The IRS delayed a new rule that would have required an estimated 44 million taxpayers to receive tax forms from payment applications and online marketplaces like Venmo and eBay for the second year. Such taxpayers should be aware of the delay. Still, it does not affect their tax payment or income reporting obligations. Furthermore, the IRS plans to gradually implement the reporting regulations for online payment processors in 2024.

Initially issued in 2012, the information return is IRS Form 1099-K, Payment Card and Third Party Network Transactions. The form aims to report payments from the following:

• Payment applications or online marketplaces (sometimes called third-party settlement organizations)
• Credit cards
• Debit cards
• Stored-value cards, including gift cards

Your payment processors or the payment settlement business should provide the form if you receive payments directly by credit, debit, or gift card. However, over the past few years, online marketplaces and payment apps must send a Form 1099-K only if the total amount of payments you get for goods and services exceeds $20,000 from more than 200 transactions. Of course, they can also send you the form for less money.

The form provides the gross amount of each reportable transaction, broken down by month and for the entire year. The IRS also receives a copy.

The new reporting rule for online payment processors

In March 2021, the American Rescue Plan Act (ARPA) was passed, greatly extending the use of Form 1099-K. The purpose of the modifications was to enhance voluntary tax compliance for these kinds of payments. The IRS claims that when amounts are subject to information reporting, there is a higher tax compliance rate.

ARPA requires online marketplaces and payment applications to disclose payments of more than $600 for selling goods and services. The number of transactions is not significant. Consequently, many taxpayers who take payments through online marketplaces or payment applications would receive the form. The proposed regulatory change may affect “casual sellers” of used furniture, clothing, and other home items. It may also affect small companies and those with side projects.

Initially, the forms were supposed to be sent out in January 2023. Then, the modification was supposed to go into effect for the 2022 tax year. Nevertheless, the IRS issued guidelines in December 2022 indicating that 2022 would be a transitional year for the shift and announced its first implementation delay.

According to the agency, the change must be handled cautiously to guarantee that the forms are only sent to the correct taxpayers and that the taxpayers are aware of their obligations due to this reporting.

The most recent implementation strategy

The IRS anticipates receiving over 44 million Form 1099-Ks in 2024, an increase of roughly 30 million, according to a report released by the U.S. Government Accountability Office (GAO) in November 2023. However, the GAO discovered that “there is no plan in place at the IRS to analyze these data to inform enforcement and outreach priorities.”

The IRS revealed a second postponement of the rule change less than a week later, stating that the prior criteria ($20,000 or more than 200 transactions) will still apply in 2023. The agency mentioned the potential for taxpayer confusion and comments from tax experts, payment processors, and taxpayers.

When the forms began arriving in mailboxes in January 2024, confusion would result. For instance, it needs to be clarified how taxpayers should transfer the stated amounts to their individual tax returns when online marketplaces or payment apps send forms. Appropriate reporting of the income on the form must be on the beneficiary’s:

• Schedule C, Profit or Loss from Business (Sole Proprietorship)
• Schedule E, Supplemental Income and Loss (From rental real estate, royalties, partnerships, S corporations, estates, trusts, REMICs, etc.)
• Appropriate return for a partnership or corporation

Furthermore, the total amount reported may not be taxable since the gross amount of a reported payment excludes any adjustments for any of the following:

• Credits
• Cash equivalents
• Discounts
• Fees
• Refunds
• Other sums

Not every transaction that needs to be reported is taxed, either. For example, you are exempt from paying sales tax when you sell a personal item on eBay at a loss. But if the sale totaled more than $600, it would appear on your Form 1099-K.

Advice for recipients of Form 1099-K

Note that the IRS is not doing away with the lower level. In its most recent release, the agency stated that a $5,000 transitional barrier will be in place for the tax year 2024. The IRS claims that this gradual approach will enable it to examine its operating procedures to address the concerns of stakeholders and taxpayers more effectively.

The IRS recommends carefully studying Form 1099-K to ensure the amounts are correct if you receive one below the current thresholds. It is advisable to ascertain any associated deductible costs that you could be qualified to deduct from your taxes.

The IRS advises you to “zero out” the amount on your return by reporting both the payment and an offsetting adjustment on Form 1040, Schedule 1 if the form contains personal items you sold at a loss. You must report any gain on selling such items as taxable income.

There is no change in the tax rate.

It is important to emphasize that taxpayers’ obligations to declare income on their tax returns remain unaffected by the delay in implementing the new Form 1099-K threshold. Unless specifically exempt by law, all income is taxed, regardless of whether a taxpayer receives a Form 1099-K. Please contact our RRBB advisors if you have any questions regarding the reporting of online payment processors.

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