IRS issues new guidance on Form 1099-K

The Internal Revenue Service updated its frequently asked questions Wednesday about Form 1099-K, the information return used for reporting transactions involving payment cards and third-party networks, after the IRS recently delayed a requirement to lower the reporting threshold from $20,000 to $600.

Last December, the IRS postponed the lowered threshold for reporting on transactions involving services such as eBay, PayPal, Venmo, Etsy, Airbnb and third-party settlement organizations. The new threshold was scheduled to take effect in the New Year and generate millions of new forms going out to unsuspecting taxpayers and their accountants (see story). The American Rescue Plan Act of 2021 lowered the reporting threshold for third-party settlement organizations to as little as $600 per year from the earlier threshold of $20,000 for more than 200 transactions per year.

Under the law, beginning Jan. 1, 2023, organizations were required to report third-party network transactions paid in 2022 with any participating payee that exceed a minimum threshold of $600 in aggregate payments, regardless of the number of transactions. Organizations such as the American Institute of CPAs, the National Association of Tax Professionals, the National Taxpayers Union and others have been sounding warnings about the lower threshold and the impact on an overworked IRS during tax season. The IRS and the Treasury said they heard concerns regarding the timeline of implementation of the changes and would provide extra time to smooth the transition and ensure greater clarity for taxpayers, tax pros and the industry.

“The additional time will help reduce confusion during the upcoming 2023 tax filing season and provide more time for taxpayers to prepare and understand the new reporting requirements,” said then-acting commissioner Doug O’Donnell at the time of December’s announcement.

Near the end of December, the IRS updated its FAQ sheet to reflect the decision to delay the requirement (see story). On Wednesday, it made further updates and additions to the FAQ sheet. 

Among the changes were two new questions and answers and updates to two other questions and answers. Question 3, which was originally added in December, has been updated. It asks whether the gain or loss on the sale of a personal item is used to compute taxable income, and is it reported on a Form 1099-K?

The answer is the gain on the sale of a personal item might be reported on a Form 1099-K, and the loss on the sale is not deductible. For 2022 tax returns, if taxpayers receives a 1099-K for the sale of a personal item that resulted in a loss, they should make offsetting entries on Schedule 1 of Form 1040, as follows: Report the proceeds (the Form 1099-K amount) on Part I – Line 8z – Other Income, using the description “Form 1099-K Personal Item Sold at a Loss.” Report the costs, up to but not more than the proceeds amount (the Form 1099-K amount), on Part II – Line 24z – Other Adjustments, using the description “Form 1099-K Personal Item Sold at a Loss.” 

The FAQ page provides some examples of sales of refrigerators and concert tickets, and what to do. 

Taxpayers can also use Form 8949 and Schedule D to report the sale of a personal item at a loss instead of Schedule 1 if they wish, for example, because they have other transactions that require them to file Form 8949 and Schedule D anyway. Because the loss isn’t deductible, they should enter an adjustment when reporting the proceeds and basis of the personal item on Form 8949. Enter “L” in column (f) as the code explaining the loss is nondeductible. Then they should enter the amount of the nondeductible loss as a positive number in column (g). 

The FAQ page includes two new questions and answers. Question 6 asks what happens when a taxpayer receives multiple Forms 1099-K that report proceeds from the sale of personal items sold at a loss or 1099-K received in error, do they need to identify the issuer and the amounts separately for each or can the taxpayer combine them all into one item on the Schedule 1, Additional Income and Adjustments to Income, for entry on Lines 8z, Other Income, and 24z, Other Adjustments? 

The IRS responded that they can report the offsetting entries on Schedule 1, lines 8z and 24z, for each Form 1099-K they received separately, or they can combine the Forms 1099-K they’ve received. The IRS then explains how to fill out the forms.

Question 7 is also new. It explains what happens when a taxpayer has received a Form 1099-K in error and couldn’t get a corrected form in time to file their taxes. For example, the tax software they used might have put the gross proceeds amount as a positive and the offsetting amount as a negative on Schedule 1, line 8z, but that’s different from the instructions telling taxpayers to enter the offsetting amount on Schedule 1, line 24z. The question is whether alternative reporting is OK? The answer is yes. For tax year 2022, taxpayers can use Schedule 1, line 8z to show both the gross proceeds and the offsetting negative amount to report a Form 1099-K received in error or report proceeds from the sale of a personal item at a loss as an alternative to reporting only gross proceeds on Schedule 1, line 8z with offsetting amounts on Schedule 1, line 24z. The IRS noted that when reporting sales of personal items at a loss, they can instead report the transactions on Form 8949, Sales and Other Dispositions of Capital Assets, which carries over to Schedule D, Capital Gains and Losses. 

In addition, the IRS updated question 5 in the section of the FAQ on filing Form 1099-K.  It asks whether there’s a de minimis exception from reporting payments to participating payees of third party network transactions on Form 1099-K for a third party settlement organization? 

The answer is yes. “There is a de minimis exception from reporting for third party settlement organizations with respect to third party network transactions,” said the IRS. “The threshold was lowered by law for calendar years beginning after 2021; however, on Dec. 23, 2022, the IRS announced it was delaying implementation of the lower threshold and would treat calendar year 2022 as a transition year for filers in which the prior (higher) threshold would apply. Therefore, for calendar year 2022, third party settlement organizations are only required to issue Forms 1099-K to report transactions where gross payments to a participating payee for goods and services during the calendar year exceed $20,000 and there are more than 200 transactions.”

The IRS pointed to Notice 2023-10, which delayed a change to the de minimis exception from reporting third party network transactions that would have required reporting if payments to a participating payee for goods and services during the calendar year exceeded $600.

One of the groups that has been lobbying Congress to restore the new $20,000 threshold or find a middle ground between that and $600 is the Coalition for 1099-K Fairness, whose members include Airbnb, eBay, Etsy, Eventbrite, PayPal, Rover, StubHub, Block Inc., the parent company of Square and the Cash App, and others. During a press conference last week, Accounting Today asked whether the IRS’s delay of the lowered 1099-K reporting threshold helped make this tax season go more smoothly than was feared, or if the extra funding form last year’s Inflation Reduction Act was more of a factor.

“I think everything helps,” said Ryan Ellis, an enrolled agent who works with the coalition and is also president of the Center for a Free Economy. “It wasn’t just the IRA money. There was also prior appropriated money to the IRS to help clear the backlog. That’s like turning a ship around. When you start to get behind with COVID, it’s not like tax season just stops. You get the next one coming up, and you’re further and further behind. I think the IRS has done a pretty solid job. Speaking as a practitioner and enrolled agent, someone who has done people’s taxes for 20 years, I think they’ve done a pretty good job of clearing that out. I’m noticing that things come through [faster]. Something simple, like if you want to let your company elect to become an S corporation, that letter during COVID might have taken six or seven months to come through. Now it comes in a month or two, so [there are] little indicators that the backlog has been cleared. But if the IRS didn’t do that in December, if they didn’t delay this provision, we’d be talking about the IRS having to deal with 30, 40 or 50 million additional information reporting forms. So there would be that burden. And then everyone receiving them would have some friction in actually getting their taxes done. They might call up the 800 number. They might report it the wrong way. That then feeds, if they report it the wrong way, into correspondence season later in the year, when the CP2000 type notices start to go out to taxpayers. I think that was a huge favor that the IRS did not only for taxpayers, but for themselves, because it would have been a far less smooth tax season if they had to deal with that disruption.”