Payment apps send tax form in error
IRS’ last-minute delay may cause confusion
Working Americans’ favorite time of year has finally come to pass – tax return season. But of course, this time filing taxes will likely have a “fun” new twist: 1099-Ks mistakenly sent out following a last-minute announcement from the IRS to delay the implementation of a law.
For nearly two years, many people have been under the impression that they would receive a Form 1099-K this tax season to ensure certain transactions on apps like Paypal, Venmo and Cash App are taxed appropriately.
This expectation was set by the new tax reporting requirement put on third-party settlement organizations (TPSOS), such as Paypal and Cash App, as part of the American Rescue Plan Act that was signed into law in 2021. The law amended some sections of the Internal Revenue Code, requiring TPSOS to report goods and services transactions made by users with $600 or more in annual gross sales, regardless of the total number of transactions, on 1099-K forms. Previously, this form was only given to users who received more than $20,000 and 200 transactions from selling goods and services in one year.
Other companies that regularly dole out 1099-K forms to users that meet the IRS’ income threshold, such as Airbnb and Etsy, also are subject to the new rule. Some businesses, like Doordash, already require users on their platform to report their income if it exceeds $600.
As it turns out, many individuals who expected to receive the form for the first time under the new reporting requirement will never get one, and for some that do – it will come in error.
The change went into practice on Jan. 1, 2022, effectively lowering the threshold for when TPSOS must report goods and services payments to its users. But on Dec. 23, 2022, the IRS announced that there would be a one year delay in the implementation of that new $600 reporting threshold.
Jim Brandenburg, a tax partner at accounting and professional services firm Sikich LLP, said one reason for the delay may be that Congress and the IRS realized that they weren't going to bridge as much of the tax gap with its implementation as they predicted. Brandenburg also stated that those entities may also be trying to limit the number of 1099-Ks incorrectly distributed.
“The IRS and Treasury heard a number of concerns regarding the timeline of implementation of these changes under the American Rescue Plan,” said Acting IRS Commissioner Doug O'donnell in the announcement. “To help smooth the transition and ensure clarity for taxpayers, tax professionals and industry, the IRS will delay implementation of the 1099-K changes. The additional time will help reduce confusion during the upcoming 2023 tax filing season and provide more time for taxpayers to prepare and understand the new reporting requirements.”
But the sudden change may only further taxpayers' confusion surrounding the new reporting requirements, as some may still receive a 1099-K erroneously.
“Literally, at the 111⁄2 hour [the IRS] said, ‘You don't have to do this,'” said Brandenburg. “[That announcement] makes it more difficult because now [TPSOS] are saying, ‘We were set to do it this way. Now we have to go back to what the rule had been the year before that and change some of what we've gathered in a matter of a week or two so we can send out the right forms'... So in some cases people may get them even though it wasn't required just because they were farther along in the process or just by accident [TPSOS] may send them out.”
Brandenburg said he wouldn't be surprised if, later in 2023, Congress decided to further defer implementation, alter the new $600 reporting threshold or do away with it altogether.
What to do after receiving a 1099-K from Paypal, Venmo, Cashapp or others
If you get a form, don't throw it away! Regardless of whether there is taxable income listed on the form, the fact that you received a 1099-K means that the third-party settlement organization has sent another copy to the IRS – who expect to see that information on your 2023 tax return.
Not including details from that 1099-K when filing your tax return may cause the IRS to send an inquiry about why it's not included and, eventually, an assessment.
If you receive a 1099-K that has no taxable income on it, Brandenburg suggests getting the form corrected and refiled by the company that sent it.
A FAQ sheet that the IRS released in December states: “Taxpayers who have questions about the information on a Form 1099-K they received should contact the filer. The contact information is in the upper left corner on the form. If a taxpayer does not recognize the filer shown in the upper left corner of the form, they should contact the payment settlement entity whose name and phone number are shown in the lower left corner of the form above their account number.”
Another option Brandenburg proposed was including the 1099-K in your tax return and canceling it out. The FAQ sheet stated that if the form cannot be corrected by the filer, the error should be reported on Form 1040, Schedule 1, Additional Income and Adjustments to Income.
“For example, you took a trip with your friend and you paid for the airline tickets,” the FAQ sheet explained. “If your friend reimburses you $2,500 for their airline tickets, and you received a Form 1099-K reporting the $2,500 as gross proceeds, your Schedule 1 should reflect the following:
Form 1040, Schedule 1, Additional Income and Adjustments to Income
Part I – Line 8z, Other income. List type and amount: “Form 1099-K Received in Error …. $2,500” to show the proceeds reported on the Form 1099-K.
Part II – Line 24z, Other adjustments. List type and amount: “Form 1099-K Received in Error…. $2,500” to offset the proceeds reported to you in error.”
It's examples like these that lead Brandenburg to believe the FAQ sheet will come in handy during the 2024 tax season, when the $600 reporting threshold is expected to be implemented.
What determines who will get a 1099-K in 2024? Who qualifies?
When determining if you will receive a 1099-K in 2024, the key words are “goods and services.” Many TPSOS have separate accounts that allow users to identify which of their transactions are for goods and services. In these applications, only transactions labeled as such will be considered for the 1099-K form.
Those who receive over $600 in goods or services transactions, like payment for a birthday cake or haircut, through a third-party settlement organization will get a 1099-K the following year.
People receiving payment for a good or service through a TPSO should have been reporting that income on their taxes all along. So, the form may not impact them drastically, besides identifying some receipts that may have inadvertently been omitted previously, according to Brandenburg.
What local buyers and sellers may not know is that items sold at a loss cannot be taxed, regardless of their appearance on someone's 1099-K. The same goes for reimbursements and personal gifts.