How 1099-Ks Are Used in Sales Tax Audits of Restaurants

If you’re a restaurant owner in the United States, you may have received IRS Form 1099-K—but what you might not realize is just how central this form has become in state sales tax audits. As digital payments grow, states increasingly rely on third-party data to identify underreported taxable sales. For restaurants, that means the 1099-K is more than just a federal tax reporting form—it’s a red flag detector.

This guide explains what a 1099-K is, how state departments of revenue use it in restaurant sales tax audits, and what restaurant owners across the country can do to protect themselves.

What Is a 1099-K?

Form 1099-K is issued by payment settlement entities (like Square, PayPal, Stripe, Clover, or Toast) and reports gross payment card and third-party network transactions. For restaurants, this means every credit card swipe, mobile app payment, or delivery charge processed through third-party networks is tallied and reported to the IRS—and often shared with state tax agencies.

In 2023 and beyond, the IRS reporting threshold for Form 1099-K has been lowered to just $600 annually, meaning most restaurants will receive these forms, regardless of size.

How 1099-Ks Are Used in State Sales Tax Audits

State tax departments, such as the Florida Department of Revenue, use 1099-K forms to compare a business’s reported sales on sales tax returns against gross receipts reported by payment processors. If the numbers don’t match up, auditors may suspect underreporting and launch a sales tax audit.

Here’s how the audit process typically unfolds:

• Selection: Your business is flagged for audit, often due to a 1099-K mismatch.
• Initial Letter: You receive a notice of intent to audit (e.g., Florida’s DR-840).
• Data Review: The auditor requests your sales tax returns, POS reports, bank statements, and your 1099-Ks.
• Comparison: Auditors compare reported taxable sales to total 1099-K receipts.
• Assessment: If the 1099-K shows higher totals, the burden shifts to you to explain the difference. Otherwise, the state may issue a proposed assessment (e.g., Florida’s DR-1215).

Why 1099-K Mismatches Lead to Big Tax Problems

1099-Ks report gross receipts without adjusting for refunds, tips, sales tax, delivery charges, or nontaxable sales. States often assume the 1099-K total equals taxable sales unless you prove otherwise.

This can lead to:

• Inflated assessments based on duplicate reporting
• Assumed unreported cash sales
• Penalties and interest for perceived fraud or negligence
• Burden of proof on the business owner, not the state

Common Issues in Restaurant Audits Involving 1099-Ks

• Double-counting: Restaurants may report gross sales already, but states add the 1099-K again.
• Inclusion of gratuities: Tips, often on the 1099-K, are not always taxable.
• Delivery app complications: Platforms like Uber Eats and DoorDash may collect and remit tax, yet the restaurant still gets taxed again.
• Cash estimation: If only card transactions are documented, auditors estimate additional cash sales.
• Lack of reconciliation: Many businesses cannot reconcile the 1099-K to their internal records.

Real-World Example: Florida Restaurant Assessed $75,000 Based on 1099-K Discrepancy

A Miami-area restaurant reported $400,000 in annual taxable sales. However, their combined 1099-Ks from Square and Toast showed $525,000 in gross receipts. The auditor assumed the difference represented unreported sales and added a cash estimate based on industry norms.

Ultimately, the business was assessed over $75,000 in tax, penalty, and interest—until documentation showed that $90,000 of the discrepancy was tips and $35,000 was delivery fees.

How Moffa Tax Law Defends Against 1099-K Based Sales Tax Audits

At Moffa Tax Law, we defend restaurants, cafes, bars, food trucks, and hospitality businesses across the country in state tax audits. Our sales tax audit defense includes:

• Pre-audit strategy sessions
• Detailed 1099-K reconciliations
• Review of POS systems and cash logs
• Delivery service documentation
• Filing protests and petitions to reduce or eliminate assessments
• Litigation before administrative tribunals or state courts

What Restaurant Owners Should Do Now

• Download all 1099-Ks annually from each processor
• Maintain detailed sales reports that reconcile cash, credit, and app-based sales
• Track and categorize tips, delivery charges, and non-taxable items
• Keep delivery platform tax remittance reports
• Hire a sales tax professional at the first sign of audit activity

FAQ: 1099-Ks in Restaurant Sales Tax Audits

What is a 1099-K form, and why did my restaurant receive one?

Form 1099-K reports gross card and app-based payments your business received. If you take digital payments, your processor must send this to the IRS and state agencies.

How do states use 1099-Ks in audits?

They compare 1099-K gross receipts to your reported sales. If the 1099-K is higher, they assume underreporting.

Are all 1099-K receipts taxable?

No. The form includes tips, delivery fees, and sometimes refunds or non-sales revenue. These must be removed before determining taxable sales.

What if I already reported everything correctly?

You still need to prove it. States don’t assume your tax returns are right if 1099-Ks show more.

What states audit restaurants using 1099-Ks?

States like Florida, New York, California, Illinois, and Texas routinely use 1099-Ks in restaurant audits.

What can I do if I get a sales tax audit notice?

Call Moffa Tax Law. We help restaurants fight back and work to resolve audits favorably.