Internet sellers will be under the IRS microscope starting in 2011. Any bank or other payment settlement company that processes credit cards, debit cards, and electronic payments such as PayPal will have to issue information returns telling the IRS what it’s merchants receive.

Who’s Affected
All merchants who accept payments through credit cards, debit cards, gift cards and PayPal will receive information returns telling them – and the IRS – the gross amount of the merchant card transactions. While the form uses the word “card,” the IRS has made it clear that this is interpreted broadly to include third-party network transactions (i.e., PayPal). An exception is made for merchants with revenue under $20,000 or less than 200 transactions.

Mechanics
As it now stands (not yet finalized), gross amounts reported for merchant transactions do not take into account any adjustments for credits, cash equivalents, discount amounts, fees, chargebacks, refunded amounts, or any other amounts. It will be up to sellers to report on their returns the full amounts reported to them and then make adjustments or explanations to account for differences in what is ultimately taxable to them.

So even though a seller who is paid $1,000 for a transaction does not necessarily have $1,000 profit, they will need to include $1,000 on Form 1099-K. The $1,000 must then be reported so the return will match what’s in the IRS computers. It is then up to merchants to report the cost of goods, transaction fees, or any other costs.

Source: Barbara Weltman – AuctionBytes.com