Though Congress failed to act to include a fix to the excessively low threshold for Form 1099-K in this year’s package to fund the government, taxpayers still got a minor win this week from a somewhat unlikely source — the IRS itself. The Wall Street Journal reports that the IRS is giving taxpayers a one-year reprieve from the lower threshold, giving taxpayers a break and, more importantly, giving legislators another year to fix this problem before it goes into effect.
Form 1099-K is intended as a mechanism for taxpayers to report peer-to-peer transactions on third-party networks that would otherwise go unreported on normal income tax returns. Prior to 2021, taxpayers only had to file Form 1099-K if they exceeded a de minimis threshold of 200 transactions and $20,000. This ensured that taxpayers did not have to report casual transactions, particularly those that involved no taxable income, and that Form 1099-K was reserved for taxpayers who gained a substantial income from peer-to-peer transactions.
Concern that gig economy income was slipping through the cracks led Congress to adjust downward the Form 1099-K threshold as part of the American Rescue Plan Act (ARPA) of 2021. Unfortunately, Congress went well overboard, removing the threshold for the number of transactions entirely and lowering the dollar value threshold to an excessively low $600.
Under this revised threshold, taxpayers could have expected to receive Forms 1099-K for transactions as trivial as sales of used college textbooks, ticket resale, and other generally non-taxable transactions. Many would likely be receiving a Form 1099-K for the first time, and could quite possibly interpret receipt of the form to imply that the income described on it is taxable, even if it is not. At best taxpayers and the IRS would exchange a great deal of useless information about non-taxable income, at worst taxpayers would pay more in taxes than they needed to.
Fixing this issue need not be a partisan concern. Organizations like the American Institute of Certified Public Accountants (AICPA) and NTUF itself came out in support of raising the threshold, and there were bipartisan efforts at a fix in Congress. Most recently, Sens. Bill Hagerty (R-TN) and Joe Manchin (D-WV) put together a bipartisan reform that would have raised the threshold back up to $10,000 — still lower than the previous $20,000 threshold, but likely to protect the vast majority of taxpayers with casual, low-level transactions. Sen. Moore Capito (R-WV) and Rep. Carol Miller (R-WV) also proposed a bill to delay the implementation of the lower threshold by a year — as the IRS ultimately ended up doing.
While Congress’s ultimate failure to come to an agreement by the end of the year is disappointing, the IRS did the right thing in providing temporary relief to taxpayers. Congress should make use of the added year it has been given to fix a threshold that most recognize is burdensome, confusing, and unnecessarily low.