The Avalanche of Form 1099-K

*1/5/23 UPDATE: The IRS has announced a delay in implementation for the new $600 reporting threshold. While these rules won’t be in effect for the 2022 tax year, the IRS has indicated that they intend to make them effective for 2023.* 

What is Form 1099-K and why should you care? You might be saying, “I don’t run a business so I would never receive this form!”  And you might be wrong.

The IRS has placed new lower (and I do mean, LOWER) guidelines in place to ensure “proper” reporting of income. How much lower? Try $600.

“Well, I don’t run a business! I just get a W2 so this could never happen to me, right?”  Well, have you ever received money from Paypal, Venmo, etc. for some odd jobs, seling a few personal items on Facebook Marketplace, or perhaps splitting a meal with a friend?

If so, you’re in for a surprise.

So What is Form 1099-K?

Form 1099-K is a tax form issued by the Internal Revenue Service (IRS) to report certain types of payment transactions. It is typically used to report payments made through third-party payment networks, such as credit card processors and online marketplaces. If you receive a Form 1099-K, it means that you received payments through one of these networks in the previous tax year.

Form 1099-K USED to be required to be issued for payments if the total gross amount of the payments exceeds $20,000 and there are more than 200 transactions. This means that if you receive a Form 1099-K, it is likely that you received a significant amount of income through the payment network in question.

Well, Congress (through the American Rescue Plan Act 2021 “ARPA”)  recently changed the threshold to $600 for 2022 sales reported in early 2023. And lowered the transaction requirement to 1 (yes ONE) from the previous 200 per year.

Avalanche of Audits?

Provided that the IRS can handle the mountain of information on their 1960’s era computers, what will they actually DO with this information? Well, let’s assume that the IRS computers can actually handle all this new & exciting information. They will most certainly add this to their “automated underreporter” program. This wonderful enhancement spits out automated notices whenever the IRS finds an information document (like the 1099-K) that wasn’t reported somewhere on your tax return.

Form 1099-K should be reported on your tax return. The income reported on your Form 1099-K should be included on your tax return, along with any other income you received during the tax year. You may also need to pay self-employment taxes on this income if you are not an employee.

Don’t Ignore Form 1099-K!

So what do you do if you receive Form 1099-K for the sale of grandma’s old rotary phone?

If you ignore it, we’re likely hearing from the IRS with a CP2000 notice next fall. We don’t want to send a response to the IRS right now. Here is a recent picture of their cafeteria. I guess employees are eating at their desk from now on….

While Form 1099-K might not be reporting actual income, we need to report the amount on the return somewhere to avoid the IRS matching computers. Often reporting the income as “Other income” and then a related contra expense does the trick. Be sure to let the IRS know why you are backing the income off your return, whether it be meal sharing or a sale of a personal item like mamaw’s phone.

AICPA Response

CPAs have been warning of the deluge of information (and problems) that this lower limitation will cause. The American Institute of CPAs (AICPA) has sent a formal request to Congress asking them to make changes to the new rules before year end, but it may already be too late to stop the huge payment processors from issuing erroneous tax documents for the 2022 tax year. The year end omnibus bill process may provide some relief right before the Christmas Congressional break. Stay tuned!