The American Rescue Plan Act (ARPA), signed into law in 2021, included a change to income reporting requirements aimed at reducing the “tax gap” between taxes the IRS believes taxpayers owe and the taxes they actually paid. ARPA required more taxpayers to complete Form 1099-K by lowering the reporting threshold from $20,000 and 200 financial transactions to just $600 with no limit on the number of transactions. This was projected by the Congressional Budget Office to increase tax receipts by $7.728 billion over ten years, but the substantially lower threshold is set to cause significant headaches for taxpayers and the Internal Revenue Service (IRS). Thankfully, several lawmakers have introduced legislation that would help alleviate this problem.
Prior to ARPA, payment vendors were required to generate Form 1099-Ks for all businesses or individuals with over 200 transactions adding up to $20,000 or more in total, and to send a copy to both the business/individual and the IRS. With COVID-19 disruptions and the growth of the gig economy, lawmakers purported lowering the threshold to $600 would ensure taxable revenue was not escaping unreported. However, as NTU Foundation notes, Form 1099-Ks often lack context for the income they report and often covers income that does not incur income tax obligations.
The $600 threshold is much too low for policymakers’ stated goal and comes with a host of problems for taxpayers. For example, a college student selling more than $600 worth of textbooks or a person hosting an online garage sale would receive a Form 1099-K, despite the fact that they are unlikely to incur tax liability from these sales. With the sizable backlog at the IRS, a lower threshold will flood the agency and taxpayers with unnecessary paperwork that will contribute to what is already a very dysfunctional tax season.
Thankfully, several lawmakers have introduced legislation to come to the aid of taxpayers. Representative Carol Miller (R-WV) introduced the Saving Gig Economy Taxpayers Act (H.R. 3425), Senator Rick Scott (R-FL) introduced S. 948, and Senator Bill Hagerty (R-TN) and Representative Michelle Steel (R-CA) introduced the SNOOP Act of 2022 (S. 3546/H.R. 6913). These bills would undo the ARPA provision and revert the Form 1099-K threshold to $20,000 and 200 transactions — a welcome change to free taxpayers and the IRS from unnecessary reporting.
Republicans are not alone in attempting to fix this problem. Representatives Cindy Axne (D-IA) and Chris Pappas (D-NH) recently introduced the Cut Red Tape for Online Sales Act which, according to their press release, would raise the threshold for reporting to $5,000 and have the IRS clarify when sellers need to file their form. Reports state that Senators Kyrsten Sinema (D-AZ) and Maggie Hassan (D-NH) are introducing a Senate companion to this bill. While NTU believes reverting back to pre-ARPA baseline would be the most straightforward solution, this would still help alleviate many of the issues facing taxpayers, and it is certainly better than the status quo.
It is our hope that the bipartisan recognition of the burdensome Form 1099-K reporting requirements will lead to a commonsense solution. Raising the Form 1099-K reporting threshold is a practical goal that should continue to attract bipartisan support. Lawmakers from both sides of the aisle should come together and find an expeditious solution to this issue facing American taxpayers, especially gig workers. NTU applauds the work to address this issue and looks forward to working with all interested parties in pursuit of a reasonable fix.