In a reversal from earlier guidance, the IRS recently announced a delay in the lower $600 reporting threshold for Form 1099-K for the 2022 tax year. Under prior regulations, businesses would have been required to report payments from third-party settlement organizations like PayPal or Venmo. The updated transition period, outlined in IRS Notice 2023-10, provides additional time for taxpayers and tax preparers to become more familiar with the new regulations. While this is certainly welcome news for many area businesses, it is important to become familiar with the new requirement. To help clients, prospects, and others, Hanson & Co has provided a summary of the key details below.
What is IRS Form 1099-K?
Form 1099-K is an information return sent to individual taxpayers on behalf of third-party settlement organizations like banks and online merchants, including PayPal, Venmo, or other payment card apps. Organizations are required to include the taxpayer’s name, address, and taxpayer identification number or social security number as well as the gross amount of reportable payment transactions, or income, to an individual taxpayer. According to the IRS, “The gross amount of a reportable payment does not include any adjustments for credits, cash equivalents, discount amounts, fees, refunded amounts, or any other amounts.”
Form 1099-K must be issued to taxpayers on or before January 31, 2023, for transactions in the 2022 tax year. From there, Form 1099-K must be filed with IRS by February 28, or March 31 if filed electronically. Organizations and/or taxpayers may be subject to penalties if they fail to meet the filing deadlines.
Under previous guidance, organizations were only required to issue Form 1099-K if the taxpayer exceeded 200 transactions or $20,000 gross at any point during the tax year.
Form 1099-K does not track personal transactions, such as those between friends or family, nor does it apply to those that are bona fide gifts. Covered transactions represent an exchange of a service or product between two parties. For example:
- Payment for services, like photography, marketing, or babysitting.
- Selling items to an unrelated taxpayer, i.e., a refrigerator, piece of furniture, or household appliances.
- Cumulative amounts traded on a cryptocurrency exchange.
Changes to Form 1099-K and Third-Party Reporting Requirements
The American Rescue Plan Act (ARPA), which was passed in March 2021, amended the de minimis amount. Effective for tax year 2022 and after, a new reporting threshold of $600 was in place without any minimum number of transactions. Requiring information returns like Form 1099-K to be filed increases compliance, even though taxpayers are supposed to self-report.
The change was never widely accepted. Among other concerns, widespread taxpayer misunderstanding was expected with a roll-out this soon. Coming off the largest IRS backlog in history, the AICPA was concerned about increased IRS and taxpayer correspondence – and confusion – in the months following implementation.
As the recent Taxpayer Advocate Service (TAS) annual report to Congress noted, two ongoing issues faced by the IRS include processing delays and the inability to reach a live representative. Even though the change in reporting threshold had been announced for months, industry stakeholders remained concerned about whether most taxpayers would understand the rule enough to follow it.
Delay in Lower Reporting Threshold
In Notice 2023-10, the IRS announced that it would delay the enforcement and administration of the lower $600 de minimis requirement for Form 1099-K until the 2023 tax year. Further, the IRS will not impose penalties for late Forms 1099-K unless the amount is more than $20,000 or involves 200 or more transactions.
1099-K Compliance for Individual Taxpayers
Especially for transactions in the 2022 transition year, it’s possible that some taxpayers will receive Forms 1099-K in error. If the information is incorrect or inaccurate, taxpayers should contact the issuing organization as soon as possible and request an updated version.
IRS guidance for common scenarios provides that:
- Personal items sold at a loss: Taxpayers should report the information on Form 1040, Schedule 1, Additional Income and Adjustments to Income. The adjusted gross income would be $0, and no tax would be due on the transaction.
- Personal items sold at a gain: Taxpayers should report the amount of the gain on Schedule D, Form 1040. The amount of the gain would be taxable according to capital gains.
- Mix of personal items sold at a gain and loss: Taxpayers should report items separately. Losses cannot offset the sale of personal items for gains.
Taxpayers will need to keep more detailed records moving forward on third-party applications, whether they offload a washer and dryer and get paid via Venmo or buy, sell, or trade cryptocurrency. Even if the organization doesn’t furnish the 1099-K, taxpayers are still required to report all taxable income sources.
Businesses and self-employed individuals will need to check that the amounts listed on all Forms 1099-K match books and records. Taxpayers who report business income on Forms 1120 or 1065 and receive a Form 1099-K with that amount by mistake should request an updated version.
Additional questions about the new filing requirements can be found in the IRS Fact Sheet: FAQs About Form 1099-K.
2023 and Beyond
The lower reporting threshold of $600 regardless of the number of transactions will be in effect for the 2023 tax year. Many tax professionals and industry experts continue to call on the IRS to increase the de minimis threshold from $600, calling it too low. The recommendation, along with the National Taxpayers Union Foundation, is to raise it to $5,000. However, as it stands the lower amount is here to stay.
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