Good news for those who use payment apps—the Internal Revenue Service (IRS) is not requiring reports of those transactions in the upcoming filing season.
The federal American Rescue Plan Act (ARP) was enacted as a stimulus measure and passed in 2021. Part of that pandemic-era stimulus plan included a section aimed at reducing tax fraud and the amount of income that goes unreported to the IRS each year.
Once an outlier, the use of third-party payment apps (known as “third-party settlement organizations [TPSOs]”) like PayPal, Venmo, and Zelle is big business. The gig economy drove the idea there was money to be made outside the day job, in side hustles, sales of crafts, goods, and transactional business—none of which was necessarily reported to or taxed by the IRS. Online storefronts are no longer limited to the biggies like eBay, which broke into the space years ago, or behemoths like Amazon.
The ARP requires entrepreneurs and people just making an extra buck to report money earned over a certain threshold. The law requires TPSOs to send a Form 1099 to the taxpayer and the IRS. This form gives the taxpayer proof of income and allows the IRS to match that document to ensure the income is reported and properly taxed. The law will eventually call for persons earning $600 or more to report that income to the IRS via the Form 1099 provided by the TPSO(s).
The new reporting requirement created significant blowback and the IRS delayed enactment of the measure pending feedback for the 2022 tax season. With the 2023 tax season right around the corner, the IRS announced in November that it would once again delay the $600 Form 1099-K reporting process in the coming tax season.
What now? The IRS still requires certain taxpayers to report earnings that are run through a TPSO. The current threshold is income of $20,000 or more involvement in more than 200 transactions in the calendar year 2023. Looking at a phased approach, the IRS is planning to reduce that threshold to $5,000 for the 2024 tax season. The IRS blames the uncertainty on the revision of Form 1040 intended to help taxpayers more easily report 1099 earnings.
Remember, the IRS is not looking at digital transactions you enter to buy meals or gifts for family and friends and the like. It will be looking for business transactions that reflect income, not leisure spending. Same time next year—let’s see if the IRS steps up to its $5,000 reporting threshold for the 2024 tax season.
Business compliance problems? Speak with our experienced tax group today
If you are looking at an audit letter from the IRS or are concerned about IRS collection, or tax litigation—we can help. With years of successful experience representing clients in IRS matters, our tax attorneys offer aggressive criminal tax defense and strategic advice for nurturing and protecting your financial portfolio. We have offices in Cleveland and Chicago and serve domestic and international clients. Call us at 800-579-0997 or contact us online.
