Do you know the dollar amount of the payments your business received in 2011 from merchant cards or from third-party settlement organizations (e.g. PayPal)? If not, then you may find out soon. Beginning in 2011, merchant card and third party network payers must report the proceeds of such transactions made to your business on Form 1099-K. Beginning in 2012, businesses will be required to report the amount of merchant card and third-party payments received on their income tax returns.By pushing off the reporting requirement until 2012 the IRS is allowing a one-year grace period for businesses to modify their recordkeeping to be able to distinguish income received from merchant card and third-party settlement organizations from income received from other sources 
such as checks and cash. The IRS is expected to develop models of various business types so they can extrapolate the income received from merchant cards and third-party settlement organizations and arrive at the estimated gross income for various types of businesses. The IRS can then use this information to select businesses for audit.
such as checks and cash. The IRS is expected to develop models of various business types so they can extrapolate the income received from merchant cards and third-party settlement organizations and arrive at the estimated gross income for various types of businesses. The IRS can then use this information to select businesses for audit.It is important that businesses keep track of the proceeds received from merchant card and third-party settlement organization transactions rather than relying solely on the accuracy of the amounts reported on Form 1099-K. Of significant concern is the fact that Form 1099-K reports the total amount paid without considering returns, chargebacks or debit transactions which involve cash back. When discrepancies arise the burden will be on the business, not the merchant card payer or the IRS, to produce reliable and accurate records to dispute the amounts reported on Form 1099-K.
