Urgency Mounts to Avert 1099-K EBay, PayPal Tax Form Chaos

Everyone, it seems—including many e-commerce platforms like eBay Inc. and PayPal Holdings Inc.—wants lawmakers and the IRS to prevent millions of Americans from receiving a tax document they may have no idea how to handle. But action will need to happen quickly.

A law that significantly expands the scope of who needs to receive 1099-K forms is set to affect millions of unsuspecting taxpayers in January, absent legislative action or new guidance. Companies are lobbying Congress to change the law, while preparing for the flood of questions if it doesn’t. The IRS is leaning on these companies to help them implement the policy ahead of the filing season.

IRS guidance is expected soon on the issue. Some companies and taxpayer advocates have been clamoring for the IRS to again delay the requirement as Congress works to come together on a larger tax deal, while others are still hoping for a legislative fix. Chances for Congress to act on tax issues this year are dwindling, though, as the most likely vehicle for a tax package was punted to next year.

“The window for 1099-K reform is closing quickly and a legislative fix or another IRS delay is critical to ensuring that millions of Americans are not caught off guard as more than 40 million 1099-K’s hit their mailboxes in January, needlessly causing confusion and compliance challenges,” said Arshi Siddiqui, who lobbies on behalf of a group of companies called the 1099-K Coalition.

The Treasury Department didn’t respond to a request for comment.

Caught Unaware

Democrats in the 2021 American Rescue Plan Act lowered the threshold for when e-commerce platforms have to to send a 1099-K tax form to users and the IRS to $600, a significant decrease from the previous threshold of $20,000 and 200 transactions. This change was meant to raise revenue and increase tax compliance.

Next filing season, the IRS expects to receive 44 million 1099-K forms—about a 30 million increase, according to a Government Accountability Office report released last week.

The new requirements could cause taxpayers to receive forms that report more income than they’ve actually earned, causing them confusion, companies warn.

Under the 1099-K requirements, Rover, a site that connects pet owners with sitters and walkers, must report the gross payments the platform processed, even if there was a cancellation. Pet sitters will likely receive forms that say they’ve earned a substantially higher number than what they actually have, and will need to figure out from there how to correctly fulfill their tax reporting obligations, said Charlie Wickers, Rover’s chief financial officer.

“We already have processes in place to make it clear to providers in a digestible manner what their earnings are, and what their costs are to use the platform,” Wickers said. “Trying to fit something as episodic as sitting pets into a banking form like a 1099-K, it’s hard to fathom.”

The new 1099-K threshold also makes things complicated when a taxpayer sells a personal good for a loss. Dori Graff, CEO of Kidizen, a platform where users can buy and sell children’s clothes, said she fears that some will report their sales as income even if they don’t need to, especially if they don’t have the original receipts.

The 1099-K requirement is only supposed to apply for business transactions, but because taxpayers don’t exclusively use online platforms for business, some companies like PayPal and Venmo prompt users to select if the transaction is personal versus business.

Building Up

The new threshold was supposed to go into effect for the 2023 filing season, but the IRS punted the start date to help the agency and companies brace for the mass of taxpayers who will be newly receiving the form.

Lawmakers from both sides of the aisle are hoping to prevent potential taxpayer panic. Rep. Carol Miller (R-W.Va.) has a bill that would revert the threshold back to its original $20,000, Rep. Chris Pappas (D-N.H.) wants to raise the requirement to $5,000, and Sens. Sherrod Brown (D-Ohio) and Bill Cassidy (R-La.) proposed legislation to create a $10,000 threshold—the only bipartisan solution on the table.

At the same time, companies are preparing for a world where there are no delays or threshold increases.

Rover has estimated there will be around an eight times increase to their technology cost to support the threshold change. They had to find an external provider to create the hundreds of thousands of forms and are expecting a flood of questions from sitters once they start receiving the document.

To combat misinformation and prepare taxpayers, PayPal will be ramping up its communications as filing season approaches, a spokesperson said. Still hoping that Congress will raise the threshold, Graff said she’s waiting to put out a big education effort to sellers until January.

“We know that there is really broad acknowledgment that if nothing happens before Jan. 1, 2024, it’s going to be painful for American taxpayers and the IRS alike,” said Ashley Shillingsburg, head of eBay‘s federal government relations.