Millions of people are about to face an unexpected headache next tax season. Hidden within the American Rescue Plan Act of 2021 was a provision that drastically lowered the reporting threshold for transactions through third-party payment platforms such as Venmo, Apple Pay, and PayPal. With the threshold lowered from $20,000 across 200 transactions to a mere $600, millions of gig economy workers and casual sellers who rely on platforms such as Uber or Etsy to cover everyday expenses are about to be hit with a deluge of 1099-K forms — and the confusion and possible tax liabilities that come with them.
Before the American Rescue Plan Act, taxpayers rarely encountered the 1099-K form unless they were running a small business. Under the act’s new threshold, a single sale of college textbooks on eBay or a casual transfer of funds between family or friends could generate a 1099-K, forcing taxpayers to sift through piles of unnecessary paperwork. The IRS projects that 44 million of these forms will be sent out next tax season, three times more than the estimate for 2023.
Many of these 1099-K forms will reflect nontaxable transactions such as personal gifts, reimbursements, or the sale of used items at a loss. Without guidance, taxpayers risk overreporting and overpaying.
The burden isn’t limited to taxpayers. The IRS itself has twice delayed the implementation of the American Rescue Plan Act’s threshold because of the challenges that it faces in administering the law and coping with the flood of 1099-K forms and questions from confused taxpayers.
Last November, the IRS announced it would enforce a $5,000 reporting threshold for the upcoming tax season. While the IRS may have flexibility in implementation timelines, it does not have the authority to adjust unilaterally the statutory $600 threshold set by Congress. If the IRS is permitted to act outside of its authority, it creates uncertainty in tax policy and sets a dangerous precedent for future administrative overreach.
In a new report, the Government Accountability Office noted that the IRS’s lack of documentation and planning in implementing the lower 1099-K threshold contributed to confusion. The solution is clear: Congress needs to act.
Fortunately, the House Ways and Means Committee also recently advanced a bill to provide clarity for taxpayers. Rep. Carol Miller’s (R-WV) Saving Gig Economy Taxpayers Act aims to repeal the American Rescue Plan Act’s lower threshold and restore the previous limit, providing a safe harbor for taxpayers from needless paperwork and IRS overreach and freeing up IRS resources for more pressing matters.
While the Saving Gig Economy Taxpayers Act passed the committee with only Republican votes, there is bipartisan recognition that the American Rescue Plan Act’s $600 threshold is too low. During the hearing, Rep. Dan Kildee (D-MI) noted an alternative bill that he introduced with Rep. Chris Pappas (D-NH) to set the limit at $5,000. Companions to this and Miller’s bill have also been introduced in the Senate.
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The Joint Committee on Taxation estimates that the Saving Gig Economy Taxpayers Act would reduce federal revenues by about $1 billion annually over the next decade. But it’s important to remember that the American Rescue Plan Act’s threshold, already delayed by two years, will impose costly compliance burdens on millions of taxpayers, as well as the IRS, in time and resources. Ensuring a fair and manageable reporting system will not only save taxpayer dollars in the long run, but it will also allow the IRS to focus on its core mission of providing better taxpayer services.
With legislative action, lawmakers can protect Americans from needless confusion and burdens and help ensure that the IRS focuses on what truly matters. With bipartisan acknowledgment of the administrative burdens, there’s an opportunity for both parties to work together to fix this problem before it turns into a taxpayer disaster.
Demian Brady is the vice president of research at the National Taxpayers Union Foundation, a nonprofit organization dedicated to tax policy research and education at all levels of government.