Christmas came early this year for many taxpayers and tax professionals. Just before the holiday, the IRS announced that it would delay the revised controversial reporting requirement for third-party settlement organizations. That means that many who were worried about the potential onslaught of Forms 1099-K are getting a reprieve. Here’s what you need to know.
The delay does not change individual tax obligations.
The initial change in the law applies to third-party reporting, not your individual tax obligations. It has always been the case that you must report your taxable income, whether it is payable to you in cash, on a credit card, through a business checking account, or over a cryptocurrency platform. That obligation starts at the first dollar.
The confusion revolves around reporting thresholds.
For years, taxpayers who provided certain goods or services worth more than $600 were responsible for issuing Form 1099-MISC. That changed in 2012 with the introduction of Form 1099-K.
Form 1099-K introduced a requirement for reportable payment transactions defined as payment card transactions or third-party network transactions. Payment card transactions include accepting a card—such as a gift card, credit card, or debit card—for goods or services. A third-party network transaction is one that is settled through a third-party payment network, such as PayPal or Venmo.
Form 1099-K requires reporting when payments total more than $20,000 and more than 200 transactions are settled through a third-party network. No threshold applies to payment card transactions.
As you can imagine, the gap between the “old” Form 1099-MISC reporting threshold and the Form 1099-K reporting threshold raised some eyebrows. The fix was a lower $600 threshold amount enacted as part of the American Rescue Plan of 2021. That new threshold was set to take effect in the 2022 tax year, meaning forms that would be distributed in early 2023.
Many feared the new threshold was too low.
Taxpayers and tax professionals were concerned that the lower threshold would open the floodgates for Forms 1099-K, including those that reported personal transactions made on certain platforms. Personal transactions were never intended to be reported on individual tax returns—the law, as written, applies only to business transactions. The combination of a low threshold and misinformation about reporting requirements resulted in considerable confusion.
A number of fixes to the law were proposed. Days before a vote on the omnibus bill, Sen. Bill Hagerty (R-Tenn.) and Sen. Joe Manchin (D-W.Va.) announced an amendment that would have increased the threshold for Form 1099-K to $10,000. The amendment didn’t appear in the final version of the omnibus—but the clamor for an increased threshold grew.
The American Institute of Certified Public Accountants sent a letter to the Senate Finance Committee and the House Ways and Means Committee, expressing “deep concerns” about the threshold. The AICPA noted that the $600 threshold was based on Section 6041 of the tax code, established in 1954, and never adjusted for inflation.
A quick check on the numbers shows quite a boost. My math using the US Bureau of Labor Statistics inflation calculatorshows that if cost of living adjustments had been made, the threshold would be over $6,640.
The AICPA gave a nod to the National Taxpayers Union Foundation, which had recommended raising the threshold “to a level sufficient to exempt casual or low-level online activity.” A $5,000 threshold, they noted, would “make significant progress toward that goal while shielding taxpayers, platforms, and the IRS from some of the worst administrative fallout.”
The IRS created a transition period.
Despite the concerns, Congress did not push through any changes even as the reporting date loomed. Instead, the IRS implemented a delay.
The agency announced that the 2022 tax year would be considered a transition period. This means that third-party settlement organizations will not be required to report tax year 2022 transactions on a Form 1099-K to the IRS or the payee for the lower $600 threshold amount enacted as part of the American Rescue Plan of 2021. The existing $20,000/200 transaction threshold remains in effect through year-end. Additionally, the IRS will not regard calendar year 2022 as a transition period with respect to the requirements of Section 6050W that were not modified by the new law.
“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.”
The “new” rules will apply in 2023.
The IRS makes clear in Notice 2023-10 that for returns for calendar years beginning after Dec. 31, 2022—meaning those in the 2023 tax year—the $600 threshold applies. That is, of course, assuming no new legislation.
The delay should mean that taxpayers and tax professionals can take a breath—a deluge of forms isn’t on the way. In the meantime, keeping good records can help alleviate the stress of sorting through business income and expenses.
As for the extra time? The IRS has indicated that additional details will be available in the near future “along with additional information to help taxpayers and the industry.” That would include instructions for taxpayers who have already received Forms 1099-K from payors who relied on the lower threshold. As a start, the IRS issued updates to its Form 1099-K FAQs. You can find the fact sheet here.
This is a regular column from Kelly Phillips Erb, the Taxgirl. Erb offers commentary on the latest in tax news, tax law, and tax policy. Look for Erb’s column every week from Bloomberg Tax and follow her on Twitter at @taxgirl or Mastodon at @email@example.com.
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