What is a 1099-K Sales Tax Audit?
If you are undergoing a sales tax audit and you do not have adequate books and records, the auditor may simply rely on the 1099-K that was provided by your merchant services company and apply the full retail sales tax rate.
It sounds unfair, but it does not end there. The auditor will then “gross up” cash sales. Essentially, if you are Retailer A, they will take the average of cash sales in your industry and in your zip code and assume that you had that much more in gross revenue from cash sales that were entirely unreported.
Example Scenario:
- If your 1099-K reads $1,000,000 in gross sales
- The auditor may add another $100,000 in presumed gross sales
- This presumption is based on the Comptroller’s belief that the average gross sales in your industry and your locale include an additional 10% cash sales
Facing a sales tax audit in Texas?
Contact our attorney for a consultation.
How the Texas Comptroller Approaches 1099-K Audits
1. Use of Third-Party Data
Texas auditors heavily rely on third-party sources like merchant service reports (1099-K) to estimate unreported sales.
2. Industry Averages for Cash Sales
They apply industry and geographic benchmarks to estimate cash sales that may not appear on 1099-Ks.
3. The Risk of Inadequate Record-Keeping
Without adequate books and records, these estimates become difficult to challenge.
4. The Impact of “Grossing Up”
This practice can significantly inflate your tax liability if not properly contested by an experienced attorney.
Next Steps If You Are Facing an Audit
- Gather Documentation: Ensure all sales records are well-organized.
- Consult an Attorney: Engage a professional who understands Texas tax law and audit defense.
- Understand Your Rights: Learn how to protect your business from unfounded estimates.
Why Hire a Texas 1099-K Sales Tax Audit Attorney?
- Experience with the Comptroller’s Tactics
- Negotiation Skills to Reduce Liability
- Legal Defense to Protect Your Business Rights
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Frequently Asked Questions
What is a 1099-K in the context of a Texas sales tax audit?
A 1099-K is a form issued by your merchant services provider that reports your gross sales processed via credit or debit card. During a Texas sales tax audit, the Comptroller may use this form to estimate your taxable sales—especially if your books and records are incomplete.
How does the Texas Comptroller calculate presumed cash sales?
The Comptroller uses industry and geographic data to estimate cash sales. They will apply an average cash-to-card ratio based on your zip code and industry, then add that estimated amount to your reported 1099-K sales, assuming those cash sales were unreported.
What does it mean when auditors “gross up” sales?
“Grossing up” means the auditor adds a percentage to your reported sales based on presumed unreported cash transactions. For example, if your 1099-K shows $1,000,000 in sales and the industry average suggests 10% of sales are cash, an extra $100,000 may be added to your gross revenue.
What happens if I don’t have proper sales records during an audit?
Without organized books and records, the auditor’s estimates become difficult to refute. The Comptroller may fully rely on third-party data and presumptions, increasing your tax liability. This is why good record-keeping is essential for defending against inflated estimates.
Why should I hire an attorney for a 1099-K sales tax audit in Texas?
A tax attorney understands the Comptroller’s audit strategies and can challenge assumptions, negotiate lower liabilities, and defend your rights. Their experience with gross-up methodologies and third-party data use can make a significant difference in the audit outcome.