Accountants, small business owners, IRS representatives, bookkeepers, and tax attorneys everywhere are breathing a sigh of relief today as the IRS — awaiting relief from Congress that never came — finally made the decision to push off the confusing and troublesome changes to 1099-K reporting for another year.
The change in law requires Payment Servicing Entities (PSEs) and Third-Party Settlement Organizations (TPSOs) such as PayPal, CashApp, Venmo, Etsy, Poshmark, and eBay to lower their reporting thresholds — from 200 transactions and $20,000 to anyone receiving $600 or more; a pretty massive net that would inadvertently ensnare plenty of folks who do not actually have taxable income, but who would be receiving a 1099-K under the new rules. As a result, many who sold personal items at a non-deductible loss might end up with unexpected tax filing requirements. The point of the changes was to catch the many “side hustles”, where folks are providing services or buying and reselling goods on online platforms, in cases where the taxpayer is either intentionally or unintentionally evading taxes on the unreported income.
Although the intention was made in good faith to close the tax gap and encourage under-reporters to comply with the law, the unintended consequences threatened to overburden already struggling IRS representatives, accountants and bookkeepers, and their small business clients.
Contrast a side gig where someone is buying items from thrift stores and reselling them on Etsy for a sizable profit — a taxable event — with someone who is cleaning out their childhood home and selling their family’s old clothing and housewares at a loss. Both would receive a 1099-K, but the second person isn’t running a business, and the loss isn’t deductible. However, if either of these folks doesn’t declare the income, they can expect an underreporting notice from the IRS. At the end of the day, the person selling old personal possessions would get a “pass” from the IRS, but not before having to deal with confusing and scary notices, resulting in required responses that won’t be reviewed for months, given the backlog of unprocessed snail mail that persists at the IRS.
You can imagine why so many of us were concerned about this imminent change — statements from the AICPA, NATP, National Taxpayers Union Foundation and other professional organizations made it clear that the burden on the beleaguered IRS and tax preparers was simply unreasonable, and the timeframe for implementation too short. Some issuers were going to be issuing exponentially more forms than previously and did not have the systems in place yet to manage the increase. Per the NATP, “the new rules create an undue burden on taxpayers and the IRS, which is still wading through a backlog of returns.”
To be clear: the delay in implementing these lower thresholds for receipt reporting on a 1099-K does not mean that income from providing services or buying and reselling goods is not taxable. It already was, it continues to be, and starting next year, it will be much harder for those trying to shirk their reporting responsibilities to do so.
For 2022, reporting in early 2023, the existing 1099-K reporting threshold of $20,000 in payments from over 200 transactions will remain in effect.
But the year’s delay gives taxpayers and their advisers more time to set up bookkeeping systems — especially for those who have not previously recognized that this type of income is in fact taxable — and allows the IRS some time to catch up on their backlog and come up with an approach for mitigating the countless numbers of folks who do not have reporting responsibilities but will likely get caught with an underreporting notice. Similarly, those taxpayers using Payment Servicing Entities like PayPal can use the extra time to get educated about what types of receipts are NOT taxable — gifts, for example, or resale of your own personal goods at a loss — and work with their PSE to make sure they’re processing these types of receipts in a way that is more likely to exempt them from receiving a 1099-K (hopefully PayPal, Venmo and the like will set up more clearly established instructions about “personal” vs “business” transactions).
Lastly, there’s some hope that Congress will revisit the situation and raise the reporting threshold from $600 — which many have argued is archaic — to something more like $5000 or $10,000. Time will tell.
I, for one, am glad for the opportunity to get back to spending my time working with clients on value-added activities, such as tax planning and managerial decision-making — rather than jumping through more compliance hoops — after a very long three years.
