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Federal Tax

Payors Should Be ‘Vigilant’ During Form 1099-K Transition Period, Tax Pro Says

Tim Shaw  

Tim Shaw  

After the IRS conceded to outside pressure from stakeholders to delay the implementation of the $600 de minimis threshold for reporting third-party settlement organization (TPSO) transactions, a Big Four tax lawyer advised caution in remaining compliant.

Pursuant to the American Rescue Plan Act of 2021 (ARPA; PL 117-2) the Code Sec. 6050W threshold was lowered from $20,000 (over 200 transactions) to payments in settlement of third-party transactions in excess of $600, effective for payments made during calendar year 2022. Such payments are reported on Form 1099-K, Payment Card and Third-Party Network Transactions. Several TPSOs and electronic payment facilitators (EPFS), lawmakers, and tax and accounting groups rallied against the change, calling for the new threshold to be raised, or at least delayed.

The IRS in Notice 2023-10, released late December, announced that calendar year 2022 will instead be considered as an “orderly transition” period, delaying the new threshold for a year. Acting IRS Commissioner Doug O’Donnell said in a statement that the relief will “help smooth the transition and ensure clarity for taxpayers, tax professionals and industry” and that the additional time will “reduce confusion during the upcoming 2023 tax filing season.” FAQs on third-party transaction reporting were also updated soon after.

Ernst & Young’s Ian Bradley, Partner, Global Director of Customer Tax Operations & Reporting Services, in comments shared with Checkpoint said that there were several legislative proposals at the end of 2022 to increase the threshold from $600, but “there was apparently not enough consensus on what the new threshold should be to amend the statute.”

Bradley noted that payers that have performed backup withholding during calendar year 2022 must still file a Form 1099-K and furnish a copy to the payee if the total payments and withholding exceeded $600, as described in the notice. Code Sec. 3406(a) requires specified taxpayers to perform backup withholding, done by deducting and withholding income tax in certain situations, such as if the payee does not supply their taxpayer identification number to the payer, or if the IRS has notified the payer that a furnished TIN is incorrect.

“While Notice 2023-10 provides welcome relief for 2022 reporting TPSOs and EPFs must remain vigilant in collecting [TINs] from all payees in 2023,” said Bradley. “Under the current statute, a payor that does not have a payee’s TIN must withhold from payments made in settlement of third-party network transactions without regard to any exception for de minimis payments … As payors are generally liable for any tax they should have withheld but did not, they should impose backup withholding (at the current rate of 24%) on every payment made in settlement of a third-party network transaction if they do not have the payee’s TIN.”

Among lawmakers in favor of a delay included West Virginia Democratic Senator Joe Manchin, who introduced an amendment December 22, calling the ARPA provision in a statement a “burdensome” requirement. Manchin had urged the IRS to “allow Congress to continue working to find a lasting solution that prevents this harmful regulation from impacting small businesses.”

The American Institute of Certified Public Accountants supported the delay in a December 23 statement. “We appreciate Acting Commissioner O’Donnell’s willingness to listen to the many concerns surrounding the implementation of this policy and take the appropriate actions, and we believe this will both allow taxpayers to better understand and comply with the law and allow the IRS sufficient time to prepare for the implementation,” the statement read.

Earlier in December, the AICPA in a letter to leaders of the Senate Finance Committee and the House Ways and Means Committee agreed with a National Taxpayer Union Foundation compromise in the form of a $5,000 threshold. The AICPA also alluded to the IRS’ possible inability to handle the tall task of matching significantly more third-party receipts with Forms 1099-K.

“When the potential for matching is overlayed with IRS’s continuing processing backlog, more needs to be done to ensure that taxpayers and practitioners are not faced in 2023 with yet another tax filing season with unprecedented backlog levels leading to additional delays in processing returns and correspondence, historically low levels of telephone service, and incorrect notices and penalties being assessed and sent to taxpayers,” read the AICPA’s December 16 letter.

In a December 27 blog post, National Taxpayer Advocate Erin Collins said that she expects the IRS, during the transition period, to “develop guidance and share information to assist taxpayers in complying with the new rules going forward.”

For more information about the $600 Form 1099-K reporting requirement, see Checkpoint’s Federal Tax Coordinator ¶S-3699.19.

 

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