07/26/2023
New 1099-K threshold set to sow confusion
The new — and significantly lower — filing threshold for 1099-Ks promulgated by the American Rescue Plan Act of 2021 could have been effective at the beginning of 2023, but was delayed a year by Notice 2023-10. The additional time has not yet resulted in more clarity regarding filing.
While tax preparers are aware of the issue, it was not apparent to the majority of taxpayers that the recently ended filing season could have had additional major complications. That's because of the provision in ARPA requiring third-party payment vendors to report information to the IRS for gross transactions of at least $600. Taxpayers are also required to report this information on their individual income tax returns. Before ARPA, the threshold for having to file a Form 1099-K was much higher, requiring at least 200 transactions and $20,000 value in gross sales.
If the provision goes into effect as scheduled, it could unleash "a whirlwind of confusion and frustration for any Americans who sell even a small amount of goods on sites like eBay, Venmo, Facebook Marketplace, Etsy and more," according to Demian Brady, vice president of research at the National Taxpayers Union Foundation. Over halfway through 2023, it is not yet clearer how the IRS will clear up the confusion caused by the provision, he pointed out, and the agency has not explained how it intends to deal with a deluge of new paperwork.
"Not only has the IRS underestimated the sheer volume of 1099-K forms set for release later this year, it has not adequately accounted for the time burdens imposed on taxpayers," he said. "Getting these calculations is important so that policymakers can make sure that the costs imposed by tax laws are not disproportionate to the revenue the government hopes to collect. The confusion and complexity doesn't just impact taxpayers and preparers, but also the IRS itself."
The previous threshold of 200 transactions and $20,000 provided a predictable safe harbor for those who sell online or only make occasional and primarily non-taxable sales, Brady observed: "Taxpayers could easily exceed the new threshold by holding a garage sale, selling their used college textbooks online, or by using smartphone apps to transfer money to family and friends. Even though selling used personal goods for less than they were purchased for, or sending money to friends to reimburse them for concert tickets, are not taxable events, the IRS and the taxpayer would still get a 1099-K at the end of the year. Many taxpayers will be misled into thinking they have a tax obligation or lack the substantiation to prove to the IRS that they should not be taxable on the full amount."
Many taxpayers will be confused by the receipt of a 1099-K form and end up overreporting their income — and even when they understand the basics of the 1099-K form, they may still end up overreporting income on the specifics, Brady suggested.
"For example, the gross dollar amount reported in the 1099-K could include costs for postage and shipping. These funds do not remain with the seller, yet they will be shared with the IRS, increasing complexity and headaches for the sellers," he said.
There are a number of legislative fixes that have been proposed, but nothing has taken hold yet — and the new threshold remains set to take effect again at the end of the year.
Kevin Smith, CPA
