The Internal Revenue Service recently said it would postpone the $600 threshold for reporting transactions on Form 1099-K for the second year in a row, and begin to phase in a threshold of $5,000 starting in 2024.
In conjunction with the announcement, the IRS released Notice 2023-74 announcing the delay of the $600 threshold for third-party settlement organizations for calendar year 2023.
Part of the American Rescue Plan Act of 2021 as a means of collecting more taxes by those who receive payment through third parties
The American Rescue Plan Act of 2021 lowered the old threshold from $20,000 to $600 as a way of collecting more taxes from people and businesses who receive payment through third parties such as eBay, PayPal, Airbnb, Venmo, Etsy, and more.
However many taxpayers and tax professionals had worried that it would prompt a flood of 1099-K forms arriving in the mail for people who had never been subject to the requirement.
It's already been postponed a year, but people still aren't ready
Last December, the IRS postponed the new threshold for a year. But many taxpayers and the IRS itself remain unprepared for the change, and in mid-November, the Government Accountability Office (GAO) released a report predicting the IRS would receive 30 million more 1099-K forms than usual, for a total of 44 million forms.
The IRS said it would continue to work to implement the new law and will treat 2023 as another transition year. It hopes to reduce the potential confusion caused by the distribution of the estimated 44 million forms sent to many taxpayers who wouldn't anticipate one and may not have a tax obligation.
That means reporting won't be required unless the taxpayer receives over $20,000 and has more than 200 transactions in 2023.
The IRS is planning for a threshold of $5,000 for tax year 2024 as part of a phase-in
In the meantime, to give taxpayers more time to get accustomed to the change, the IRS is planning for a threshold of $5,000 for tax year 2024 as part of a phase-in to implement the $600 reporting threshold.
After hearing feedback from the tax professional community, the IRS said it's also looking to make updates to Form 1040 and related schedules for 2024 that would make the reporting process easier for taxpayers.
The changes to the 1040 are complicated, though, and take time, so delaying changes to tax year 2024 allows for additional feedback.
Implementing it through a phased-in approach
"We spent many months gathering feedback from third-party groups and others, and it became increasingly clear we need additional time to effectively implement the new reporting requirements," said IRS Commissioner Danny Werfel in a recent statement.
"Taking this phased-in approach is the right thing to do for the purposes of tax administration, and it prevents unnecessary confusion as we continue to look at changes to the Form 1040. It's clear that an additional delay for tax year 2023 will avoid problems for taxpayers, tax professionals, and others in this area," Werfel continued.
Some payments aren't taxable and should not be reported on Form 1099-K
The IRS noted that the new reporting requirements don't apply to personal transactions such as birthday or holiday gifts, sharing the cost of a car ride or meal, or paying a family member or another for a household bill. Those payments are not taxable and should not be reported on Form 1099-K.
However, the casual sale of goods and services, including selling used personal items like clothing, furniture, and other household items for a loss, could generate a Form 1099-K for many people, even if the seller has no tax liability from those sales.
The complexity adds to the confusion
This complexity in distinguishing between these types of transactions factored into the IRS decision to delay the reporting requirements and plan for a phase-in threshold of $5,000 for 2024. The service is asking for feedback on the threshold of $5,000 and other elements of the reporting requirement, including how best to focus reporting on taxable transactions.
The IRS told reporters it would update its frequently asked questions page, as well as produce additional educational content for taxpayers. Payors who comply with the current threshold of $20,000 and 200 transactions won't be penalized for failing to file or furnish information returns as long as they comply with these rules that are in the notice.
And... there's an exception...
However, there's one exception to the thresholds in a situation involving backup withholding: In cases where third-party settlement organizations that have backup withheld on a payee and the total reportable payments to that payee in the year exceeded $600, then the third-party settlement organization will be required to file a 1099-K.
During a press conference, Accounting Today and other news outlets asked about the various bills that have been introduced in Congress to raise the 1099-K threshold and whether the IRS was deciding on its own threshold.
The IRS said it had previously made such adjustments in the past for phasing in legislation such as the Foreign Account Tax Compliance Act, and that it can't make assumptions that Congress is going to make additional changes.
The service is going to work on implementing the law as it stands now, and the planned $5,000 threshold is a phased-in approach to eventually implementing the $600 threshold that's within the American Rescue Plan Act.
But as you can expect, everything that can be taxed will be taxed
IRS officials were also asked about specific examples, such as the sale of concert tickets, after a controversy erupted this summer over whether the sale of Taylor Swift tickets over StubHub and similar services would subject concert attendees and ticket sellers to the new Form 1099-K rules.
The IRS noted that a couch, a car, clothing, a bicycle or anything that a person chooses to sell that is their own personal asset would fall into the category of reporting it as either a gain or a loss.
If taxpayers sold at a loss, which means they paid more for an item than they sold it for, they will be able to zero out the payment on their tax return by reporting both the payment and an offsetting adjustment on a Form 1040, Schedule 1. That way, people who unnecessarily get these forms don't have to pay taxes they don't owe.
On the other hand, if the items were sold at a gain, they will need to report that gain as income, and it will be taxable.
Reactions to the IRS $600 1099-K threshold delay
The Coalition for 1099-K Fairness, a lobbying group that represents Airbnb, Bikelist, Block Inc. (formerly Square Inc.), eBay, the Electronic Transactions Association, Etsy, Eventbrite, Goldin, Mercari, Noihsaf Bazaar, OfferUp, PayPal, Kidizen, Poshmark, Reverb, Rover, the Sports Fan Coalition, Stubhub, TechNet and Tradesy, issued a statement praising the IRS's move.
"The IRS decision to delay 1099-K implementation spares millions of Americans from widespread confusion and represents a critical step in allowing Congress more time to craft a legislative solution," stated Arshi Siddiqui, a partner at Akin Gump, who is leading the coalition's lobbying efforts.
"The Biden administration's decision represents a victory for common-sense tax policy by ensuring that consumers are not facing a tsunami of 1099-Ks in January. Congressional members across the ideological spectrum are working towards a permanent, bipartisan fix and we look forward to working with them to provide certainty for millions of Americans," said Siddiqui.
Compliance and administrative concerns at the root of the delay
The National Taxpayers Union Foundation also hailed the move, but said Congress should fix the provision from the American Rescue Plan Act.
"ARPA's threshold was originally supposed to have gone into effect for tax year 2022 but was delayed because of compliance and administrative concerns," said NTUF executive vice president Joe Bishop-Henchman in a statement.
"All of the problems and concerns that led the IRS to delay implementing it a year ago remain in place today, which is why it is a relief for taxpayers that it has been delayed for another year... While the threshold change was a law passed by Congress, every expert (including those charged with administering it) is saying that lowered threshold is unworkable. Hopefully, it is revisited," Bishop-Henchman continued.
The group urged Congress to take advantage of the IRS's latest delay to fix the issue, arguing the $600 threshold is unworkable and must be changed legislatively. The NTUF noted that multiple bipartisan bills have been introduced in Congress, including ones from House Ways and Means chair Jason Smith, R-Missouri, Sen. Maggie Hassan, D-New Hampshire, and Sen. Sherrod Brown, D-Ohio, and Bill Cassidy, R-Louisiana.
Resources for understanding the 1099-K form and implications
The latest guidance is available at IRS.gov/1099K. The IRS Understanding Your Form 1099-K webpage provides resources for taxpayers who receive a 1099-K, including what to do with a Form 1099-K and what to do if they get a Form 1099-K in error.
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