IRS Snooping Isn’t the Only $600 Threshold That Makes No Sense

The Treasury Department’s proposal to require reporting of financial account inflows and outflows has been the focus of a great deal of attention in recent weeks, with taxpayers and financial institutions alike rightly concerned about the potential for IRS overreach, harassment, and data leaks. But while that is certainly a potential threat to be concerned about, millions of other taxpayers are already set to be subjected to heightened scrutiny come January.

Section 9674 of the American Rescue Plan Act (ARPA) passed at the beginning of this year contains a major change to transaction reporting requirements for e-retail platforms and payment vendors. As part of ongoing efforts to raise revenue for the enormous Biden agenda by whittling down the (probably exaggerated) size of the “tax gap,” this change aimed to make income reporting requirements more stringent. 

Prior to ARPA, payment vendors were required to generate Form 1099-K for all businesses using that vendor with over 200 transactions adding up to more than $20,000 in total, and to send a copy to both the business and the IRS. ARPA lowered the threshold significantly so that vendors must do this for every business with more than $600 in receipts, with no limit on the number of transactions. 

If that $600 number sounds familiar, it should — it has a long and troubled history as a threshold that gets scrapped for being overly burdensome. Most recently, it was set aside in favor of a $10,000 threshold in discussions on proposed bank account reporting requirements. Back in 2012, it was an Obamacare requirement that businesses report payments for goods or services that exceeded $600 in a given year. That change was eventually set aside after then-President Obama admitted that it was “too burdensome for small business.”

This version deserves the same treatment. With the far lower dollar threshold and the transaction limit removed, online businesses could see themselves having to send a 1099-K to a college student selling their textbooks, or someone selling used items from their attic online. 

When one considers the sheer number of 1099-Ks that would have to be sent out, it’s easy to see how this is a major burden. Moreover, it’s likely to lead to significant confusion about what the tax implications really are for modest amounts of money derived from selling things online. Taxpayers do not owe income tax on used personal items that they sell for less than they originally paid, but they’ll receive a 1099-K regardless if their receipts exceed $600. That could mean millions of Americans being scared into thinking they have tax obligations they don’t in fact have.

At the same time, ARPA required platforms like Etsy or eBay to collect sensitive information like Social Security numbers for taxpayers exceeding the aforementioned lowered threshold. That means that just about everyone selling on these platforms, even people who would in no sense be considered to be doing so as a “business,” would have to provide sensitive personal information just to use those platforms. In a world where data leaks are increasingly common, that’s a risk for the platform that is responsible for securing the information, and a risk for the taxpayers who have to provide it. It also might lead some to throw their hands up and skip selling entirely, making it harder to make ends meet.

Taxpayers should of course pay what tax they owe, but some juice isn’t worth the squeeze. Vastly expanding the reporting regime to target taxpayers selling a few household items online will do little but confuse taxpayers and require more paperwork for online platforms and businesses.