Preparers should remind clients not to ignore 2022 Forms 1099-K

The IRS has announced that it won’t require third-party settlement organizations (TPSOs) like PayPal, eBay, Etsy and Venmo to issue Forms 1099-K, Payment Card and Third-Party Network Transactions, for 2022 based on the $600 reporting threshold, but tax preparers still need to remind their clients to be on the lookout for the forms over the next few weeks. This reminder may be necessary because the media coverage of the postponement of the $600 threshold may have left taxpayers confused or believing that they can simply ignore any Forms 1099-K they receive.

While the IRS dropped the requirement that TPSOs issue Forms 1099-K based on the $600 threshold, the announcement came just a few weeks before the forms were scheduled to go out, and it’s likely that some organizations will simply go ahead and issue the form to taxpayers and the IRS. Additionally, a fact sheet issued by the IRS Dec. 28 makes it clear that taxpayers should not ignore the form:

“The IRS is delaying the requirement for third party settlement organizations to report income at the more than $600 threshold for calendar year 2022 (tax filing season 2023). However, the legal requirement for reporting income has not changed, regardless of the reporting threshold for providing a Form 1099-K.

Reporting does not impact a taxpayer’s responsibility to accurately report ALL income, whether or not they receive a Form 1099-K or other information return (e.g., Form 1099-MISC, Miscellaneous Information; Form 1099-NEC, Nonemployee Compensation; etc.).”

2021 Legislation Lowered the Threshold

Prior to 2022, TPSOs were only required to issue the forms when a taxpayer had more than 200 transactions with a combined value of $20,000 or more. But the American Rescue Plan Act of 2021 lowered the reporting threshold to require TPSOs to issue Forms 1099-K whenever any user received payments of $600 or more. The change would have resulted in millions of additional taxpayers receiving Forms 1099-K and was unpopular with taxpayers as well as those concerned the IRS would be unable to process the additional reporting since it was already struggling with its workload.

When the IRS issued its Dec. 23 announcement that the 2022 tax year would be a transition year and that third-party settlement organizations were not required to issue Forms 1099-K based on the new $600 threshold, and that the previous threshold would in place for a least another year, many news outlets picked up on the story. Unfortunately, some news outlets that picked up the story made it sound like taxpayers could ignore any Form 1099-K they received – that is not the case..

What Should Taxpayers Do?

If a taxpayer receives a Form 1099-K, whether it was issued under the new or old threshold, they need to remember that the IRS is also receiving a copy of the form, so the agency will be expecting the reported amount to be included in the taxpayer’s 2022 income. Simply ignoring the form is not an option. When the IRS believes a taxpayer has not reported income reflected on a form from the 1099 series usually notifies the taxpayer and retroactively charges penalties and interest beginning on the day it first determined they owed tax.

Many tax professionals have been concerned that under the lower reporting threshold taxpayers will be issued Forms 1099-K in non-commercial situations. For example, when a friend or family member is using a service like Venmo or PayPal to reimburse the taxpayer for money spent on their behalf. Since the money was not payment for the sale or goods or the provision of services, the IRS has said that the reported amount is not taxable.

In situations where the taxpayer has received a Form 1099-K that includes a nontaxable amount, the IRS says the taxpayer should file a Schedule 1 (Form 1040), Additional Income and Adjustments to Income, and make the following entries:

• Part I, Line 8z, Other Income. List type and amount: “Form 1099-K received in Error” and report the amount reflected on the Form 1099-K. This will show the proceeds reported on Form 1099-K.
• Part II, Line 24z, Other Adjustments. List type and amount: “Form 1099-K received in Error” and report the amount reported on the form. This will offset the proceeds reported in error.

Preparers Need to be Ready for Questions

The Form 1099-K FAQs also highlight some questions tax professionals may need to answer if their clients receive a form they were not expecting. Those questions include:

• How is the gain on a personal item sold on an online marketplace calculated?
• What does a taxpayer do if they lack the records necessary to calculate a gain or loss?
• How to account for the fees the taxpayer paid to an online marketplace when determining the gain or loss from a sale?
• Is the gain from the sale of a personal item is long- or short-term?
• What a taxpayer should do if they were issued a Form 1099-K for a payment received from a family member or friend who used a TPSO like Venmo to reimburse them?

Unfortunately, the IRS has not issued any guidance on the reduced filing threshold beyond its FAQs. If a taxpayer or tax preparer have additional questions the IRS recommends consulting the instructions for Form 1099-K and the general instructions on information returns.