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Biden Administration’s 1099-K Rule Already Punishing Casual Sellers

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AP Photo/Manuel Balce Ceneta

A new Internal Revenue Service (IRS) provision contained in the American Rescue Plan is negatively impacting third-party app sellers ahead of the 2023 tax season. 

Section 9674 of the law, about 1099-K filing thresholds, went into effect on December 31st, 2021. It’ll impact third-party network transactions on platforms like PayPal, Etsy, and Venmo.  

The explanation reads like this: “Under the provision, for any calendar year, a third-party settlement organization is required to report third-party network transactions with any participating payee that exceed a minimum threshold of $600 in aggregate payments, regardless of the aggregate number of such transactions. Third-party network transactions include any commercial transactions settled through a third-party payment network. The provision also clarifies that third-party network transactions only include transactions for the provision of goods or services (e.g., personal gifts, charitable contributions, and reimbursements are not included).” 

The old rule about Form 1099-K previously applied to tax filers with 200 transactions amounting to an aggregate exceeding $20,000. Now single traction exceeding $600 will “trigger” receipt of Form 1099-K

Ahead of Thanksgiving, the IRS warned casual sellers must report their earnings from third-party apps or face consequences, writing, “Now a single transaction exceeding $600 can trigger a 1099-K. The lower information reporting threshold and the summary of income on Form 1099-K enable taxpayers to more easily track the amounts received.” 

The government agency claims “money received through third-party payment applications from friends and relatives as personal gifts or reimbursements for personal expenses is not taxable.” 

But when does the IRS never abuse its newfound powers? 

What was the justification for this obtuse policy? The Biden administration openly desires to “close the tax gap” and bring in $8.4 billion in alleged missing tax revenue from 2021-2031. 

Groups like the Coalition for 1099-K Fairness lambasted the rule for disproportionately punishing casual sellers. 

“The new reporting threshold of only $600 means that Americans who sell only used goods and owe no taxes will now get confusing IRS forms, and many will be forced to consult costly tax experts when they normally handle their returns or risk overpaying on their taxes,” the coalition wrote on their website. “Even those who do not owe taxes may lack the documentation they need to file appropriately. Already-strained IRS resources will be spent processing hundreds of millions of new forms – even when no reportable income was generated.” 

Additionally, there are many expected potential privacy concerns with giving the IRS expanded powers to extract more taxes from individuals.

Tax policy expert Kimberly J. Pinter warned this new reporting regime will invite more IRS audits and unnecessary headaches for casual sellers:  

While these platforms claim “they can tell” which payments are business-related, the risk remains that non-taxable transactions will be reported anyway and triggering privacy concerns.

If you sell your car at a loss but for more than $600 and receive payment electronically, it is none of the IRS’ business. At the same time, that transaction may result in a Form 1099-K filing, leading to unnecessary audit notices and headaches for taxpayers.

There is, however, growing Congressional bipartisan opposition to these new tax changes. Thus far, three bills have been introduced to counter the lowered 1099-K filing threshold. They include the Cut Red Tape for Online Sales Act, Saving Gig Economy Taxpayers Act, and the Stop the Nosy Obsession with Online Payments (SNOOP) Act. 

The first bill would increase the threshold from $600 to $5,000. The second bill would raise the reporting threshold back to the original $20,000 amount. And the third bill would modify “requirements for third-party settlement organizations to eliminate their reporting requirement concerning the transactions of their participating payees unless they have earned more than $20,000 on more than 200 separate transactions in an applicable tax period.” 

In February, the Coalition for 1099-K Fairness surveyed the IRS provision’s impact on current and would-be casual sellers. The majority of respondents surveyed said they shouldn’t be considered businesses because they generated less than $5,000 in gross income in 2021.  

Moreover, 85% of respondents said the IRS shouldn’t target occasional casual sellers while 65% of respondents are “somewhat concerned that non-taxable online sales will be reported to the IRS.” 

Given this, Congressional Republicans must fight the Biden administration’s War on Small Business– from attacks on casual sellers to forced unionization of one-person businesses – head-on when they regain control of the House of Representatives in January 2023. 

If they don’t prioritize this, their newfound majority will fail as a counterbalance to the White House. 

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