Don't Mess With Taxes

UPDATE, Tuesday, Nov. 21, 2023: The Internal Revenue Service today gave millions of people whose earnings are paid through third-party settlement orgs (think Venmo, PayPal, even TicketMaster) an early Christmas present. The new $600 transaction trigger to issue 1099-K forms is on hold for another year, with a $5,000 phase-in amount set for tax year 2024. Details in my post 1099-K $600 reporting threshold delayed again, this time to 2025.

Are you worried about getting a slew of 1099-K forms next year in connection with your side gig earnings? The Internal Revenue Service has an early Christmas present for you.

The tax agency today announced that it was going to delay the requirement that third-party settlement organizations — places like Venmo, PayPal, CashApp, and similar payment mechanisms — issue the 1099-Ks to earners who in 2022 received at least $600 in a single payment or in aggregate, regardless of the number of transactions, for their goods or services.

Instead, the new lower earnings level that triggers issuance of 1099-Ks will apply to applicable earnings and transactions that occur "after calendar year 2022," that is, in 2023. The subsequent reporting forms will then not be required to be issued until the 2024 tax filing season.

Tax Gap prompted lower earnings trigger: The dramatic drop to a $600 earnings threshold was part of the American Rescue Plan Act (ARPA) of 2021. The prior reporting level was more than 200 transactions per year that exceeded an aggregate amount of $20,000 in earnings.

The law change was needed, said supporters, to help close the Tax Gap (now estimated at $496 billion) by making sure that unreported earnings were included on annual tax returns. It's no secret that many taxpayers don't realize that any amount of earnings, regardless of the amount and issuance of any official tax statement, is taxable.

It's also no secret that many who do know this tax law decide to ignore it since there's little chance that the IRS, without outside information of the earnings, can find out about their intentional oversight. OK, let's call it what it is: tax cheating.

Not a new procedure: Third-party reporting of earnings is not new. Millions of us are familiar with the process thanks to W-2 forms detailing our salary or wage earnings. That form, which is copied to the IRS, lets the tax agency know about the money so it can verify taxpayer amounts on their 1040 forms.

Then there are the many other 1099 forms, for example, payments to independent contractors (1099-NEC) or reporting investment earnings (1099-B, 1099-DIV, 1099-INT) or unemployment benefits (1099-G), that are issued to taxpayers and copied to the IRS, every year.

Form 1099-K, Payment Card and Third-Party Network Transactions, has been a part of that large 1099 family since 2012, when they first were issued for 2011 payments. Its issuance to those meeting the $600 level would have greatly expanded its reach starting Jan. 1, 2023.

See more tax forms and more about them at Talking Tax Forms.

COVID gigs also contributed to reporting change: The growth of gig earnings, especially during the COVID-19 pandemic when people turned to these types of jobs to make up lost job income, also was a contributor to the ARPA 1099-K change.

The lower reporting level, said supporters, would help keep a new pool of potential earnings from slipping through untaxed.

The lowering of the 1099-K threshold didn't create much of a stir when enacted. But as the 2023 tax season and new $600 1099-K reality neared, the IRS started getting some pushback. It came from all sides — potentially affected earners, their tax pros concerned about client confusion, the payment companies, and members of Congress, some looking to go back to the old law or at least raise the earnings level that triggers the form.

The IRS got the message.

IRS delaying 2023 1099-K requirements: So that filers and issuers are aware of the many matters surrounding the $600 trigger for 1099-K forms, the IRS says that it will not require third-party settlement organizations (TPSOs) to report tax year 2022 transactions on Form 1099-Ks to the IRS or to payees in 2023.

Instead, according to IRS guidance released today in Notice 2023-10, calendar year 2022 now is viewed as a transition period for implementation of the lowered threshold reporting for TPSOs.

"The IRS and Treasury heard a number of concerns regarding the timeline of implementation of these changes under the American Rescue Plan," said Acting IRS Commissioner Doug O'Donnell. "To help smooth the transition and ensure clarity for taxpayers, tax professionals and industry, the IRS will delay implementation of the 1099-K changes. The additional time will help reduce confusion during the upcoming 2023 tax filing season and provide more time for taxpayers to prepare and understand the new reporting requirements."

Or for it to be changed.

1099-K transition time: The transition period described in the IRS notice delays the reporting of transactions in excess of $600 to transactions that occur in 2023. This transition period, says the IRS, "is intended to facilitate an orderly transition for TPSO tax compliance, as well as individual payee compliance with income tax reporting."

The IRS reiterated how "hugely important" all types of third-party reporting is. "[T]ax compliance is higher when amounts are subject to information reporting, like the Form 1099-K," noted the agency.

But it also is aware that taxpayers and form issuers need to fully understand any reporting changes, with the process managed carefully in the case of 1099-Ks to ensure that they are only issued to taxpayers who should receive them. This was a concern in cases when third-party payment apps were used for personal financial transactions, such as reimbursing family and friends shared costs or nontaxable sales of personal items. If individuals got a 1099-K for transactions that aren't taxable, they could end up paying tax on it anyway or hassling with the IRS over the amount.

The IRS says the year delay in the new $600 trigger/1099-K issuance should allow for taxpayers to understand what to do as a result of this reporting, as well as allow tax preparers and software providers get the information they need to assist taxpayers with proper filings.

The tax agency also said it would issue additional details on the delay, along with additional information to help taxpayers and the industry.

If you've already received a 1099-K as a result of the ARPA changes, the IRS says it also is "working rapidly to provide instructions and clarity so that taxpayers understand what to do."

Finally, during this transition period, the IRS noted that the existing 1099-K reporting threshold of $20,000 in payments from over 200 transactions will remain in effect.

Holiday tax number: In light of the IRS' new 1099-K decision, the existing $20,000 amount to trigger issuance of the form is week's By the Numbers figure.

Yes, I usually pick a number on Sundays, but this weekend that is Christmas day. I'm taking it off, as I suspect so will most of the ol' blog's readers.

So you can view this post as my early Dec. 25 tax info gift to you. Remember, it's the thought that counts!

You also might find these items of interest:

• What to do if your 1099-K is not OK
• Dealing with a 1099-K for tax-free residential rental income
• Personal cash app transfers are NOT part of new IRS reporting rule  
• New gig economy reporting law could create tax confusion for online sellers of personal property

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