The IRS gave gig workers a reprieve Tuesday by announcing they won’t have to worry about burdensome requirements to file paperwork on low-dollar payments collected on apps such as Venmo and PayPal when they file their 2023 tax returns.
The delay is likely welcome for taxpayers but is a black eye for Democrats who stuck the stiffer reporting requirements into their 2021 pandemic stimulus package.
To encourage gig workers to pay taxes on their earnings, Democrats wrote legislation saying anyone who collects more than $600 in income through an electronic payment app must get a form detailing the money and report it to the IRS.
The goal was to collect taxes from people making money by selling services or goods online. Yet it also could snare Americans who used the apps to sell used furniture, reimburse a friend or send a monetary gift to a relative.
The law was supposed to kick in last year, but the IRS, bowing to intense pressure, belatedly declared 2022 a “transition” year. On Tuesday, the tax agency said 2023 would be another “transition” year. So will 2024, when the reporting changes take effect only for income exceeding $5,000.
“We spent many months gathering feedback from third-party groups and others, and it became increasingly clear we need additional time to effectively implement the new reporting requirements,” said IRS Commissioner Danny Werfel.
With the delay, the reporting requirement for tax year 2023 — meaning returns due in 2024 — will remain at $20,000 in payments across at least 200 transactions.
About 14 million taxpayers currently receive Form 1099-K.
If the $600 threshold took effect, that number would rise to about 44 million, according to the Government Accountability Office. The congressional watchdog predicted “confusion” among average taxpayers who would have to figure out profits and losses from simple transactions such as selling an old couch online.
“This puts them at risk of inaccurately reporting their incomes to the IRS or not meeting their tax obligations,” GAO said in an audit last week.
The audit also said the IRS lacked a plan for enforcement and outreach.
Republicans have mocked Democrats’ bungling. They say the whole idea of lowering the threshold to snare more Americans was ill-advised.
Rep. Jason Smith, Missouri Republican and chairman of the House Ways and Means Committee, said the IRS rule may not even be legal. He said the legislation Democrats wrote doesn’t seem to allow for the delays the IRS is attempting and needs a rewrite from Congress.
“Republicans have tried to repeal this terrible law, but Democrats have refused. 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,” Mr. Smith said.
Taxpayers will start receiving 1099-K forms in January.
The announcement Tuesday at least gave taxpayers plenty of notice. Last year, the IRS waited until Dec. 23, the Friday before Christmas, after some 1099-K forms had already been sent.
When Democrats passed the legislation in 2021, they were trying to target people who use online marketplaces to sell goods, such as Etsy or eBay, and who collect payments through transaction apps. Democrats figured Americans collected thousands of dollars without pressure to report the income.
The transaction apps can’t automatically distinguish between a payment from a customer, a reimbursement from a friend or a gift from a relative.
The IRS said it’s up to those involved to label the transactions in the app to head off a 1099-K. Those who receive the form must use it and other records to report the correct income on their tax returns.
Even trickier is selling on sites such as eBay.
As long as the selling price is lower than the purchase, it’s not considered taxable income, according to the IRS Advisory Council. If they receive a 1099-K, they must figure out how to handle the situation.
In a report this month, the advisory council said the IRS needs to do much more to help taxpayers sort out those issues.
The IRS said another year’s delay and altering next year’s filing threshold to $5,000 instead of the eventual $600 should buy space to make improvements.
“We want to make this as easy as possible for taxpayers,” Mr. Werfel said. “We will work to make the new reporting requirements easier for them, and we’ll work closely with third-party groups, tax professionals and others to find the smoothest path to ensure compliance with the law.”
• Stephen Dinan can be reached at sdinan@washingtontimes.com.
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