The U.S. Internal Revenue Service (IRS) has announced a postponement in implementing a contentious rule that would require individuals to report income over $600 received via digital payment platforms like Venmo and PayPal. This decision marks the second consecutive year of delay for the rule initially set to take effect in 2023, now pushed to 2024.
The delay aims to alleviate taxpayer confusion and to offer clarity on the new reporting requirements, according to IRS Commissioner Danny Werfel. "We spent many months gathering feedback... and it became increasingly clear we need additional time to effectively implement the new reporting requirements," Werfel stated.
This rule, part of the 2021 American Rescue Plan passed by Democrats without Republican support, would have led to the issuance of an estimated 44 million additional 1099-K forms by the IRS. However, with the new timeline, users of third-party payment apps will only need to fill out 1099-Ks in 2023 if they received over $20,000 in income and engaged in more than 200 transactions.
The IRS plans to introduce a phased-in approach, initially raising the reporting threshold to $5,000 for the 2024 tax year, before potentially implementing the $600 threshold in 2025. This approach targets a smoother transition for taxpayers, tax professionals, and payment processors.
Erin Collins, the National Taxpayer Advocate, lauded the decision, emphasizing the need for certainty and clarity in tax requirements. "Equally important is the IRS's announcement today that it will adopt a phased-in approach and only require reporting of transactions totaling more than $5,000 next year," Collins commented.
The proposed rule had sparked significant pushback from online selling platforms and Republican lawmakers, who criticized it as government overreach and potentially burdensome for people relying on payment apps for personal reimbursements.
The Biden administration's intent behind this rule change is to clamp down on tax evasion by lowering the reporting threshold. However, the IRS's decision to delay reflects a recognition of the challenges and confusion it poses to millions of taxpayers.
IRS officials clarified that the delay also stems from the need to educate taxpayers about which transactions are reportable under the new law. Personal transactions, like reimbursing a friend for a meal, or selling used items at a loss, are not subject to the reporting requirement. However, sales by small businesses generating profit will be taxable.
Rep. Jason Smith of Missouri, Chair of the House Ways and Means Committee, suggested that this repeated delay indicates the rule's unfeasibility and called for its reevaluation. "Given that even Democrats now admit that this law is unworkable and are trying to rewrite a key provision, it's time to scrap it and start over," Smith stated.
The IRS's move to delay and phase in the implementation of the $600 reporting threshold aims to balance the need for more effective tax administration with the necessity of reducing taxpayer confusion and burden.
