IRS Letter 5040 – Second Notice

The IRS needs verification of the income that was reported to the IRS by credit card merchants and/or third-party networks on Forms 1099-K.

Click to enlarge

Type of Notice: Return accuracy

Likely next step: Address a business audit

Also see: Business penalties, Unpaid business taxes

Why you received IRS Letter 5040

1. You received income through a credit card merchant account and/or through other third-party network transactions.
2. You filed a tax return reporting business income.
3. The IRS thinks that your tax return shows an unusually high portion of gross receipts attributable to credit card payments. The IRS would typically expect a higher portion of gross receipts from cash and checks for your type of business.
4. Letter 5039 was sent to ask you to complete Form 14420, Verification of Income but it did not receive a response.
5. The IRS sent Letter 5040 as a reminder to send the completed Form 14420. If additional income should be reported, you are asked to attach an amended return to your response. If there is no additional income, then you need to explain why the portion of receipts from credit card sales is higher than expected.

Notice deadline: 30 days

If you miss the deadline: Failure to respond may result in the IRS auditing the tax return or sending a notice proposing additional tax, penalties and interest.

Want more help?

Your tax professional can deal with the IRS for you. Learn more about H&R Block’s Tax Audit & Notice Services.