A major contributor to the Tax Gap is unreported taxable income. The Internal Revenue Service thought it was going to be able to collect more when Congress new reporting rules were included in American Rescue Plan Act (ARPA) of 2021.
ARPA dramatically reduced the income level at which third-party, e-commerce payment platforms — such as eBay, PayPal, Etsy, CashApp, and Venmo, — must issue 1099-K forms to sellers who got money through them. It was set to drop from $20,000 to $600 beginning in 2023.
That much smaller earnings level obviously means that more people, and the IRS, would get 1099-K forms with details on the income.
But that change is on hold (more on that in a moment). Plus, there are now moves on Capitol Hill to go back to the original $20,000 amount, or at least bump it up to $10,000 to help small businesses and occasional individual sellers.
Lower 1099-K level reasons, reactions: The Tax Gap is the amount of money the U.S. Treasury is legally owed, but which the IRS has been unable to collect. That amount is an estimated $496 billion.
Much of the Tax Gap is attributable to unreported income, which ARPA's $600 1099-K level was created to cover. Alas for the IRS, as that reporting requirement's 2023 effective date neared, backlash to the change grew.
While many potential new 1099-K recipients simply were upset that the IRS soon would know they made money they must be reported tax returns, there also were some legitimate concerns. A key one was how to clarify the reported earnings on 1099-Ks that actually are nontaxable.
The $600 level law did note that transactions that generally are excluded from gross income and therefore not subject to income tax don't have to be reported, regardless of amount. These excluded transactions include amounts from selling personal items at a loss, amounts sent as reimbursement, and amounts sent as a gift.
But the tricky question is, how will payment processors know when these conditions apply? The short answer is, they won't.
For example, a person sells on eBay some personal property, such as old furniture they no longer want, for less than they paid for it. There's no taxable gain, so no tax due. eBay, however, has no way of knowing the selling circumstances, so it simply would report the full sale amount if it exceeded $600 to the seller, with a copy going to the IRS.
If the seller did not report the nontaxable money, the IRS, using its 1099-K copy info, would issue the taxpayer a notice about the difference. Then the seller would have to deal with a delay in return processing while the discrepancy was explained to the tax agency's satisfaction.
This and other complaints prompted the IRS in December 2022 to postpone implementation of the new $600 1099-K reporting trigger. It declared 2023 a transition year, with the goal being that taxpayers, tax professionals, and payment platforms would use the time to resolve to all's — including the IRS' — satisfaction the new reporting requirements and accounting for associated exceptions.
There's been no public word on how any such 1099-K refinements are coming along, but a couple of U.S. senators have another idea. They want to bump up the $600 reporting level.
$10,000 level proposed: Sen. Sherrod Brown, an Ohio Democrat, and Sen. Bill Cassidy, a Republican from Louisiana, last week introduced what they've dubbed the Red Tape Reduction Act. The legislation, which has yet to receive a legislative bill number, will reduce the ARPA $20,000 threshold to $10,000.
That's still a substantial jump from the ARPA $600 level, but the bipartisan pair says it would ensure that fewer small businesses and casual sellers receive excessive paperwork for online sales.
"Ohio small businesses are frustrated with the 1099-K reporting threshold. This red tape hits small businesses and other Ohioans selling products online, sucking time and resources from the smallest online sellers," said Brown. "By raising the threshold, we can prevent the IRS from interfering with minor transactions and cut down on excessive paperwork."
Brown brought up the $600 reporting level with new IRS Commissioner Daniel Werfel when he appeared before the Senate Finance Committee last month to testify about the Biden Administration's 2024 IRS budget and the current filing season.
Cassidy echoed Brown's comments regarding the reporting level's burden on small businesses, albeit with a bit more political shading.
"The cap the Biden administration implemented in their American Recession Plan is hurting everyone from small business owners to people just trying to pay their rent," said Cassidy. "This bill lifts that cap and prevents the IRS from spying on American taxpayers."
A House member wants to go further.
In January, Republican Rep. Carol Miller of West Virginia introduced H.R. 190, the Saving Gig Economy Taxpayers Act. It would in part repeal ARPA's lower 1099-K reporting level and return to what Miller calls "the time-tested $20,000 and 200 separate transactions" level.
The Senate 1099-K bill is pending in the Senate Finance Committee. The House one is awaiting action by the House Ways and Means Committee.
You also might find these items of interest:
- What to do if your 1099-K is not OK
- The many versions of IRS Form 1099
- 1099-K reporting delay yays and nays
- Tax Gap likely $1 trillion, thanks largely to cryptocurrency