The IRS has over the last week or so started sending Letter 5036 to small businesses questioning the possible under reporting of income. The letter looks intimidating as it’s header states “Notification of Possible Income Under reporting” and starts with “Your gross receipts may be under reported.”

Rest assured this letter is systematically generated.  Basically the IRS matched the information reported on Form 1099-Ks that were sent to the business with income reported on the tax return. Don’t be threatened or upset by this letter but do recognize that you will be required to provide a written explanation, or a completed Form 14420, Verification of Reported Income, explaining why the portion of the gross receipts from credit card payments and other 1099-K transactions was higher than expected. Failure to respond might result in a proposed assessment or further compliance action, so please respond.

My advise is that this might be a job for the accountant, controller or tax practitioner signing the income tax return as accuracy is paramount.

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