The decision follows confusion and operational issues surrounding the new rule, which was initially passed as part of the American Rescue Plan (ARP) in 2021.
The threshold for the tax year 2023 will remain at $20,000 and more than 200 transactions, as it was last year, according to IRS officials. However, the IRS plans to enforce a $5,000 limit next year as a transitional threshold on the way down to the $600 required by law.
The ARP originally mandated apps and online marketplaces such as eBay and Ticketmaster to report payments exceeding $600 for the sale of goods and services on a Form 1099-K starting in 2022. These forms are then sent to taxpayers and the IRS. However, officials have noted that people are struggling to distinguish between sales made for personal commercial gain, which are taxable, and payments made to friends and family for personal expenses and transfers, which are not.
The IRS clarified in a statement on Tuesday, "The Form 1099-K could be sent to anyone who’s using payment apps or online marketplaces to accept payments for selling goods or providing services. This includes people with side hustles, small businesses, crafters and other sole proprietors. However, it could also include casual sellers who sold personal stuff like clothing, furniture and other household items that they paid more than they sold it for.”
The IRS further noted that reporting requirements do not apply to personal transactions such as birthday or holiday gifts, sharing the cost of a car ride or meal, or paying a family member or another for a household bill. These payments are not taxable and should not be reported on Form 1099-K.
There is also confusion about what to do if items are sold at a loss, which shouldn’t be taxed but can still generate forms to be sent out to taxpayers, leading to a potential mess of paperwork. The IRS explained, “Selling items at a loss is not actually taxable income but would have generated many Forms 1099-K for many people with the $600 threshold. This complexity contributed to the IRS decision to delay the additional year to provide the agency time to update its operations to make it easier for taxpayers to report the amounts on their forms.”
Taxpayers selling items at a loss are advised to “zero out” the payment by reporting it on both their tax return and on Form 1040, Schedule 1. This will ensure people who unnecessarily get these forms don’t have to pay taxes they don’t owe, according to the IRS.
The delay in the rule change was welcomed by the office within the IRS that advocates on behalf of individual taxpayers and households. Taxpayer advocate Erin Collins said in a statement, “Taxpayers and tax professionals need certainty and clarity about what is expected of them. By announcing its plans for this year and next year now, the IRS is taking steps to provide it.”
Collins emphasized that the updated 1099-K reporting requirements only apply to third party payment services. She said, “It’s important for taxpayers to understand that today’s announcement applies only to reporting requirements imposed on third parties. If income is taxable, taxpayers have been and continue to be required to report it on their tax returns. Nothing about the Form 1099-K reporting dates changes that.”
Officials stated that the agency has the authority to unilaterally make these changes in implementing the law, citing “broad discretion” provided by the Internal Revenue Code in administering the tax law. However, they did not provide an estimate of how much additional revenue the government is expected to receive as a result of the lowered threshold.
In response to the $600 threshold, which was supposed to take effect this year, companies offering payment apps and sales platforms have been asking customers for their personal tax information, causing some distress. The IRS is currently undergoing the largest overhaul to its daily operations in decades, following an initial $80 billion funding boost to be spent over the next decade as a provision of the 2022 Inflation Reduction Act.
Despite the funding increase being scaled back by about $20 billion due to Republican opposition, the operational overhaul is continuing. Further cuts to the additional funding could occur as part of the appropriations process next year.
The overhaul includes an online tax filing system that could effectively replace many pieces of private software designed to help people file their taxes. The system is set to debut in 2024 with a pilot program. The IRS stated as part of its strategic operating plan for the funding boost, “The IRS will explore providing taxpayers the option to file certain tax returns directly with the IRS online.”