Form 1099-K with ARPA Change Delayed 1 Year written over it

The American Rescue Plan Act of 2021 (P.L. 117-2, 3/11/21) lowered the filing threshold for Form 1099-K by third-party settlement organizations (TPSO). Since first enacted in 2008, IRC §6050W had a de minimis exception for third-party settlement organizations (such as PayPal) where they only had to issue a 1099-K to the IRS and customer if they processed over $20,000 of payments AND over 200 transactions for the customer for the year. Starting for 2022, ARPA lowered this to only except filing 1099-K if payments processed were $600 or less. But it also specified that the filing was only if the payments were processed for the sale of goods or services.

Since that change, there were concerns raised about lots more Forms1099-K to be received for 2022. But, I argue that is a good result because data has shown for decades that income tax reporting is better when the taxpayer receives an information return (such as a W-2 for wages), and better yet if there is withholding (no withholding for 1099-K unless backup withholding applies). But, some of the 1099-Ks would also be for selling household/personal use items at a loss. That loss is not allowed, so what does one do with the 1099-K to prevent IRS from sending a CP-2000 notice saying the recipient owes more taxes?  I think this is the reason there was a high filing thresholds from the start of IRC §6050W for third party settlement organizations. The main reporting under §6050W is for the gross amount of credit and debit cards processed and such cards generally are only accepted by merchants.

On December 23, 2022, the IRS issued IR-2022-226 and Notice 2023-10 announcing they are delaying the effective date of the ARPA change for TPSOs. They are now calling 2022 a transition year and per Notice 2023-10, “a TPSO is not required to report payments in settlement of third party network transactions with respect to a participating payee unless the gross amount of aggregate payments to be reported exceeds $20,000 and the number of such transactions with that participating payee exceeds 200.” So they are going back to the old de minimis rule for TPSOs for 2022.

On December 28, 2022, the IRS issued new FAQs on dealing with 1099-Ks that are either issued for personal use transactions producing a loss or issued incorrectly (not for sale of goods or services). I suspect they did this because some TPSOs might still issue the 1099-Ks per the ARPA change. After all, they should have been updating their IT systems long before December 23 as the 1099-Ks are generally due by January 31. I suspect though that for public relations purposes, while the IT systems will likely still produce the reports, the TPSOs will not issue the smaller ones to the taxpayers or the IRS – extra work for them.

Observations:

1. Where does the IRS get the authority to change the statutory effective date for the §6050W change, that is spelled out in P.L. 117-2 (Sec. 9674)? This is not the first time such a change has been made, there were a some Affordable Care Act changes where IRS changed the effective date. But if done for effective tax administration, perhaps Congress should just give IRS/Treasury blanket authority to do so within specified parameters and with the caveat that Congress can override that within 30 days.  

2. The FAQs released on 12/28 provide a remedy for dealing with a 1099-K received for a non-taxable activity. If people are just sending gifts or splitting restaurant bills using TPSOs, there should be no 1099-K, but mistakes can be made (including by the sender of funds saying the funds ARE for sale of goods or services even when they were not). And some sales of goods such as selling unwanted household items and clothes, produce a non-taxable loss. Here is what the FAQs say to do with such a 1099-K:

The example is sale of your old refrigerator for $600 (better example would be sale for $601). You originally paid $1,000 for it. Report the 1099-K amount on Schedule 1, line 8z and write on that line: “Form 1099-K Personal Item Sold at a Loss”. Then on line 24z, write the same and also enter $600 (1099-K amount). This enables the IRS to see that the 1099-K was addressed. Of course, if you sold multiple items including some at a gain, this gets more complicated.

Earlier this year, I suggested that the IRS create a new form or schedule for reconciling incorrect information returns to avoid unnecessary issuance of CP 2000 notices and provide greater certainly to taxpayers and practitioners that they were properly filing the return. I had the opportunity through the DC Delegation project of the California Lawyers Association Tax Section to present this proposal to staff of congressional tax committees, IRS Chief Counsel Office, the National Taxpayer Advocate and more. I also have it written up in this June 20, 2022 Tax Notes State article. I think this is something worth pursing as there are various information returns that require reconciliation but no place to easily do that.

3. If a business owner uses a TPSO account, such as PayPal for both personal and business transactions, get this fixed this coming year to have separate accounts for personal and business to lessen reporting issues.

What do you think?