Statements of relief abounded as the IRS announced it was delaying – for the second consecutive year – the new $600 threshold for reporting payments by gig economy businesses and other online platforms.
Faced with a rapidly approaching 2024 filing season, a dearth of guidance, a host of internal struggles to prepare and the worries of every imaginable stakeholder, the IRS opted to punt implementation of the new Form 1099-K reporting requirements another year.
The American Rescue Plan Act of 2021 required payment processors, gig economy platforms like Uber and online marketplaces like Etsy or eBay to issue a Form 1099-K for business transactions exceeding $600 in tax year 2022, down from the previous threshold of $20,000 from more than 200 transactions in a year. But the IRS delayed that requirement so that it wouldn’t take effect until tax year 2023.
Tax year 2023 is now coming to an end, and payment processors would have begun sending out Forms 1099-K reporting those payments early in 2024, but thanks to the Nov. 21 announcement and related Notice 2023-74, 2023-51 IRB 1, that’s being bumped back another year. The IRS also said it will phase in the new lower threshold beginning in tax year 2024. The phase-in will drop the threshold to $5,000 while the agency works to clarify the rules needed to implement the new system.
“We spent many months gathering feedback from third-party groups and others, and it became increasingly clear we need additional time to effectively implement the new reporting requirements,” IRS Commissioner Daniel Werfel said in a statement. “It’s clear that an additional delay for tax year 2023 will avoid problems for taxpayers, tax professionals and others in this area.”
That reasoning was widely applauded.
“I don’t believe you’ll see a tax professional or tax administrator unhappy with this announcement,” said Robert Kerr of Kerr Consulting LLC.
Given all the critical attention the issue has received and the many tax administration challenges associated with it, it’s “not terribly surprising” that the IRS opted to push the deadline again, according to Jorge E. Castro of Miller & Chevalier Chtd.
The decision shows that the IRS isn’t turning a blind eye to challenges faced by taxpayers and businesses, according to Castro. “They’re trying to be responsive,” and that deserves praise, he said.
National Taxpayer Advocate Erin Collins cheered the announcement, saying in a statement that it was good news for everyone involved and a step toward giving taxpayers and tax professionals the certainty they need to comply with the law. She also praised the IRS’s decision to phase in the new reporting requirement.
Last month, Collins expressed worry that the IRS was unprepared for a smooth rollout of the new reporting regime and concern that taxpayers would be confused, leading to a bumpy filing season in 2024.
Arshi Siddiqui of the Coalition for 1099-K Fairness called the decision a commonsense move that will keep millions of consumers from “facing a tsunami of 1099-K’s” next January. The delay also creates valuable time for lawmakers to settle on a new threshold, she told Tax Notes.
What the appropriate threshold should be is for lawmakers to decide, added Siddiqui, a lobbyist with Akin Gump Strauss Hauer & Feld LLP.
The IRS research division recently predicted that the agency was expecting to be flooded with up to 30 million more Forms 1099-K in 2024 than in 2023, a 214% surge. The Government Accountability Office concluded earlier this month that the IRS still didn’t have a plan in place to effectively analyze that surge in information returns.
At What Cost?
The praise wasn’t universal. Chye-Ching Huang of the New York University Tax Law Center told Tax Notes that the immediate relief claimed by many masks a laundry list of problems.
The extra delay undermines both the IRS’s stated efforts to reduce the tax gap and the “sound purpose of Congress in enacting these rules,” which includes bringing parity between the companies that process billions of transactions every year and banks and other payment processors that already face similar reporting requirements, according to Huang.
It’s also unfair to the companies that devoted resources to timely prepare for the new threshold, and it “signals that companies can drag their feet on implementing future compliance measures in the hope of securing further delays from the IRS or Congress,” Huang said.
There’s also a cost, she added, noting that the Joint Committee on Taxation had estimated the reporting provision would raise more than $500 million annually, thanks to better tax compliance.
IRS research has concluded that information reporting is a critical factor in tax compliance. In its latest tax gap estimates, the agency estimated that just $9 billion of income subject to substantial reporting was underreported in 2021. But for income with little to no reporting, that number spiked to $167 billion.
In its announcement, the IRS acknowledged the importance of expanding information reporting. However, it went on to say that the expansion “must be managed carefully to help ensure that Forms 1099-K are issued only to taxpayers who should receive them.”
Because I Said So
Kerr said he was flummoxed that the IRS was again taking matters into its own hands and postponing an action that has a statutorily mandated start date.
“Why does IRS get to try on the role of Bartleby the scrivener? And what’s the limiting principle?” Kerr said, adding that he wondered what authority the IRS was relying on to continue to flout the statutory effective date.
House Ways and Means Committee member Carol D. Miller, R-W.Va., also blasted the agency’s decision on the delay in a Nov. 21 post on X, formerly known as Twitter, saying the IRS is “making the law up as they go” and calling the move “legally dubious.”
“Now they’ve done it yet again, giving American taxpayers no certainty on what the future of this policy will hold,” Miller said. “The Biden Administration must be reminded that Congress writes the laws, they are the ones who must correctly implement them.”
The IRS told Tax Notes in a statement that it has broad discretion to administer tax laws — citing section 7803(a)(2)(A) — which it has used in the past to “delay implementation of complex laws in the interest of good tax administration.”
Castro noted that the situation is similar to the rollout of the Foreign Account Tax Compliance Act, which was supposed to go into effect in 2011. That didn’t happen; instead, thanks to years of technical and legal challenges, the reporting requirements weren’t fully implemented until 2016.
More Capitol Hill Reaction
The notice comes as hopes for a tax package making its way through Congress by the end of the year – including fixes and provisions like raising the 1099-K threshold – have dwindled in recent weeks. Addressing the reporting threshold was high on the wish list of lawmakers’ bipartisan items for the legislation before drawn-out appropriations work pushed government funding deadlines to January and February in recent weeks.
Miller’s Saving Gig Economy Taxpayers Act (H.R. 190), which would restore the reporting threshold to $20,000 or 200 transactions a year, was included in the tax package that advanced through the Ways and Means Committee on June 13.
While Miller opposes the $600 threshold, she said the Biden administration’s move “kicks the can down the road for the next president to deal with” rather than relying on a permanent solution from Congress.
Ways and Means Committee Chair Jason Smith, R-Mo., called the Treasury’s planned transition to a $5,000 threshold “nothing but politics” in a Nov. 21 release.
“It’s unlikely this move is even constitutional given the clear text of the legislation Democrats enacted, when it’s up to Congress, not the White House, to amend or repeal bad laws,” Smith said. “Given that even Democrats now admit that this law is unworkable and are trying to rewrite a key provision, it’s time to scrap it and start over.”
In response to the GAO report, Sen. Jon Tester, D-Mont., wrote to Werfel on Nov. 17 urging the IRS to again delay the requirements.
Senate Finance Committee member Sherrod Brown, D-Ohio, whose bipartisan Red Tape Reduction Act would raise the reporting threshold to $10,000 a year, praised the agency’s decisions to further delay the $600 implementation but advocated a permanent solution.
“This is welcome news for small businesses across Ohio who were about to be hit by red tape and excessive paperwork,” Brown said. “But it’s not enough.”
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