For the second consecutive year, the IRS has postponed implementation of a new rule that would have led to an estimated 44 million taxpayers receiving tax forms from payment apps and online marketplaces such as Venmo and eBay. While the delay should spare such taxpayers some confusion, it won’t affect their tax liability or income reporting responsibilities. And the IRS indicated that it intends to begin phasing in the rule in 2024.
The new reporting rule
The rule concerns IRS Form 1099-K, Payment Card and Third Party Network Transactions, an information return first introduced in 2012. The form is issued to report payments from:
Credit, debit and stored-value cards such as gift cards, and
Payment apps or online marketplaces (also known as third-party settlement organizations).
If you receive direct payments via credit, debit or gift card, you should receive the form from your payment processors or payment settlement entity. But for years, payment apps and online marketplaces have been required to send Form 1099-K only if the payments you receive for goods and services total more than $20,000 from more than 200 transactions (although they can choose to send you the form with lower amounts).
The form reports the gross amount of all reportable transactions for the year and by the month. The IRS also receives a copy.
The American Rescue Plan Act (ARPA), enacted in March 2021, significantly expanded the reach of Form 1099-K. The changes were designed to improve voluntary tax compliance for these types of payments. According to the IRS, tax compliance is higher when amounts are subject to information reporting.
Under ARPA, payment apps and online marketplaces must report payments of more than $600 for the sale of goods and services; the number of transactions is irrelevant. As a result, the form would be sent to many more taxpayers who use payment apps or online marketplaces to accept payments. The rule change could ensnare not only small businesses and individuals with side hustles but also “casual sellers” of used personal items like clothing, furniture and other household items.
The change originally was scheduled to take effect for the 2022 tax year, with the forms going out in January 2023. However, in December 2022, the IRS announced its first implementation delay and released guidance stating that 2022 would be a transition period for the change.
The agency also acknowledged that the change must be managed carefully to help ensure that 1) the forms are issued only to taxpayers who should receive them, and 2) taxpayers understand what to do as a result of this reporting.
