Introduction
It’s well known that, without congressional action, many of the reforms in the Tax Cuts and Jobs Act of 2017 will expire at the end of next year, leading to a massive tax hike on households. But there is a separate tax trap looming before that. Millions of gig economy workers and small online sellers could be hit with a flood of paperwork and potential tax confusion, all thanks to a change buried in the American Rescue Plan Act (ARPA) of 2021.
This change, which drastically lowered the threshold for reporting transactions through third-party payment platforms like Venmo, PayPal, Apple Pay, eBay, and many others, is set to unleash millions of 1099-K forms on unsuspecting taxpayers. To prevent this, the House Ways and Means Committee on September 11 advanced Representative Carol Miller’s (R-WV) Saving Gig Economy Taxpayers Act (H.R. 190). This legislation would stop this impending disaster by repealing the lower threshold and protecting gig workers and casual sellers from IRS overreach.
Background
Before ARPA, the reporting requirement was triggered when a person had at least 200 transactions and a gross dollar amount of $20,000. ARPA drastically lowered the threshold to $600 per year, with no minimum number of transactions. When the threshold is met, the third-party platform must issue a 1099-K form reporting gross receipts to the taxpayer, as well as a copy to the IRS.
Although ARPA’s threshold was supposed to take effect in 2022, the IRS suspended its implementation in 2022 and then again in 2023. The IRS also announced that it will enforce a $5,000 reporting threshold for next year’s tax filing season, rather than the statutory level of $600.
ARPA’s 1099-K Threshold Is a Headache for the IRS along with Taxpayers
It is easy to see why the IRS has made these decisions. NTUF has long warned that ARPA’s threshold would impose needless confusion and compliance burdens on taxpayers. Late last year, the IRS revised its 2024 estimate upward, from 16 million 1099-K forms to 44 million—three times more than the estimate for 2023. Millions of taxpayers will be receiving copies of the 1099-K form for the first time, and many may not realize that the gross dollar amounts included in them are not necessarily taxable, including transactions that are personal reimbursements, gifts, or sales of used items at a loss, which will further complicate compliance for taxpayers unfamiliar with these new requirements. Without clear guidance from the IRS, taxpayers may inadvertently report incorrect amounts, leading to potential overpayments of tax or triggering audits. Moreover, despite the Biden administration’s pledge not to increase taxes on those earning less than $400,000, the 1099-K burdens will fall most heavily on small businesses, part time workers, and middle- and low-income earners.
There are also administrative burdens on the IRS to implement ARPA’s policy and cope with the sudden surge in 1099-K forms. IRS Commissioner Daniel Werfel testified before the Senate Finance Committee on April 19, 2023, noting that ARPA’s 1099-K threshold was paused because the agency was “not ready to administer in a way that provides taxpayers the clarity they need.”
The IRS’s Revision of Statute for the 1099-K Also Raises Legal Questions
While there are several practical reasons why the IRS postponed implementing ARPA’s 1099-K changes twice and then announced a plan to phase them in with an alternative threshold, there are constitutional concerns about these decisions. While the IRS may have flexibility in implementation timelines, it does not have the authority to unilaterally adjust statutory thresholds set by Congress. Changes to tax law and reporting requirements should come through legislative action, not administrative fiat. The deviation from statutory requirements sets a dangerous precedent for the IRS, the Department of the Treasury, or the White House to sidestep tax laws when convenient or politically expedient, undermining the rule of law and opening the door to legal challenges.
In a new report, the Government Accountability Office (GAO) criticized the IRS for not documenting its decision-making process when it chose to implement a 1099-K reporting threshold of $5,000 instead of the $600 statutory threshold set by ARPA. The IRS bypassed its own management guidelines and federal control standards to document risks or explain its decisions in the course of a major change in tax policy. The IRS has a voluntary Risk Acceptance Form and Tool that is supposed to help it track information related to decisions that could ultimately face congressional scrutiny. Failing to adhere to this process raises concerns about transparency and oversight within the IRS. Moreover, GAO also noted that IRS officials did not provide documentation of any legal analysis justifying the agency’s authority to delay the ARPA threshold and use an interim threshold of $5,000 and that, as of April 2024, the IRS has not ruled out further changes or delays in the implementation of the new reporting threshold.
Legislative Resolution is the Best Path
The House Ways and Means Committee, under the leadership of Chairman Jason Smith (R-MO), worked to correct this debacle by passing Rep. Miller’s Saving Gig Economy Taxpayers Act. The bill would restore the $20,000/200 transaction threshold for reporting 1099-K forms. This would relieve taxpayers from confusing paperwork burdens that may lead some to think that they owe more than they actually do.
During the hearing, Rep. Dan Kildee (D-MI) argued that the pre-ARPA threshold was a “loophole” in the tax system, but, in actuality, the higher threshold provided a safe harbor for people who sell online or only make occasional and primarily non-taxable sales. Taxpayers could easily exceed the new threshold by holding a garage sale, selling their used college textbooks online, or by using smartphone apps to transfer money to family and friends.
Kildee agreed that ARPA’s $600 threshold is too low and noted his alternative bill introduced with Rep. Chris Pappas (D-NH), the Cut Red Tape For Online Sales Act (H.R. 3530), which would raise the threshold for reporting to $5,000 and have the IRS clarify when sellers need to file the 1099-K form. He offered the text of that bill as an amendment to H.R. 190 but withdrew it because of lack of support from his Republican colleagues on the Committee.
Budgetary Scorekeeping Challenges
A revenue estimate was also prepared for the hearing by the Joint Committee on Taxation, finding that H.R. 190 would decrease revenues by an average of $1 billion per year over the next decade. JCT’s analysis will be incorporated into the Congressional Budget Office’s forthcoming official cost estimate for the bill. JCT’s report does note the IRS’s plan to implement the $5,000 threshold for the next tax season, indicating that JCT is incorporating a current-policy baseline into its estimate as opposed to a baseline based solely on current law. Incorporating current policies into baselines can help produce more accurate projections for lawmakers. There are still caveats regarding this estimate given that the IRS has already postponed it twice and, as GAO noted, might still reconsider following through with its $5,000 threshold plan.
In addition to the budgetary impact, lawmakers should also consider the burdens imposed on taxpayers in terms of hours spent complying with this tax law and any out-of-pocket expenses, as required by the Paperwork Reduction Act. However, last year NTUF warned that the IRS had not provided an accounting of the compliance burdens for ARPA’s change, and, per the filings available from the Office of Information and Regulatory Affairs’ database, it still has not done so.
Conclusion
ARPA’s vastly lowered 1099-K threshold will impose large compliance burdens and confusion on taxpayers, while also presenting an administrative nightmare for the IRS that has already led to a two year delay in the IRS implementing it. The IRS’s tentative decision to set a threshold other than the one mandated by law raises serious constitutional concerns and could set a bad precedent for future tax administration. The time spent by the IRS figuring out how to implement ARPA’s unworkable 1099-K threshold represents a massive opportunity cost for the agency when it should be focusing resources on taxpayer services and easing compliance hassles while at the same time adhering to the law.
With members of both parties acknowledging the administrative burdens imposed on the IRS and taxpayers alike, there is a clear opportunity for Congress to work together to address this issue before it causes unnecessary confusion and strain. Ensuring clarity and fairness in 1099-K reporting would free up IRS resources for improving taxpayers services in other areas, a win-win for taxpayers.