IRS ditches new tax requirement for now that would have caused ‘lots of confusion’

The Internal Revenue Service is delaying the new $600 reporting threshold for 1099-K tax forms, a move many tax experts believe will help avoid potential chaos this upcoming filing season.

The updated law, enacted by the American Rescue Plan, required third-party transaction networks such as Venmo, Paypal, eBay, and Etsy to issue a 1099-K for users who had more than $600 in payment transactions during the year. The previous threshold was $20,000 with over 200 transactions.

Many professional groups called for more time before implementation, noting the unexpected forms scheduled to go out in January would create confusion for many Americans who use the payment services for many nontaxable events.

“We appreciate the IRS providing this critical relief so that millions of people aren’t unnecessarily burdened with tax forms in 2023 for splitting meals, selling used goods, paying back a friend, or other instances where no taxable income was generated,” a spokesperson for the Coalition for 1099-K Fairness told Yahoo Finance in a statement after the delay was announced before the Christmas holiday.

‘Lots of confusion’

The lower reporting threshold was intended to capture electronic cash incomes from side gigs, part-time work, or small businesses, but experts worried that many taxpayers would have received 1099-K for personal transactions that are not taxable.

"That's probably the biggest concern," Tom O'Saben, EA enrollment agent and director of tax content at the National Association of Tax Professionals, told Yahoo Finance before the delay. "People might be receiving government forms that look like income for nothing more than gifts going back and forth between family members."

Or, splitting the tab when dining out, he added.

"You and I go out to dinner and you pay for the whole check and I reimburse you on your Venmo for this totally personal expense," he said.

Selling used items for over $600 and getting paid through third-party cash apps could have also triggered the reporting requirement, generated a 1099-K form, and required extra tax return calculations to prove the event wasn't taxable.