The IRS delay prevents a bad policy from taking effect, but Congress should solve the problem once and for all.
The IRS delay prevents a bad policy from taking effect, but Congress should solve the problem once and for all.
T he IRS announced on November 21 that it would be delaying the enforcement of a provision of the Democrats’ American Rescue Plan Act that would require third-party payment platforms to generate tax forms for anyone with more than $600 worth of transactions annually. The current threshold is $20,000 and 200 transactions.
The American Rescue Plan Act was passed in 2021, and the IRS made the same decision to postpone the $600 threshold last year. That’s because it’s a terrible policy, and Congress should repeal it.
Millions of people use apps such as Venmo, CashApp, or Zelle to make payments between friends or sell stuff they want to get rid of. Think of splitting the bill at a restaurant or receiving a few hundred bucks for an old piece of furniture.
Plenty of people do things like that enough times in a year that they would easily cross the $600 threshold. The IRS estimated that 44 million people would receive a 1099-K form if the $600 threshold took effect, which is 30 million more than currently receive one.
Processing that many new forms is a significant problem for an agency that is constantly behind on the forms it already requires. Adding to the confusion is that a large portion of those 30 million people would actually owe nothing anyway.
The 1099-K form is part of the income tax. If you pay the entire tab at a restaurant and your friend sends you $20 on Venmo to cover his portion of it, that’s not income for you. All you did was split up the payment for services differently. That $20 isn’t subject to income tax at all, yet it would show up as a debit in your Venmo account and, assuming you transacted more than $600 in a year, would be reported to the IRS.
If you sell an old couch for $200, and you paid $1,000 for it new, the $200 isn’t taxable income. Selling a product for a loss isn’t taxable. Many of the transactions people would make using payment platforms are for used items, which are basically never profitable. But again, the $200 would show up as a transaction on the payment app, so the IRS would see it if your transactions totaled more than $600 in a year.
Under the $600 reporting requirement, the IRS would be deluged with mostly extraneous information. But taxpayers would see a tax form with a big number at the bottom and could, understandably, think that they are liable to pay taxes on all of it.
In the event of an audit, taxpayers could face the prospect of having to prove that payments on their 1099-K were not taxable income, which could involve going through a year’s worth of receipts from restaurants and bars. This isn’t a good use of the IRS’s time or the taxpayer’s time.
The real target of the $600 threshold is people who have side gigs. For example, some people make between $600 and $20,000 per year selling arts and crafts online in their spare time. That isn’t their primary source of income, but it is technically taxable, in the same way that cash received for mowing someone’s grass is technically taxable. Plenty of people don’t report those relatively modest sources of income. Despite their repeated promises to never increase taxes on people making less than $400,000, Democrats want a piece of that side income.
The $20,000 and 200 transaction threshold ensures that people aren’t deriving their primary income through payment platforms and therefore dodging the income tax entirely. That’s a sensible policy. The $600 threshold, irrespective of the number of transactions, is a dragnet that will catch millions of taxpayers who owe basically nothing, all to punish people who dared to make a little extra money without Democrats being able to skim some of it.
In its announcement, the IRS claimed it would phase in the new threshold, lowering it to $5,000 next year instead of the $600 the law required. The two postponements so far, and the new phase-in, were not written into the law that Congress passed. When Congress passes tax legislation, the words on the page are treated as an opening move rather than a pronouncement of the law as decided by the people’s elected representatives.
It’s a good thing that the $600 threshold isn’t taking effect, but it should be repealed by Congress, not delayed ad infinitum by the people whose job it is to enforce it.