As most practitioners are aware, the legislation addressing threshold changes to Form 1099-K was postponed last year. Form 1099-K is issued by payment processors like PayPal, Venmo or even Intuit to individuals to receive funds through their payment processing systems.
The thresholds for the forms were originally set at $20,000 or 200 transactions. The idea with the higher thresholds being to capture individuals using the processing systems for business and not to issue a 1099 to two friends was transferring funds to pay their portion of rent money.
The problem with the new legislation is it drops those thresholds to issue a 1099-K to anyone who receives $600 or more in funds through one of the systems.
At the end of 2022 the Internal Revenue Service (IRS) had issued no guidance nor had they come up with any solutions as to how to handle situations where the money reported on a 1099-K at lower dollar amounts was not taxable. Millions of Venmo users transfer funds to their friends and family to cover things like coffee, pizza and concert tickets as a matter of convenience, but none of those are taxable transactions.
Taxpayers preparing their own returns could certainly be misled into overreporting their income when receiving their forms. To make more work for tax preparers, we have to figure out how to report the 1099-K to avoid a notice coming in the mail but ensure that it’s also not treated inaccurately as taxable income. All with no guidance from the IRS.
Multiple pieces of new legislation have been proposed to address these potential issues but nothing has passed yet and no guidance has been issued by the IRS. We may have avoided the problem for one tax season but as of the end of 2023 compliance kicks in and these forms will be going out to impact the upcoming tax season.
Currently, it seems as though the IRS is grossly underestimating the number of forms it will need to process as well as the undue burden on taxpayers and tax preparers alike.
Keep your eyes peeled for progression on this issue and make sure you’re contacting your representatives, as well as the American Institute of Certified Public Accountants (AICPA) and other associations to voice your concerns and support of a fix and/or guidance related to the matter.
Also consider giving your clients a heads-up on what’s coming. Preparing them now to be on the lookout for these forms can help everyone avoid confusion during tax season.
Consider polling your clients to see how many of them use these types of payment processors to give your firm a leg up on understanding how many returns you may need to address this issue if legislation doesn’t correct it by the end of the year.