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.

Watch the video explanation

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:

  1. The person is going through a sales and use tax audit.

  2. 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?

  • A 1099-K is a statement from your merchant services provider (e.g., Bank of America).

  • 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.

  • If you had $1,000,000 in gross sales and the sales tax rate is 9%, then:

    • You’re assumed to owe $90,000 in sales tax

    • Returns and non-taxable items are not deducted

2. Risk of Paying Tax on Non-Taxable Items

For example, if you’re a restaurant owner, fees like:

  • Parking charges

  • 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:

  • Documents

  • Books

  • Records

they may:

  • Apply sales tax to your entire 1099-K amount

  • Add penalties and interest

  • 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:

  • Fully cooperate with sales tax audits

  • Always submit proper documentation to avoid assumptions based on gross numbers

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