WILFORD: How The IRS Saved Congress From Its Own Failures On Digital Transaction Change

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Andrew Wilford Contributor
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If you’re a member of Congress, the way you can know that you’re not doing enough to protect taxpayers from excessive burdens is when the IRS steps in and says that taxpayers need a break. Unfortunately, that’s exactly what happened this year with an under-the-radar change that would have confused millions of taxpayers.

When individual taxpayers earn income via transactions on third-party platforms between two individuals, such as the sale of some craft goods on Etsy or used household items on eBay, they are expected to report that income. As that income wouldn’t show up on a traditional wage earner’s W-2 form, Form 1099-K exists specifically for this type of income.

The problem is that many of these transactions are either non-taxable (you owe no tax when selling a used item so long as you sell it for less than you bought it for) or so small that they are the digital equivalent of a lemonade stand. As such, up until last year there was a threshold in place of 200 transactions and $20,000 in sales, designed to ensure that taxpayers didn’t have to file a form just to let the IRS know about a small amount of income that was quite possibly non-taxable anyway.

To offset some of the cost of the massive, unnecessary, and quite possibly inflationary stimulus bill in March of 2021, legislators slipped in a change to this threshold. Instead of the previous 200 transaction, $20,000 threshold that made rules about reporting peer-to-peer transactions of little concern to most Americans, the threshold was set to drop to $600. 

Suddenly, taxpayers who resold a couple concert tickets or used college textbooks were on the hook for reporting that to the IRS, even though the proceeds from both sales would probably not be taxable in the first place. The third-party platforms they sold on are also liable for generating and sending a Form 1099-K to all affected taxpayers.

For these non-taxable transactions, the best case scenario is that the taxpayer is aware that they are non-taxable and reports them as such, making the whole exercise merely a waste of the taxpayer’s (and the IRS’s) time. On the other hand, many taxpayers receiving a Form 1099-K would be receiving it for the first time, and may logically assume that they are receiving the form because the income it describes is taxable. In that case, taxpayers would waste not only time, but also money.

And somewhat lost in discussions of the “tax gap” and “tax cheats” is that most Americans earn some “income” every year that the IRS doesn’t need to know about. If a friend of yours gives you some money for watching their dogs for the weekend, you’re not required to report that to the IRS. Conceivably, the federal government could take in a little more revenue by demanding that you keep track of those small personal payments and pay taxes on them, but most people would agree that the hassle it would cause is not worth it.

That same principle should apply to peer-to-peer transactions. Undoubtedly, people making a substantial income from sales on third-party platforms should pay taxes on that income. But there is little need for the IRS to scrutinize small hobby or digital garage sale transactions.

Some legislators realized that this change made little sense and tried to fix it before it went into effect. Bipartisan legislation was introduced by Sens. Joe Manchin (D-WV) and Bill Hagerty (R-TN) to raise the threshold back up to $10,000 — lower than before, but still likely to exempt most casual activity. Unfortunately, time ran out on an agreement that legislators had all year to reach.

With a fix on the Form 1099-K threshold out of the year-end spending package, the IRS acted on its own to delay the implementation of the lower threshold by a year. Taxpayers should always be leery of unilateral actions by the IRS, but in this case it was helpful, and the IRS does have some authority to delay tax enforcement measures that it or taxpayers are unprepared to handle

But all the IRS gave taxpayers is a one-year delay. Legislators need to use 2023 more productively than they did 2022, and come to an agreement on a 1099-K fix without counting on the IRS to save their bacon.


Andrew Wilford is a senior policy analyst with the National Taxpayers Union Foundation, a nonprofit dedicated to tax and fiscal policy research and education at all levels of government.

The views and opinions expressed in this commentary are those of the author and do not reflect the official position of the Daily Caller.