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
So today we’re going to be doing Q&A, and our first question is from Ian Oh, and the question is “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.” Okay, what is a 1099-K? So there’s two issues here. First of all, he’s going through a sales and use tax audit. Secondly, there’s something to do with a 1099-K. Alright, sales and use tax audit: they’re just going to make sure that he’s been paying the correct amount of sales tax on all his sales. 1099-K is a statement that you get from your merchant services company. So let’s just say you’re using Bank of America merchant services. At the end of the year, what they’re going to do is produce a 1099-K form and that’s all your sales in a given year. Okay, so the biggest problem that we’re going to see with the 1099-K audit is the fact that 1099-K itself is flawed. So all the returns that you’ve ever had during the year, they’re not going to account for that at all. So if you’ve had a one million dollars in sales and the sales tax rate is nine percent, simply it’s ninety thousand dollars of sales tax that you should have paid out, and if you don’t they’re going to charge you for the difference plus penalties and interest. Okay, and then secondly, another problem that you’re going to see with the 1099-K is that not everything is always going to be a taxable item. So for example, if you’re a restaurant owner and you charge for parking fees or people are paying separately for tips, none of that stuff is going to be taken into account if someone’s just going to do a 1099-K audit. So really this is the the IRS — sorry not the IRS — but this is the sales tax department whether you’re at the comptroller or the department of revenue level, and they’re just going to be coming to you to say, hey look, you know what, you didn’t want to provide documents, books, and records, and that kind of stuff, so we’re just going to hit you with the full amount of tax that we possibly can plus the penalties and interest. So it’s in your best interest to really try your best to avoid an audit like this. Thanks.
