Sellers are reporting discrepancies on Form 1099K tax forms received from Etsy, and since Etsy also sends the form to the IRS, sellers are asking whether it could flag an audit since it over-reports their gross sales income.
There are numerous sellers who say the discrepancy is for the month of December 2018. Some wonder if it is related to Etsy’s practice of collecting sales tax on behalf of states with Marketplace Facilitator laws, where it is Etsy rather than the seller that is processing the tax.
On Etsy’s help pages, there’s a FAQ “How Is the Total on My 1099-K Calculated?“
If you are located in the US or paid in USD, Etsy is required to report your total gross sales income from Etsy Payments on the 1099-K form without subtracting expenses, such as (not a complete list):
- Fees
- Refunds
- Shipping costs
- Sales tax collected by you
The page specifically states, “Taxes collected by Etsy from your buyers are not reported on the 1099-K form we issue.”
We sent an inquiry to Etsy with links to two of the threads where sellers were discussing the 1099K discrepancy.
On this thread started yesterday, a seller who pored over her numbers believes it may have to do with December transactions involving refunds and how Etsy handled the sales tax it had collected for states on those transactions.
On this thread started 2 weeks ago, an Etsy moderator posted the following and closed the thread a week ago:
“If you’re experiencing discrepancies with your 1099, can you reach out to us directly over email and we’d be happy to review this with you right away. In the meantime, since these sorts of issues will need to be handled over email, I’m going to close up this report.”
Some Etsy sellers may remember an unrelated problem involving 1099Ks last year, which we reported in this article from a year ago.
And more information about Form 1099Ks can be found in this recent AuctionBytes Blog post.
I don’t sell on Etsy but in regards to the question about 1099 numbers being higher than the income being reported by the Seller, yes it can and will spark an audit if things are not addressed quickly and correctly in regards to the errors. More likely you will receive a letter from the IRS indicating that there is a discrepancy on your 2018 tax return and it will go on to explain the discrepancy and the change in the tax due if you agree with that difference. Remittance of that amount including penalties and interest will more than likely end the contact regarding that years taxes.
If you revise your tax return to include the additional 1099 information but still reflect an increase in your tax due that brings your return onto the IRS radar and may or may cause your return to be selected for an audit for that year. Remember though that most audits occur as the IRS is approaching the 3 year statute of limitations for that tax return so just because you file the additional return a few months after the original, make sure you keep the tax information and backup in case the dreaded letter comes a year or two later.
The odds of your return being audited are both the luck of the draw as well as the % of difference the 1099 reported has compared to what you originally reported as well as other %’s for other categories. The IRS is shorthanded and cannot audit as many returns as they used to so those that they do audit they tend to try and get something out of the taxpayer to justify their existence to their bosses.
I was audited a few years back and the auditor ignored everything i sent in and unilaterally closed the audit (it was a by mail audit) and suddenly sent me a revised tax bill for over $250,000 plus interest and penalties, all due to a faulty 1099 issued by an escrow company. I wound up hiring a CPA to deal with it as I realized that the IRS was not going to listen to anything i had to say (even though I was a CPA at that time also) and over $10,000 in fees and a 250 page tax return to help justify the fees later, my audit was changed to a no change audit and they admitted that my original 7 page return was absolutely correct. By the way the total amount due per my original return was $374 which was paid with the return and the final revised 250 page return showed my tax liability as $374 which was paid with the original return.
I mention this information to emphasize how important checking the 1099’s you get is ( I had not gotten one for this sale from the Escrow company and didn’t realize it although i did correctly file the money from the 1099) and disputing any discrepancies with the issuer of the 1099 and forcing them to issue AND FILE all corrected 1099’s. The IRS takes those forms that are filed with them as gospel and you will need excellent record keeping as well as bank statements, paypal, Etsy or Ebay statements to backup your records to show that the original 1099 was incorrect. Because of the amount that was supposedly due, the IRS immediately put a lien on my home as well as a lien on all my bank accounts and tried to drain every penny from them, not only once but a second time when the Taxpayer Advocate with the IRS failed to document all the correspondence with my CPA in their system. They operate like Ebay where the right hand never knows what the left hand is doing. Luckily my CPA had kept all the emails and was able to get all of the liens removed within a week but you can imagine how much selling I got done during this period of time.
I cannot emphasize enough just how important it is to get these companies to issue the corrected amount on your 1099 and to give you proof that they not only printed it but FILED it with both the Federal and State taxing authorities.