With Election Day fast approaching, there’s not a lot that Democrats and Republicans find themselves agreeing on. But there is one change that members of both sides of the aisle of Congress agree on, would help millions of taxpayers, and could even conceivably get done before the end of the year.
Back in 2021, before legislators realized the time for stimulus bills had passed, Congress passed the American Rescue Plan Act (ARPA). Though the focus of the bill was on fiscal stimulus, buried in this package was a change to the filing thresholds for Form 1099-K.
Form 1099-K is the form that taxpayers and web platforms are required to file to report peer-to-peer or third-party payment transactions. The intent is to ensure that people are reporting income from online sources like Paypal or Venmo.
However, prior to the passage of ARPA, Form 1099-K had a higher safe harbor to ensure that people with run-of-the-mill online transactions did not have to file a tax form with the IRS over it. Taxpayers with less than 200 transactions or $20,000 in gross income derived from online vendors did not have to file Form 1099-K.
This higher safe threshold accounted for the fact that a lot of these online transactions are not (or should not be) of interest to the IRS. After all, many Americans use online platforms for resale of items for less than they originally purchased the item for, including used college textbooks and tickets for an event they can no longer go to. Such transactions are not taxable, and therefore the IRS does not need to know about them. Meanwhile, Americans operating a business online would generally hit the higher $20,000 threshold.
ARPA changed that. Instead of the more reasonable threshold of $20,000 and 200 transactions, ARPA lowered the threshold to just $600 in gross income, with no transaction threshold at all. Now, just a couple sales online, with no taxable income at all, is enough for you to be legally required to submit a Form 1099-K. And for taxpayers unaware of this change, the online platforms facilitating these transactions themselves are required to generate and send a Form 1099-K to taxpayers exceeding this low threshold.
That may sound merely irritating, but many of the taxpayers receiving these forms may never have encountered Form 1099-K in their lives, and could easily be misled into thinking that the form describes taxable income even where it does not. At best, it is an inconvenience, but at worst, it will cause inadvertent tax hikes.
And even the “inconvenience” aspect of this change is more than just that. Prior to the change, the IRS estimated it would receive roughly 9.4 million Forms 1099-K. Though the IRS has yet to update this estimate, despite the massive change, it can safely be assumed that this will result in many times more taxpayers having to file Form 1099-K.
Given that the IRS estimates that compliance with Form 1099-K filing requirements costs taxpayers a half hour per form, that’s no small thing. But it’s also an issue for the IRS, which struggles tremendously with handling its most basic responsibilities to process taxpayer returns. Massively increasing the number of forms the IRS has to trawl through, particularly when many of them will describe no taxable income whatsoever, is no way to help the agency out.
Frustratingly, Congress has thus far failed to fix this 1099-K change not because there is any real support for the $600 threshold, but because legislators can’t agree on how high the threshold should be. While Democrats introduced legislation to raise the threshold to $5,000, Republicans are pushing for a return to the previous $20,000 threshold. In typical Washington fashion, taxpayers are stuck instead with the current $600 one.
While a higher threshold is better, Congress must act to provide some relief to taxpayers and the IRS on this issue. The IRS does not need to be hearing about your income from virtual garage sales, and Congress should work quickly to make sure that taxpayers are not required to spend time and money telling the IRS about it.