Newly proposed legislation would partly reverse a provision of COVID-19 relief legislation that lowered the transactions reporting threshold for third-party payment settlers.
The American Rescue Plan Act (ARPA; PL 117-2) required third-party payment platforms like PayPal and Venmo to report to the IRS customers’ transactions if a taxpayer transacted more than $600 in a year, down from $20,000 prior to ARPA.
On May 18, Senators Sherrod Brown, Democrat of Ohio, and Bill Cassidy, Republican of Louisiana, introduced the Red Tape Reduction Act, named so given the unpopularity of the low reporting threshold for Forms 1099-K, Payment Card and Third-Party Network transactions. Critics of the ARPA provision argue that the change imposes an administrative burden on third-party settlement organizations (TPSOs) and invites IRS scrutiny of taxpayers conducting everyday transactions.
The bipartisan bill would raise the threshold to $10,000.
“Ohio small businesses are frustrated with the 1099-K reporting threshold,” said Brown in a press release. “This red tape hits small businesses and other Ohioans selling products online, sucking time and resources from the smallest online sellers. By raising the threshold, we can prevent the IRS from interfering with minor transactions and cut down on excessive paperwork.”
“The cap the Biden administration implemented is hurting everyone from small business owners to people just trying to pay their rent,” said Cassidy. “This bill lifts that cap and prevents the IRS from spying on American taxpayers.”
In response to an onslaught of criticism, the IRS on December 23, 2022, delayed the implementation of the $600 reporting requirement. TPSOs were not beholden to report tax year 2022 transactions below $20,000 or less than 200 total transactions. “The IRS and Treasury heard a number of concerns regarding the timeline of implementation of these changes under the American Rescue Plan,” said then-Acting IRS Commissioner Doug O’Donnell, who returned to his post as deputy commissioner when Daniel Werfel was confirmed as commissioner. The IRS is treating the year delay as a transition period.
“The transition period is intended to facilitate an orderly transition for TPSO tax compliance, as well as individual payee compliance with income tax reporting,” read an IRS release (IR 2022-226). “The change under the law is hugely important because tax compliance is higher when amounts are subject to information reporting, like the Form 1099-K. However, the IRS noted it must be managed carefully to help ensure that 1099-Ks are only issued to taxpayers who should receive them.”
Werfel testified before the Senate Finance Committee April 19, 2023, where he was asked by Brown if a higher Form 1099-K threshold would allow the IRS to focus its efforts elsewhere. “Absolutely, yes,” Werfel answered. A higher threshold “would reduce volume, it would reduce complexity,” and “make the IRS’ job a lot easier.”
He could not comment, however, on the Biden Administration’s stance towards such a legislative proposal, instead deferring to the Treasury Department.
For more information about the $600 Form 1099-K reporting requirement, see Checkpoint’s Federal Tax Coordination ¶S-3699.19.
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