Thank you for your question. Starting with this past tax year, 2011, the IRS generated a new form, Form 1099-K
for companies that process credit and debit cards as well as third party network payments such as Pay Pal, Amazon.com and Google and required them to report to merchants and the the IRS the gross amount of the transactions
they've processed, unless the business had fewer than 200 payments totaling less than $20,000.
What this means in answer to your question is, no, they cannot search your cc use HOWEVER, they can (and are) making the 3rd party merchants accountable for making individuals pay sales and /or use tax. If you were a large user of any of these third party network payments, then this is what generated the letter.
Generally, the pre-determined $ amount based on your AGI is more advantageous, however, if you have accurate records that would prove otherwise, then use which ever results in a lower tax.
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