Advocates are pushing for Congress to restore the $20,000 threshold for reporting transactions from payment cards and third-party networks after it was lowered by the American Rescue Plan Act to just $600, warning of a tidal wave of Forms 1099-K hitting millions of unsuspecting taxpayers and an already overburdened Internal Revenue Service and overworked tax preparers.
They are hoping that lawmakers will suspend the change in the threshold during the lame duck session in Congress after the midterm elections as part of an end-of-year tax extenders package or at least find some middle ground in between. Last month, a group of over 70 mostly conservative and free market organizations, including the National Taxpayers Union, Americans for Tax Reform, the Center for a Free Economy and the American Business Defense Council, sent an
"Under the prior law, a 1099-K was issued only in the event that a business charged customers at least 200 times in a year, and $20,000 in the aggregate," they wrote. "H.R. 1319 eliminated the 200 transaction threshold entirely, and lowered the dollar hurdle to just $600. As a result, both very small business ventures and unwitting non-business taxpayers have found themselves caught in the 1099-K reporting net. Millions of Americans who have never received a 1099-K form before, and don't know what to do with it, will get one. If they seek help from the IRS, they will quickly run into an overwhelmed agency trying to process this gusher of new 1099-K returns, keep up with filing season, clear out prior backlogs, respond to correspondence, and even answer the 800-number telephone line."
They raised the specter of young people who have never before received such a tax information form suddenly being the recipients, including occasional teenage babysitters and lawn mowers; college students tutoring high school students; people clearing out old garage and basement items by selling them on platforms like eBay and Facebook Marketplace; roommates and couples splitting rent, vacation or restaurant tabs; sporadic vacation home rental providers; and rideshare drivers with even one mile of business.
"Taxpayers receiving a 1099-K may not know what to do with it, and may be apt to ignore it on their tax return," according to the letter. "Doing so will result in the IRS assessing tax on the full amount found on the 1099-K, even if the taxpayer has basis or business expenses that would reduce or eliminate the ultimate amount of tax owed."
IRS overwhelmed
Congress may be more amenable to rolling back the changes once lawmakers hear from worried constituents next tax season who receive the forms in the mail, but to avoid confusion, advocates hope Congress will include a provision in the perennial tax extenders bill. Lawmakers continue to pass such legislation at the end of most years despite many of the traditional batch of extenders being made "permanent" in the 2017 tax overhaul. When a gridlocked Congress doesn't manage to do it, they sometimes pass the extenders retroactively, but that just complicates life for tax professionals and taxpayers who then need to file amended returns. Advocates point to the impact on the beleaguered IRS.
"There will be a flood of 1099-K's resulting from this," said Pete Sepp, president of the National Taxpayers Union. "It's not only a concern for those who are earning small amounts of income that might be taxable. But what about all of the reporting that will go on for nontaxable transactions, casual online sellers, students selling back their textbooks? If those transactions don't actually earn a profit over and above the original selling price, they're not taxable. And how is the Service going to be sure that somebody who gets one of these for doing a transaction that isn't taxable in the first place is aware that they don't have a tax obligation?"
He predicts the IRS will print on the 1099-K notice somewhere that the transaction may not be taxable and taxpayers should consult their tax advisors.
"Well, what's a 20 year old who sold back her textbooks going to do when she gets a document like that?" said Sepp. "She doesn't have a tax advisor on speed dial. That doesn't seem to be well thought out either inside or outside the Service."
He pointed out that IRS employees could have brought those matters to the attention of Congress in the past, but now they are precluded from doing so.
The sudden changes may even take longtime tax preparers by surprise if they have grown accustomed over the years to the old threshold.
"Congress, starting this year, lowered the $20,000 number to $600 and eliminated the 200-transaction hurdle entirely, which brings in a lot of new people," said Ryan Ellis, an enrolled agent who is president of the Center for a Free Economy. "That didn't happen before. Casual sellers, teenagers in the neighborhood, music instructors and tutors, people that were never thinking about this before are going to be caught up in it starting this year unawares. That's going to be a problem for a lot of people. They weren't prepared for this and they might not have a tax professional advising them. A teenage babysitter doesn't have a tax pro they go to on a regular basis. But what can they start doing if they were even aware of this?"
The forms will be coming from payment service providers they might have been using like Venmo or PayPal or from marketplaces like eBay, Facebook or Amazon or another third party such as a bank or a credit or debit card company. But recipients of the forms could have some complex tax issues they may be facing that may require the assistance of a tax professional.
"Hopefully those conduits have started to alert people that this is a tax form that you're likely to get," said Ellis. "Even if they do, there are some problems that the conduit can't fix. For example, let's look at casual sellers. If you have an old lawnmower in your garage and you're selling it on Facebook Marketplace, you have basis in that lawnmower. You bought it for something. But all that Facebook Marketplace is going to know is that you sold it for $50. And they're going to send you a 1099-K that has the $50. You don't know what your basis is on that anymore. You probably didn't even make a profit in selling that lawnmower. Ten years ago, you paid $250 for that lawnmower and you sold it for $50, so you actually have a loss and there's no tax to pay. That's a personal loss, but that's not accounted for in any of this. Even if they're prepared to get the 1099-K, I don't think people are prepared to deal with it on their taxes themselves."
He doesn't expect the IRS to be in a position to help taxpayers sort out those complicated questions, even with the extra funding it's getting from the Inflation Reduction Act for improving taxpayer service.
"I'm an enrolled agent, which is kind of a cousin to the accounting business," said Ellis. "The IRS can't do anything these days. They can't answer the phone. I still have a client that's trying to get a 2020 refund, but I'm going to have to do a power of attorney in order to try to get that. They can't answer correspondence in a timely way. They cross wires. You'll send something in and you get correspondence back, but it doesn't reflect what you just sent in. They're a complete mess."
He pointed out that the IRS will have its hands full implementing the new tax provisions in the recently enacted Inflation Reduction Act. "They need some time to catch up," said Ellis. "Congress just burdens them with it all. In the so-called Inflation Reduction Act bill that just passed, they're going to have to stand up a brand new corporate AMT starting next year. They've got to stand up that 1% stock buyback tax. Those are all brand new things they've never had to do before. They just saddled on them as well as all of those energy tax benefits and environmental tax benefits that were put in place. They add that to the pile of what the IRS has to do. And now how many millions of 1099-K's are there going to be? $600 is not a lot of money if you think about everybody that uses Venmo, PayPal, Apple Cash, eBay, Facebook Marketplace and Etsy for the casual sellers of the world. That's a lot of people, but potentially millions of these 1099-K's are going out and the IRS is in absolutely no position to deal with them."
Both he and Sepp believe there will be bipartisan support in Congress for changing the reporting threshold again in some form and have been actively lobbying the issue, pointing to the relatively small amount of tax revenue the $600 requirement would raise.
"It's about $7.8 billion in revenues raised from this new requirement, so just under $800 million a year," said Sepp. "I can't imagine a situation where the paperwork burdens and the additional staff time in any way justify that kind of revenue. Think of potentially several hundred million 1099's being introduced into the document flow and tens or hundreds of thousands of personnel with extra reporting obligations. Then you think of the economic lock-in effects of folks who might no longer conduct casual online sales and just hold onto junk. The costs there far exceed the revenue gains in the long term."
Lobbying underway
Republican lawmakers already appear to be on board with the effort on the tax-writing House Ways and Means Committee and the Senate Finance Committee. The midterm elections could swing control of Congress in at least one chamber to the GOP next year.
"I think the conservative movement has done a good job with the Republicans in getting them activated," said Ellis. "I've talked to top staff on the Republican side for both Ways and Means and Finance. They're highly aware of the issue, highly motivated to deal with it. There are bills that have been introduced on both sides, both House and Senate, to deal with this from members that sit on the tax-writing committees of jurisdiction. I can tell you on the Republican side, the ranking members are very aware of it and it's on the table. So I think there's a very good chance that we're going to take care of this in December. But it doesn't happen by itself. You have to push it."
Sen. Rick Scott, R-Florida, and Rep. Carol Miller, R-West Virginia,
"I think that would be a key requirement if this new reporting regime is retained in any way, shape or form," said Sepp. "The IRS notices are notoriously vague and continue to confuse and often worry taxpayers when they get them."
A compromise bill might have a better prospect of gaining bipartisan support. "It might make sense to restore the old threshold, but if the compromise is that it gets raised to some more reasonable level and there needs to be an accompanying effort to explain the changes to the public, that's certainly better than what we're facing now," said Sepp. "This was actually among about two dozen recommendations we made to Congress this year for tax administration reforms that we've sent to the tax-writing committees and communicated more broadly to Congress. It's a priority for us in the sense that here is a golden opportunity to avoid piling on workloads at the IRS, imposing far more in compliance costs on the private sector than this proposal will raise, and focusing on better priorities in the system of tax administration."
He believes it should be a priority for tax preparer organizations as well.
"It could also be something that's readily achievable if you've got bipartisan proposals to scale back this requirement and it hasn't quite taken effect," said Sepp. "It's something that very few either inside the IRS or outside can defend as written. You have a confluence of factors that could allow a reform proposal to make it through the legislative process."
Congress may decide to put the 1099-K requirement somewhere in between the old and new thresholds in an extenders package. "Another thing they might choose to do is come to some middle number between $600 and $20,000," said Ellis. "And then, of course, then there's a secondary question. Do they come to that middle number permanently or just for a year?"
An end-of-year tax package could also include some of the expiring provisions related to renewable energy and perhaps the Secure 2.0 (Securing a Strong Retirement Act) legislation with retirement-related provisions, which enjoys bipartisan support. A version of Secure 2.0 already passed in the House in March, and a version known as the Earning American Retirement Now (EARN) Act advanced in Senate committees with some similarities and differences. Some business groups like the Business Roundtable are also hoping to see an extension of the ability to immediately deduct R&D expenses instead of having to amortize them over either five or 15 years because of a provision of the Tax Cuts and Jobs Act that took effect in 2022.
Some tax provisions don't get extended, like pandemic relief provisions such as the expanded Child Tax Credit that was included in the American Rescue Plan last year. Democrats are still hoping to revive it, but were unable to get the Build Back Better Act passed. That was among the dozens of tax extenders that were still on the table earlier this year (
Whatever happens may depend on the outcome of the midterm elections in November before any real action happens in the lame-duck session with the 1099-K threshold.
"I think that a change in control of Congress could hasten somewhat a proposal to scale back the requirement, though the fact that there's already a great deal of Democratic support probably means that it would still be at the head of the line for consideration in a lame duck session, even if control of both chambers remains the same and Democrats continue to be in control of the House and nominally so in the Senate with the vice president's tie-breaking vote," said Sepp.
But even if the threshold goes back up again and the change is made retroactively, as sometimes happens with tax extenders, it may be too late to avoid trouble next tax season.
"If Congress doesn't get this done, information-reporting forms have to go out in January," said Ellis. "This is not an example of an issue where Congress can let this slip into January and people aren't going to file their taxes until March or April. This is an example where the information returns are going to start going out almost immediately in the month of January, and it's very hard to unring that bell once the taxpayer has already gotten a third-party information form. I don't think this is under the category of something they can let slip if it doesn't get fixed in December. We're going to have a tax season problem no matter what."
