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A Christmas Present from the IRS

December 31, 2022

Apparently IRS was visited by the Ghost of Audits Yet to Come and had a change of heart. This week it announced that it would not be implementing new Form 1099-K reporting requirements for tax year 2022. Thank goodness! In announcing the delay, IRS has saved itself and taxpayers from a time-consuming mess.

Here's a quick explanation of what was supposed to happen. If you receive payments through eBay, Venmo, Square, on any other similar electronic platform, those companies were going to be required to issue you a Form 1099-K if the total payments you received during the year went over $600. Prior to the rule change, you had to have $20,000 in payments or more than 200 separate transactions to receive a Form 1099-K.

The rule was designed to make sure side-hustle business income is being correctly reported. But it was going to snare a lot of other people in a mess of red tape. Suppose, for example, you used Venmo to send your college-age kid some money. If you sent more than $600, guess what…the new rules stipulated that your child would receive a Form 1099-K. Now, this is not taxable income to your child, but the payment is reported to IRS in exactly the same manner. In other words, IRS simply receives a record that money changed hands, and there is no way to show that it was taxable or not. Now think of all the ways a similar situation could play out: you split a vacation rental with a friend and Venmo’d them your half of the lodging, you sold a piece of furniture on eBay for less than you paid for it. No tax consequences, but if the amount was over $600…a Form 1099-K is generated.

So the likely unintended consequence is that IRS would send tens (hundreds?) of thousands of friendly notices of under-reported income, and the notices would likely include some scary language that the tax must be paid within 30 days. If you received a notice, you’d be on the hook to convince IRS that this was not taxable income. Have you tried contacting IRS recently? If you don’t want to sit on hold for hours, only to be disconnected, the only other way was written correspondence. We have seen as much as a six month delay in hearing back from IRS! And remember, this backlog already exists and doesn’t take into account all the additional work coming from these unnecessary Forms 1099-K.

Fortunately, IRS realized the monumental mess they were facing and delayed the new 1099-K rules for a year. Breathe a sigh of relief! Taxpayers and IRS employees have been given a great gift. Now, hopefully IRS can use the extra year to figure out a better solution so they aren’t just delaying the mess until next year.

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