It takes an unusually bad tax enforcement idea for even the IRS to tell Congress to take a beat. But that’s exactly what the IRS is doing for the second time in a year.
As part of the American Rescue Plan Act (ARPA) of 2021, Congress dramatically lowered the reporting threshold for Form 1099-K from $20,000 to $600. If you’ve never heard of Form 1099-K, you’re not alone — the form, used to report peer-to-peer transactions on third-party platforms such as Etsy, eBay, and Ticketmaster, was generally only necessary for individuals with substantial income off of these platforms.
In the wake of the pandemic, legislators began to fear that the $20,000 threshold allowed some Americans to avoid paying taxes — thus leading to the change under ARPA to a $600 threshold. But this far lower threshold is likely to create enormous compliance burdens for little benefit.
That’s because many Americans sell goods online without making a business of it, or even necessarily earning any taxable income. For example, if you sell used goods for less than their original purchase price, that’s not a taxable transaction. Nevertheless, the resale of a few used textbooks or tickets to an event that you can no longer attend would be more than sufficient to exceed a $600 threshold.
And it’s not just sales of goods that could be caught up in the change. Payments between friends and family using digital platforms like Venmo to split a check or pay back borrowed cash are also not taxable, but would count towards the $600 1099-K threshold.
Under ARPA, exceeding the threshold on a platform would require that platform to automatically generate and send two copies of Form 1099-K — one to the taxpayer, and one to the IRS. The taxpayer would then be responsible for including all those forms on their individual income tax return that year, whether any of the income described is taxable or not.
That’s an enormous burden not just on the platforms that have to generate these forms, but also on the taxpayer and even the IRS. The IRS estimated earlier this year that the new rules would lead to 44 million 1099-K forms being sent out, and even that may be an underestimate. That’s likely to lead to a lot of time and effort spent generating and processing forms that describe minimal amounts of taxable income.
Of course, many taxpayers receiving a Form 1099-K for the first time may not be aware that the form does not necessarily describe taxable income. After all, why would they receive an official tax form in the mail if it didn’t entail tax obligations? Confused taxpayers may end up being duped into paying taxes they don’t owe.
So why haven’t you gotten one of these forms in the mail already? Well, before the provision could go into effect at the start of this year, the IRS announced a delay in implementation at the eleventh hour, arguing (reasonably!) that it and taxpayers were unprepared for the change. That’s not really how the legislative process should work, but it was a welcome reprieve and an opportunity for Congress to step in and adjust the threshold before it could harm taxpayers.
Now, despite nearly an entire year having elapsed, Congress has still failed to raise the threshold from the absurdly low $600 number, despite numerous bills being introduced to do so by members of both parties. And so again, the IRS is intervening, announcing that it will only enforce a still-lower $5,000 threshold for 2024 as a “transition” measure. It’s as close as the IRS will ever get to begging Congress to do something about this problem.
Of course, bureaucrats unilaterally ignoring legislative mandates is no one’s idea of an ideal policymaking environment. Come this time next year, Congress can’t be counting on the IRS to save it from itself. It’s long past time for Congress to fix this mess of its own making.
