Very soon, taxpayers will have to grapple with a change made under the American Rescue Plan Act (ARPA) that dramatically reduced the reporting threshold for Form 1099-K. This change, starting in the upcoming tax filing season, will impact everyone from Americans who sell items on e-retail platforms to those who use apps to transfer money to friends and family.
Previously, the reporting requirement was triggered when a seller had an annual total of 200 transactions and a gross dollar amount of $20,000. Under ARPA, the threshold is now just $600 per year, with no minimum number of transactions. When the threshold is triggered, the third-party platform will issue a 1099-K form reporting gross receipts to the taxpayer as well as a copy to the Internal Revenue Service (IRS).
Since the time that the lower threshold was proposed, NTUF has warned that it will “cause tax anxiety for people who sell used goods online like an ongoing garage sale.” A major concern is that millions of taxpayers stand to receive a 1099-K for the very first time and face a steep learning curve to understanding the tax obligation of the transactions included. While it may appear to some individuals that they are obligated to pay taxes on the entire gross amount specified, this assumption might not necessarily be accurate. If an item is sold for a loss (as most used goods are), the amount should not be taxable. If someone resells tickets online they would only be liable for the net gain and should take heed to save and organize all receipts. Moreover, the payments received by an online seller for shipping costs should also not be taxable.
The Government Accountability Office (GAO) published a new Snapshot report yesterday that echoes what NTUF has been saying about ARPA’s reduced 1099-K threshold. Overall the Snapshot looks into how the IRS can use information returns to help increase tax compliance and reduce burdens on taxpayers, and it includes a section titled “New Form 1099-K Reporting Threshold May Exacerbate Taxpayer Confusion.” GAO warns:
Many taxpayers will receive Form 1099-Ks who did not in the past, which may help some taxpayers comply. But, despite IRS communication efforts, it also may exacerbate confusion among some taxpayers, such as gig workers, who may not understand the taxability of their payments and taxes owed. For example, some of these taxpayers may not know how to calculate profit or loss and may not understand the information reported on the form. This puts them at risk of inaccurately reporting their incomes to the IRS or not meeting their tax obligations.
GAO went on to cite that the IRS projects that it will receive nearly 44 million forms in 2024 -- 30 million higher than its previous projection. In its revision, the IRS explained that it arrived at the higher estimate based on information from a few large third-party businesses that will generate a lot of these forms, and also from some states that have enacted a lower 1099-K threshold. The IRS also said that it will update the numbers as more data comes available next year. In its Snapshot, GAO raised a concluding concern that the ”IRS does not have a plan to analyze these data to inform enforcement and outreach priorities. This limits its understanding of changes in taxpayer burden.”
There are two additional concerns that GAO’s Snapshot did not address.
The lower threshold will also impose administrative burdens on the IRS. ARPA’s threshold was supposed to have gone into effect for the 2023 tax season, but the IRS made an administrative decision to delay implementation by one year. IRS Commissioner Daniel Werfel told the Senate Finance Committee on April 19, 2023 that ARPA’s 1099-K threshold was paused because the agency was “not ready to administer in a way that provides taxpayers the clarity they need.” Later in that hearing he also said that the IRS would have a much easier time administering the threshold if it was changed.
IRS has not yet provided an estimate of the compliance burdens on taxpayers under the lower threshold. Under the federal Paperwork Reduction Act, federal agencies are supposed to calculate the time and out-of-pocket expense burden of all forms that the public is required to fill out. This information is published in a database managed by the Office of Information and Regulatory Affairs. The IRS has revised the estimate on the vendors who produce the forms, but it has yet to account for the paperwork burden or the out-of-pocket expenses imposed on the millions of taxpayers who will receive a 1099-K form as they prepare their taxes.
NTUF noted that there are several bipartisan bills in Congress to provide taxpayers with relief from the reduced 1099-K threshold. This includes House Ways and Means Chair Jason Smith’s (R-MO) Small Business Jobs Act (H.R. 3937) which passed the Committee in June and will be part of a larger tax package, the American Families and Jobs Act. The proposal would restore the prior reporting threshold.
As we approach the end of the calendar year, time is running out for Congress to fix ARPA’s 1099-K problem. GAO’s new warning, along with the additional concerns about the administrative challenges and the lack of compliance burden estimates should underscore the need for urgency to protect taxpayers from onerous complexity and tax confusion.