The IRS has delayed implementation of the new $600 threshold for Form 1099-K reporting by “third-party settlement organizations.” The new reporting threshold, added by the American Rescue Plan Act of 2021, was originally scheduled to take effect January 1, 2023, but the IRS announced in Notice 2023-10 that calendar year 2022 will be a “transition period” for implementing the new requirement. As a result, the previous reporting threshold of more than $20,000 in aggregate payments from more than 200 transactions remains in effect for 2022.
Third Party Settlement Organizations
The instructions for Form 1099-K, Payment Card and Third Party Network Transactions, define a third party settlement organization (TPSO) as “the central organization that has the contractual obligation to make payments to participating payees of third party network transactions.” According to the Congressional Research Service, TPSOs “generally function as intermediaries between buyers and sellers of goods or services, and charge a fee for serving as an intermediary. Examples of these types of entities include some online auction or marketplace services (such as eBay and Amazon), some gig economy platforms (such as Uber and Airbnb), and some cryptocurrency processors (such as Bitpay and CoinBase before 2020).” Interestingly, Venmo takes the position that it is a TPSO while Zelle maintains that it is not a TPSO.
As originally enacted, IRC Section 6050W required TPSOs to report third party network transactions with respect to a particular payee only when the gross amount involved exceeded $20,000 and the number of transactions with the particular payee exceeded 200. According to the Congressional Research Service, Section 6050W was intended as a revenue offset for the Housing and Economic Recovery Act of 2008. The Joint Committee on Taxation (JCT) estimated at the time that the reporting requirement would increase revenue by $9.5 billion from FY2008 to FY2018 due to an increase in tax compliance.
As mentioned above, the American Rescue Plan Act of 2021 amended Section 6050W such that TPSOs will need to file a Form 1099-K reporting the gross amount of reportable transactions for all payees with aggregate transactions exceeding $600. According to the Congressional Research Service, the “JCT estimates that this change will increase federal tax revenue by $8.4 billion from FY2021 to FY2031.”
Increased Compliance Burden and Complexity
The reduced reporting threshold will significantly increase the number of Forms 1099-K filed each year and may increase tax complexity. For example, taxpayers that receive a Form 1099-K for selling a personal item (e.g., used furniture) on an online marketplace may not know how to correctly report the transaction on their income tax return.
Several attempts were made by members of the 117th Congress to increase the Form 1099-K reporting threshold, but those attempts were unsuccessful. Thus, unless the 118th Congress is successful in passing legislation that increases the reporting threshold, taxpayers will need to prepare during 2022 for increased compliance and complexity beginning in 2023.
For more information about complying with this new requirement, contact us. We are here to help.