Restaurant 1099K Gross Receipts

[willatbird]

New restaurant client received a 1099K from Square which is about 200K higher than their booked gross receipts due to tips and sales tax flowing through. They don't want to report the entire gross receipts because that will skew their local business tax calculation and the California LLC fee. Should I be worried that the IRS is going to want them to adjust their income because it doesn't meet/exceed the 1099K total amount? Does anyone have experience with this? 

[IRonMaN]

Report the correct amount.  If you like, add an attachment to the return explaining the difference between the 1099K and the return ------- someone at the IRS might read it.  In a worse case scenario the IRS sends out a love letter sometime down the road asking why the difference and you already have your reasons why ready to go.  But I don't know the odds are great as far as receiving an IRS notice ------- the 1099K reporting is causing chaos wherever they show up.

[JRC]

YES they do check 1099K's.

[willatbird]

The statement on the return was my instinct, but I'm wondering whether they will automatically spit out a notice because it's lower. I guess I just need to prepare my client for it.

Thanks.

[JRC]

They will receive a Deficiency Notice for an amount due. Its Happened to me with a client, and I will not file a return unless I have the 1099K in my files going forward. Client blamed me for the Deficiency even though I used their Numbers and requested a 1099K from them which they didn't provide.

Whether its automatic or not I do not know.

[IRonMaN]

If a humanoid ever looks at things, they have to realize that restaurants are most likely going to have 1099Ks exceeding reported income because of the sales tax and tip aspect.  If they have some magical formula to factor X number of dollars before the lights start flashing, who knows.

[rbynaker]

I've been assured by IRS personnel that every CP notice is reviewed by a human before it gets sent out.  My SOP is to attach a statement to the return in cases like this.  Then when the letter comes you can reply with "As stated in the note attached to the original return, [copy/paste]."

[Couls Law]

If it's a Schedule C and you don't tie to 1099-K you will receive a tax notice.  If it's S or Ptnrsp then you will not.  Assuming it's a sole prop., I would gross up to the 1099K on line 1 and reverse the gross up on line 2.  That will leave net sales on line 3.

[BobKamman]

@rbynaker But Tax Court judges have been assured by IRS lawyers that some CP-2000 notices are not reviewed before they are sent out, so that managerial approval is not required for the penalty assessment.  

Is it really allowed not to report tips as gross income?  Even if the owner is also the maitre d' and server?  And can't the sales tax be included and then deducted as a cost of good sold?  I don't know, I don't have any restaurant clients.  Just the guy who lost his 401(k) on a pizzeria, 25 years ago.  Does California really charge higher LLC fees based on gross revenue, not gross income? 

@JRC  IRS doesn't match all 1099-K forms, but those of this size are probably at the top of their inbox.  Your client wouldn't have received a Notice of Deficiency before responding to a CP-2000, but he might have tried and it might not have convinced them.   

[sjrcpa]

But, as OP stated, that would cause local gross receipts tax to be higher than it should be.

[BobKamman]

@sjrcpa That assumes that the tax collection agency matches income tax returns to sales-tax returns, without allowing an explanation of the difference.  Which might happen, in California.  

@Couls Law Just because IRS hasn't matched many 1099's to corporate returns in past years, doesn't mean they won't start doing it in future years, at least as a pilot project.  After all, Congress gave them money to buy 87,000 more guns and now they are hiring the people to go along with them.  This may be canceled but only after they agree on how much aid to provide the Russians.  

[willatbird]

Tips are reported as a liability and then a payment against that (in this restaurant). A matching amount is reported on the servers' W2s. The owners do not receive any of the tips.

San Francisco gross receipts tax is a major expense and we don't want to report the tips OR the sales tax in the gross receipts for that reason.

And yes, CA calculates the LLC fees based on gross receipts. This could put them into the next bracket.

[willatbird]

Is that true? This is a partnership. I still think I'm going with the statement in the return. I'd rather explain this to the IRS than to the sales tax folks or the FTB.

[Couls Law]

If it's a F1065 then don't gross up to the 1099-K.

[IRonMaN]

Folks often like to bump up income and then back it off to avoid a potential IRS notice.  But often they don't realize those bumps can have other effects with state or local entities.  Tips are not income and sales tax is not income so I would never go the bump up route.  I would prepare the return the correct way and just alert the client that it is possible to receive a notice but they don't need to sweat it.

[willatbird]

Plus, I find that the agents I deal with at the IRS seem to be smarter (?) than the folks at the sales tax and state tax agencies. My one encounter with the SF Business tax office was like trying to navigate an MC Escher painting.

[Couls Law]

Yeah... don't sweat it but please do sweat paying my $300 bill for replying to the tax notice with a reconciliation between gross receipts on Schedule C and the 1099K.

[willatbird]

Yikes! I guess I'd better raise my rates!

[IRonMaN]

Yeah, I don't tend to gouge my clients like that.  I don't know the last time I charged a client to respond to an IRS notice.

[willatbird]

Definitely depends on the notice and the client, but I would likely not charge them to respond to this one. Might add 15 minutes to their return next year.

[Couls Law]

Call it what you want but I'm not going to spend an hour of my life getting the IRS to remove a $30K proposed tax increase when you failed to provide me the 1099-K.   

[willatbird]

That's completely different. These guys did not fail to provide the 1099Ks

[IRonMaN]

They provided the 1099K and the return was prepared correctly.  You need to talk to Jim from Ohio if it takes you an hour to respond to that notice.

[Couls Law]

Doesn't sound like you've ever had to reconcile it.

[IRonMaN]

If reconciliation was needed, that would fall on the front side, not the back side of return preparation.