The new-for-2022 law change that sharply reduced the reporting threshold at which third-party payment settlement entities must issue a Form 1099-K, Payment Card and Third Party Network Transactions, drew a cautionary tax tip from the Taxpayer Advocate Service (TAS) and urging from the National Taxpayers Union Foundation (NTUF) for Congress to revoke or reduce the magnitude of the change.
"Payment settlement entities" generally include banks or other organizations that process credit card transactions on behalf of a merchant and make an interbank transfer of funds to the merchant from a customer.
They also include, for payments through a third-party network, a third-party settlement organization — generally, a bank or other organization with a contractual obligation to make a payment in settlement of a payment card transaction. These include payment services such as PayPal, Venmo, and CashApp. They also include online auction payment facilitators and marketplaces connecting independent sellers with customers, such as eBay and Etsy. Some gig-work platforms, including Uber, Lyft, and TaskRabbit, are either third-party settlement organizations or use them to pay gig workers.
For each calendar year between 2010, when Sec. 6050W requiring this reporting first took effect, and 2021, payment settlement entities have been required to file Form 1099-K annually with the IRS with respect to payees and furnish it or its information to those payees, reporting the gross amount of reportable payment transactions. During this period, third-party settlement organizations have been allowed a de minimis exception to filing Form 1099-K with respect to payees with 200 or fewer such transactions during the calendar year with an aggregate gross amount of $20,000 or less.
However, the American Rescue Plan Act (ARPA), P.L. 117-2, amended this de minimis amount to $600, with no minimum number of transactions, effective for calendar years beginning after Dec. 31, 2021. Consequently, many more payees than before will likely be receiving Form 1099-K, which must be sent by Jan. 31 following the end of the reporting year, for reporting years 2022 and subsequently. ARPA also clarified (for transactions after March 11, 2021) that only the provision of goods and services are reportable third-party network transactions.
Despite the law's clarification, third-party settlement transactions that do not involve the provision of goods and services, such as personal payments and reimbursements, are common and could be mistakenly reported on Form 1099-K — all the more likely with the new, lower de minimis amount, according to a TAS Tax Tip posted on TAS's website Tuesday.
"Use caution when paying or receiving payments from friends or family members using cash payment apps," the tip warned. For example, reimbursing a friend who picks up a restaurant check for one's own share of the meal or sending a gift by a cash payment app might be erroneously reported on Form 1099-K if such transactions, along with any others during the year, amount to $600 or more.
Payment services generally allow users to designate a payment as personal, which should prevent such a mistake, TAS advised. "Be sure to ask those friends or family members to correctly designate the payment as a non–business-related transaction and then make a note yourself of what the payment was for and from whom it was received."
Taxpayers who receive a Form 1099-K that erroneously includes a nonreportable payment must ask the third-party settlement organization to file and furnish a corrected form, TAS said, and referred taxpayers to the IRS's frequently asked questions on Form 1099-K.
Also on Tuesday, the NTUF posted an issue brief on its website decrying the $600 threshold as not only imposing a significant additional administrative chore for third-party settlement organizations but also likely to worsen the IRS's own difficulties in digging itself out from its well-publicized backlog of unprocessed returns and mail and being overwhelmed in serving taxpayers in other ways.
The $600 threshold "risks making a disastrous tax filing year even worse," the issue brief stated, one that "is likely to flood both taxpayers and the IRS itself with paperwork — despite the fact that much of the activity described on the forms won't even yield income tax obligations."
The NTUF, like TAS, pointed to the likelihood that Forms 1099-K going forward may include nonreportable transactions, citing as examples "digital garage sales" of personal items and college students selling used textbooks online, both likely for less than their cost basis.
The $600 threshold for Form 1099-K, moreover, represents a "clumsy" attempt to raise revenue and increase compliance, targeting the growing gig economy, whose workers often receive third-party settlement payments as independent contractors, the NTUF said.
Congress should act quickly, the NTUF said, to either restore the prior $20,000/200 transaction threshold or set it at a more reasonable level, such as $5,000.
Once the IRS's backlog is addressed, Congress should also pursue comprehensive reforms to the employee vs. independent contractor distinction that take into consideration many factors in the gig economy creating new hybrids between the traditional classifications for tax purposes, the NTUF suggested.
"Until the IRS can get its house in order and Congress can enact other needed reforms, Congress should act to reduce the added burden and confusion caused by its recent change to Form 1099-K," the NTUF said.
— To comment on this article or to suggest an idea for another article, contact Paul Bonner at Paul.Bonner@aicpa-cima.com.