IRS Delays Hotly Debated Reporting Rule

The Internal Revenue Service (IRS) has announced that it will delay a highly controversial tax reporting requirement targeted toward Americans who make more than $600 online through third-party payment apps such as Venmo and PayPal. This decision, made by the IRS on Tuesday, comes in response to mounting backlash and concerns from both individuals and small businesses.

Originally approved by Democrats in March 2021 with the passage of the American Rescue Plan, the rule change would have required payment apps to send Form 1099-K to the IRS and users if their transactions totaled more than $600 over the course of the year. This was intended to crack down on tax evasion, but critics argued that it amounted to government overreach and could ultimately hurt small businesses.

Under the new decision, 2023 will be treated as an "additional transition year" which means that payment apps will not be required to send users Form 1099-K unless their gross income exceeds $20,000 or they had 200 separate transactions within a calendar year. This is the second consecutive time that the IRS has delayed the reporting threshold.

IRS Commissioner Danny Werfel stated that this phased-in approach is necessary to avoid confusion and prevent problems for taxpayers, tax professionals, and others in this area. He also explained that it became increasingly clear, after gathering feedback from third-party groups and others, that additional time is needed to effectively implement the new reporting requirements.

The change, initially aimed at ensuring individuals report their full income, now threatens to sweep up millions of Americans who make money online. According to the Pew Research Center, roughly one in four Americans earn extra income on the side by selling something online, renting their home, or working through digital platforms.

Under the new rule, Form 1099-K will only apply to payments received for goods and services transactions, meaning that using Venmo or PayPal to send a loved one a gift, pay rent, or reimburse a friend for dinner will not be included. This exclusion also applies to anyone who receives money from selling a personal item at a loss.

PayPal, one of the major payment apps affected by this rule, previously stated that it does not include payments made between family and friends, shared trips, or reimbursements for things like dinner or gifts.

Business owners are also not exempt from reporting their income, as they are already required to do so. The new rule simply expands the scope of the threshold, meaning the IRS will now have access to more information about what business owners earn on cash apps.

Overall, the delay in implementing the lower reporting threshold is a welcome relief for individuals and small businesses who were concerned about the potential impact of this change. It remains to be seen how the rule will ultimately be implemented and what effects it will have on tax reporting and compliance in the future.

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