Back in early 2021, Congress passed the American Rescue Plan Act (ARPA), a massive stimulus bill that came months after the time for stimulus had passed. One of the few “pay-fors” in this giant glob of cash was a poorly-considered provision that would increase scrutiny of online third-party transactions. As the time when this provision will finally come into effect comes closer, it is only becoming more and more apparent that not only are taxpayers not ready to deal with the full consequences of this provision — the IRS is not either.
Form 1099-K is intended for taxpayers with substantial incomes from side hustles outside the context of an official “business” to report peer-to-peer transactions, such as through Venmo or Paypal. In other words, if a taxpayer sells crafts on Etsy or makes a great deal of money reselling event tickets, Form 1099-K exists to report this income.
But prior to ARPA, there was also a recognition that for the vast majority of Americans, these types of peer-to-peer transactions are either non-taxable or so minimal as to not be worth the hassle of coming after taxpayers over. Consequently, taxpayers only had to file a Form 1099-K if they had at least 200 transactions worth a total of over $20,000.
The growth of the gig economy has led some policymakers to worry that these thresholds are too high, allowing substantial taxable income to go unreported. But to address this, Congress took things much too far, eliminating the transaction threshold entirely and reducing the dollar threshold to just $600 in gross income.
That means that, once these lower thresholds go into effect, any taxpayer with over $600 in gross income from these peer-to-peer transactions will receive a Form 1099-K in the mail, and be expected to include this information in their tax return. Any added time spent filing one’s taxes is never pleasant, but the problem is much of it is likely to be a waste of time for everyone involved.
Consider the types of transactions that Form 1099-K covers. Taxpayers who sell used textbooks, resell concert tickets at a loss when they can no longer go, or reimburse a friend for covering a meal bill through Venmo would all receive 1099-Ks for these transactions once they broke the very low threshold. Even though none of these transactions are taxable, it would be up to the taxpayer to prove that to the IRS.
The “online garage sale” issue is particularly likely to cause trouble. Many Americans sell used goods online to recoup some cash while cleaning out their garages and closets. So long as they do not make a profit on these sales, the sales are not taxable. But proving that you did not make a profit requires knowing the original purchase price, often on goods that were bought years or even decades ago. The IRS rarely appreciates when taxpayers guess or estimate. That leaves taxpayers in a bind, unable to prove the non-taxability of a transaction that they had every reason to think the IRS would not be scrutinizing anyway.
The lower 1099-K threshold is likely to overwhelm the IRS’s already-limited bandwidth to process returns. Each of the major third-party platforms like Etsy, eBay, Facebook and Amazon marketplace, and so on boasts millions of active sellers, many of whom are likely to be hit by new 1099-K requirements. But the IRS officially estimates that its 1099-K submissions will rise only from 13 million in 2022 to 14 million in 2023, when the new threshold comes into effect.
That’s almost certainly a drastic underestimate of the scale of taxpayers previously covered by the safe harbor. Should the IRS be swamped by millions of unanticipated forms in 2023, it will only have ARPA to blame.
Fortunately, there’s still time to fix this problem. Legislation from Democratic and Republican lawmakers in both houses of Congress to raise the 1099-K threshold has been proposed to address the issue. While there is not yet bipartisan agreement on what the exact threshold should be, all parties agree that it should be far higher than $600.
While a little time for horse trading remains, taxpayers should demand that Congress does not let the clock run out on some fix. No one is ready to handle the status quo.
