IRS Taps the Brakes on Form 1099-K Lowered Threshold, But States Keep Accelerating
Know the reporting requirements across federal and state jurisdictions
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IRS Taps the Brakes on Form 1099-K Lowered Threshold, But States Keep Accelerating
Know the reporting requirements across federal and state jurisdictions
On November 21, 2023, the IRS issued Notice 2023-74 further delaying the application of the $600 reporting threshold for third-party network transactions another year, until tax year 2024, with tax year 2023 being treated as a transition period. However, the press release from the IRS accompanying the Notice indicates that 2024 will also be a transition period with a proposed payment threshold of $5,000.
The timeline below reflects the proposed reporting timeline for Forms 1099-K as stated in the Notice.
American Rescue Plan Act and its Reduced 1099-K Threshold
As noted in our previous publication, in March 2021, Congress passed the American Rescue Plan Act. Buried in this Covid-relief bill was a revenue-raising tax provision that reduced the reporting threshold for third-party network transactions. The new threshold was scheduled to be effective for tax year 2022, with filing occurring in early 2023.
The decreased reporting threshold resulted in a significant amount of backlash from taxpayers and reporting entities. In late December 2022, the IRS issued Notice 2023-10 announcing that the 2022 tax year would be treated as a transition period under the new legislation, and ultimately delayed the reduced reporting threshold of $600.
States have reduced the 1099-K Threshold Already
It is important to note that this delay perpetuates the complexity with 1099-K reporting as there continues to be a variance between federal and state thresholds. While the IRS has delayed the reduced threshold of $600, states have already reduced the reporting threshold. So while enterprises may not have a federal filing requirement, they should look carefully at the applicable state threshold and corresponding filing requirement for Forms 1099-K.
The following states have reduced the threshold below the federal level of $20,000 in payments and 200 transactions.
Many enterprises may not have systems that are capable of handling variances with thresholds across states and the IRS for the Form 1099-K filings. Luckily, the IRS specifically addressed penalty relief for enterprise filing Forms 1099-K. Specifically, the Notice states that no penalties will be imposed against entities that would be required to report under the law as long as they report consistently with the above-referenced threshold for 2023. No formal guidance is provided for 2024 and 2025.
Why Is There So Much Concern Over this $600 Threshold?
Generally, Congress, the IRS, and tax practitioners view information reporting as a good thing. It serves two important purposes.
First, it provides valuable information to individuals and businesses about their tax obligations. The information returns give taxpayers specific information about taxable income they received during the year helping them prepare the tax returns accurately.
Second, it provides the IRS with information that can be used to enforce tax rules more efficiently. Using the information, the IRS can better spot tax non-compliance and focus its enforcement efforts on those taxpayers.
However, the concerns from taxpayers here arise mostly from the nature of the activities involved and the difficulty with accurately reporting on taxable transactions. Under the statute third-party network transactions are only subject to information reporting when they involve settlement of payments made for the provision of goods or services. Receiving payment for goods or services generally implies that the activity represents the receipt of taxable income—although there are likely relevant deductions that can be taken against that income. The issue, however, is that many individuals use third-party payment networks to facilitate transactions between parties that do not represent the provision of goods or services, such as reimbursing a friend for lunch or sending a monetary gift to a family member.
The concern is that the decreased threshold of $600 with no corresponding transaction volume requirement may improperly capture individuals who are receiving funds in transactions that are not actually taxable and, as a result, those funds are being improperly captured as taxable and improperly reported on to the IRS. Congressional offices don’t want to get flooded with phone calls from confused constituents asking why they have to pay tax on the used couch they sold for $650 when, in all likelihood, they owe no tax on the proceeds of that sale.
Separately, even for those who did settle transactions for goods or services that should be taxable in nature, there is a record keeping concern. For example, receiving funds via a third-party payment network for items sold at a garage sale or possibly through an online social marketplace could result (properly) in the receipt of an information return, but the individual taxpayer may not understand the need to keep records, or even have the records, for the one-off personal items purchased years prior for amounts almost certainly in excess of the resale price, leaving them subject to a tax compliance issue where there almost certainly was no taxable net income in the transaction.
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