Overview

An IRS notice claiming unreported 1099‑K income flags a mismatch between the payment‑processor report (Form 1099‑K) and the income you filed. Common causes: omitted freelance or marketplace sales, reporting net instead of gross receipts, duplicate reporting across forms, or an incorrect 1099‑K issued by a processor.

Authoritative sources

Step-by-step response checklist

1) Verify the notice is legitimate and note deadlines

  • Confirm the letter is from the IRS (official notice comes by mail and includes a contact phone and notice number). If unsure, check the IRS guidance on recognizing notices before sending sensitive information. (See internal guide: “How to Verify an IRS Notice Is Legitimate Before Responding” for practical checks.)

2) Read the notice carefully

  • The notice will list the tax year, the amount difference, and the IRS’s proposed adjustment. Record the response deadline and any contact info.

3) Reconcile your books to the 1099‑K

  • Match the 1099‑K gross amount to your bank and platform transaction reports, taking care to:
  • Identify refunds, returns, personal transfers, or third‑party payouts that shouldn’t be treated as gross business income.
  • Check whether some payments were already included elsewhere (for example, reported on a Form 1099‑NEC or on Schedule C).
  • In my practice, the most common fix is showing that a portion of 1099‑K receipts were refunds or transfers and therefore not taxable income.

4) Gather supporting documentation

  • Collect transaction histories, invoices, receipts, platform reports (e.g., PayPal, Stripe, Venmo business reports), bank statements showing refunds, and written communications with buyers or platforms.

5) Decide how to respond

  • If the IRS is correct: prepare to amend your return (Form 1040‑X) to include the missing income, calculate tax, interest, and any penalties, then file and pay promptly. See our detailed guide on filing an amended return: Step‑by‑Step Guide to Filing Form 1040X.
  • If the 1099‑K is incorrect: contact the issuer first and request a corrected 1099‑K. Document all communications. If unresolved, attach an explanation and supporting documents when you respond to the IRS.
  • If you already reported the income: show where the amounts were reported (attach relevant schedules, Forms 1099‑NEC, bank statements, or ledgers).

6) Prepare your response package

  • Include a cover letter referencing the IRS notice number and tax year, a reconciliation worksheet (line‑by‑line showing why the amounts differ), copies of supporting documents, and a clear request (e.g., correction, acceptance of amended return, or rejection with explanation).

7) Send response on time and keep records

  • Follow the IRS directions for mailing or electronic response. Keep certified‑mail receipts or proof of electronic submission and retain copies of everything for at least three years.

8) If you can’t pay immediately

  • Consider payment options: pay in full, request a short extension, or apply for an Installment Agreement with the IRS. If penalties apply, you may request penalty abatement for reasonable cause.

Common mistakes to avoid

  • Waiting to respond — ignoring a notice increases the chance of additional penalties.
  • Throwing away platform records — marketplaces and processors can issue corrected 1099‑Ks, but you’ll need records to prove it.
  • Assuming net income equals reported 1099‑K numbers — 1099‑Ks show gross receipts; deductions come separately on your return.

When to amend versus when to explain

  • Amend (Form 1040‑X) when income was actually omitted or incorrectly reported. Use our internal how‑to: Step‑by‑Step Guide to Filing Form 1040X.
  • Explain (with documentation) when the 1099‑K double‑counts non‑taxable items (refunds, transfers) or the amount was already reported elsewhere.

Example scenario (realistic, anonymized)

A client who sold handmade goods on two platforms got a notice showing $18,000 on a 1099‑K but his Schedule C showed $12,000. After reconciling, we found $4,000 was refunds and $2,000 had been deposited to a spouse’s account and reported on a joint business return. We assembled platform reports, a reconciliation table, and either amended or explained the difference — resolving the notice without a penalty in that case.

Penalty and interest basics

  • If tax is owed after correction, the IRS charges interest from the original due date and possible penalties for late payment or underpayment. Penalty relief may be available for reasonable cause; documentation is key.

Get professional help when

  • The amounts are large or span multiple years.
  • You see evidence of identity theft or fraud.
  • You aren’t confident reconciling platform data and tax forms.

Helpful internal resources

Final notes and disclaimer

This article explains common, practical steps to respond to IRS notices about Form 1099‑K discrepancies. It’s educational and not a substitute for personalized tax advice. Consult a qualified CPA or tax attorney for complex cases or before filing amended returns. See the IRS Form 1099‑K page for official rules and thresholds (IRS.gov).