What is a 1099-K Style Sales Tax Audit?
A 1099-K style sales tax audit simply applies sales tax to your gross revenue number. This is one of the worst ways to undergo a sales tax audit.
You might pay double the tax and/or even pay tax on non-taxable items that you sold.
Transcript
Q&A Overview
Question:
“What’s a 1099-K audit? I was told that if I don’t produce the documents for a sales tax audit, that they’re going to do a 1099-K audit.”
Breaking Down the Situation
There are two issues here:
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The person is going through a sales and use tax audit.
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There is involvement of a 1099-K form.
Sales and Use Tax Audit
This audit checks whether you’ve paid the correct amount of sales tax on all your sales.
What is a 1099-K?
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A 1099-K is a statement from your merchant services provider (e.g., Bank of America).
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It summarizes all your sales for a given year.
Why 1099-K Audits Are Problematic
1. Flawed Reporting
The 1099-K does not account for returns or non-taxable items.
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If you had $1,000,000 in gross sales and the sales tax rate is 9%, then:
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You’re assumed to owe $90,000 in sales tax
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Returns and non-taxable items are not deducted
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2. Risk of Paying Tax on Non-Taxable Items
For example, if you’re a restaurant owner, fees like:
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Parking charges
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Tips paid separately
are not taxable, but still counted in a 1099-K audit.
What Happens If You Don’t Provide Records?
The sales tax department (comptroller or department of revenue) will assume the worst.
If you don’t submit:
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Documents
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Books
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Records
they may:
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Apply sales tax to your entire 1099-K amount
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Add penalties and interest
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Charge you for the full amount of tax possible
Final Advice
Avoid a 1099-K audit at all costs.
It’s in your best interest to:
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Fully cooperate with sales tax audits
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Always submit proper documentation to avoid assumptions based on gross numbers