IRS determines this based on the taxpayer’s line of business and a perceived disproportionate share of credit, debit card and third-party network payments reported on Forms 1099-K, compared with gross receipts from other sources reported on the tax return.
In November, as reported by the National Association of Tax Professionals, the IRS indicated that it is starting three initiatives:
A soft-touch inquiry that asks taxpayers to review their returns more closely;
A correspondence audit; and,
An under-reporter notice and assessment, similar to the CP2000 automated under-reporter program used for individual income discrepancy adjustments.