Tim’s Tax News on the Tenth – October 2023

Be forewarned about the new $600 IRS rule being implemented this year, which may likely impact over 40 million Americans. The tax documents that are going to be sent out in January may catch a lot of people by surprise.

If you use PayPal, Cash App, or Venmo, you are going to want to make sure you understand the tax implications. If you received $600 or more of qualifying transactions through these companies or any other Third-Party Settlement Organizations (“TPSOs”), the IRS will get involved and you will receive a tax document called 1099-K come January 2024.

Congress modified the requirements for reporting these transactions by lowering the minimum reporting threshold to any amount over $600 for one or more transactions. Prior to the change, TPSOs were required to report transactions for a payee if (1) they exceeded $20,000 and (2) the number of transactions with that payee exceeded 200.

How may this impact you? Here is an example: You decide to sell your old sectional sofa for $600 in total. Your neighbor buys it from you and pays you $600 through Venmo. With the old rules, nothing would have happened because it is under the $20,000 threshold and the IRS would have stayed out of it. But now the rules have changed. Dropping the threshold from $20,000 to $600 is a big change because in January 2024, in this type of situation, you are going to get a tax form you need to make sure you properly report. If you do not, then you will likely have problems with the IRS.

In the example above, you may argue that the $600 is not taxable income because one pays taxes on profits. If you bought your sofa for $1,000 and now you sold it for $600, you actually lost money on the transaction and should not have to pay taxes on the transaction. But the question is: Do you have a receipt? If you get audited the IRS will ask you to provide a receipt for the sofa. If you fail to provide it, then it is going to look like you got that sofa for free and that $600 that you made was pure profit that you must pay taxes on. You may say: How am I supposed to come up with a receipt for a sofa I bought years ago? And the IRS will say: That is your problem, and if you do not have the receipt, you are guilty until you are proven innocent, and if you think that is unreasonable, that is just the way it is.

You may think that only certain IRS agents would take it that far, and most would not be so extreme. And let’s just say that you get lucky and get a very understanding IRS agent. You still have to suffer through the emotional damage and waste your time with an IRS audit that may drag out for months and cause you much stress.

Another way this change will affect most Americans is in their tax preparation fees. If you end up getting the 1099-K form in January, it is just going to be an upcharge in your tax preparation services because you have to fill out an additional schedule on your 1040 called the Schedule C. You may try to put the 1099-K into other income, but if you have offsetting expenses (which will be the situation in most cases) then you cannot. The implication is that, inevitably, people are going to make errors with their 1099-K tax forms and will end up paying more taxes than they should.

Remember that this change applies to goods and services that are sold. Therefore, if you are simply splitting a check at a restaurant, that is not a qualifying transaction. Similarly, if you are sending your grandchild money for a birthday or graduation gift, then that is not a qualifying transaction. However, it is important to ensure the sender categorizes the transaction correctly when they send the money. Otherwise, it will trigger a 1099-K tax form. For example: When you send money through PayPal it will ask you to identify what the money is being sent for. Is this a gift or is this for goods and services? So make sure you pick the appropriate one.

It is important to note that this threshold change applies only to TPSOs. Zelle, Chase, QuickPay, or Crypto are not considered to be Third-Party Settlement Organizations and will not trigger a 1099-K tax form. That is because payments between financial institutions that do not hold accounts or handle settlement funds are exempt from these IRS reporting requirements.

Finally, this rule was scheduled to be implemented last year. However, because the change was done close to the deadline at the end of the year, it was delayed to 2023. So if you are expecting this will get delayed again from 2023 to 2024, it is unlikely. It does not appear that IRS Commissioner, Danny Werfel, will change his mind on this. So while politicians are attempting to raise the threshold from $600 to $10,000, if you have been following the developments in Congress, you know they have much more pressing matters at the moment, so it does not look like the new $600 threshold will change before January.

If you would like more details, please do not hesitate to call our office. Our office has been successful in helping taxpayers with IRS and IDOR collection problems for over 28 years. If you have a tax or debt problem, please contact me at 847-705-9698 or thughes@lavellelaw.com and find out how we can help you.

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Lavelle Law, Ltd. is registered with the Illinois Department of Financial and Professional Regulation as an approved continuing education provider for CPE for CPAs and Enrolled Agents. If your organization is seeking CPE courses in the area of Business Law, Innocent Spouse Relief, IRS Collections, Tax Scams (including ID Theft), or other areas of tax law that can be taught at your office, please contact me at thughes@lavellelaw.com.