Tax Simplification? I Think Not!

I participated in a tax update webinar the other day, and I wanted to pass along a couple of changes that probably affect most taxpayers in this country. The common thread between the two changes is that they point out how tax preparation is becoming more complicated (and not to be attempted by amateurs), and just how much ‘big brother’ is watching.

Credit Card Sales By Businesses-Beginning with tax year 2011, credit card companies will be sending Form 1099-K to all credit card accepting merchants/businesses. Form 1099-K is titled “Merchant Card and Third Party Network Payments”. Guess what…every penny that customers charge to pay for a business’s goods and services is going to be reported to IRS, and wait, it gets better. The form breaks down the annual total by month, which will make it easier for IRS to trade information with all of the states, who, in turn, will match the information up with sales tax returns being filed every month (or quarter). Additionally, on business returns, line 1 reporting has gotten more complicated. Starting with 2011 tax returns for businesses (Forms 1065, 1120, 1120S, even Schedule C for sole proprietors), line 1 gross receipts reporting will now be split out to one line for credit card income and one line for all other income. If a business accepts credit cards but doesn’t report that income on the credit card line (i.e. includes it with all the other income), I’m almost willing to bet that they’ll receive an inquiry from IRS. If the gross sales on sales tax returns doesn’t amount to at least the amounts reported on the 1099-K, I’d bet an inquiry from the state will be coming, too. This is all pretty scary stuff!

Securities Sales Reporting, and Reporting of Basis-If you have any type of securities account (through a broker or through a mutual fund, etc), you may have already received a piece of mail talking about how the broker/fund is going to be required to report to IRS the basis of securities sold. The letter also describes what method the broker/fund will use to compute the basis (such as ‘first-in first-out’, average cost, etc). There’s a possibility that you ignored this letter, and may have even thrown it out. I recommend that you read this letter, and understand it, as the ‘default’ the broker/fund will use may not be the best for you tax-wise. In addition to this change in reporting by the brokers/funds, the way you report securities sales on your tax return is going to get WAY more complicated. Describing all the changes can be an article in itself, but let me say that you’re not only going to have to file Schedule D (as in the past), but Form 8949 will also need to be completed…as many as six times! In short, separate Forms 8949 need to be filed for short and long-term gains or losses, as well as for gains or losses where the broker reported the basis, gains or losses where the broker didn’t report the basis, and gains or losses where a Form 1099-B wasn’t received from the broker.

As with air travel these days, when this tax season rolls around, you’re going to have to pack a little patience, and be prepared for more questions from your tax professional, as we’re going to have a lot more work to do for preparing business and personal returns on behalf of our clients.

Please pass this article along to anybody who may benefit from the information. As I said at the outset, these two changes alone will affect a large percentage of business and personal taxpayers, so chances are you personally know more than a couple of people who will be affected. Please leave a comment about your thoughts on these two new tax developments.

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