The Internal Revenue Service (IRS) has announced a deferral of the initiation of the new reporting threshold of $600 for Form 1099-K issued by third-party settlement organizations, such as payment apps and online marketplaces. This is contained in Notice 2023-74, and it is a result of a lot of comments received from taxpayers, tax practitioners, and payment processors to minimize confusion and clarify the portable transition.
A transition year for 2023: Addressing complexity
For calendar year 2023, the IRS will maintain the existing reporting threshold of $20,000 with over 200 transactions, treating the year as a transition period. This decision was influenced by concerns over the potential issuance of an estimated 44 million Form 1099-Ks to taxpayers, many of whom may not owe taxes or expect these forms.
The lower $600 threshold was initially enacted under the American Rescue Plan (ARP) and was set to begin in 2022. However, its introduction has been postponed twice to give taxpayers and the tax community more time to adapt. In response to feedback, the IRS is also working on updating Form 1040 and related schedules for 2024 to make the reporting process simpler and more user-friendly.
IRS Commissioner Danny Werfel emphasized the importance of a phased approach, stating:
“We spent many months gathering feedback from third-party groups and others, and it became increasingly clear we needed additional time to effectively implement the new reporting requirements. Taking this phased-in approach is the right thing to do for tax administration and prevents unnecessary confusion.”
Phased implementation for 2024 and beyond
The Internal Revenue Service has indicated that a threshold of $5,000 will be set for the tax year 2024 as it moves further towards the $600 requirement on which it will be applying that threshold. Thus, it intends to reconcile the two policies: an expanded reporting system with a resolution such that there is less burden on taxpayers and third-party organizations.
Under ARP, a third-party settlement organization is now required to report all transactions above the $600 threshold for goods and services. It was reduced from a former threshold of $20,000 and 200 transactions. These forms are supposed to help taxpayers report their income accurately, rather than whether a transaction is taxable or not.
For instance, personal payments like splitting a bill on dinner, household expenses for a family, or sending gifts would not be taxable or require reporting on Form 1099-K, and casual sales like furniture or clothing could create Form 1099-K, although the seller does not owe taxes on those sales.
Thereby, it has made the implementation quite difficult, prompting the IRS to solicit public feedback about the proposed $5,000 threshold and other terms in the reporting procedure. As Commissioner Werfel stated to the concerned stakeholders:
“The IRS will use this additional time to continue carefully crafting a way forward to minimize burden. We want to make this as easy as possible for taxpayers and will work closely with third-party groups, tax professionals, and others to ensure compliance with the law.”
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Balancing compliance and simplicity
Reporting requirements that reformed Form 1099-K are part of a broader objective of ensuring better compliance with tax laws, and such measures also simplify the filing of taxes by all Americans. The vision for this reform is the reduction or total elimination of confusion with regard to whom the form shall be issued, as well as bright and clear instructions on whom to report, not to mention the long-awaited ease for taxpayers to get it right the first time. The IRS intends to keep on implementing amendments that are in line with its Strategic Operating Plan, hence targeting taxpayer education and synergy with relevant stakeholders.
Thus, the agency’s decision to defer the $600 threshold for tax year 2023 gives all time and other required tools to the taxpayers, software providers, and tax professionals for effective adjustment.
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