The Internal Revenue Service said on Friday that it was delaying by a year a new tax guideline that would require users of digital wallets and e-commerce platforms to start reporting small transactions to the tax collection agency.
The delay followed a bipartisan backlash from lawmakers and an uproar from small business owners who were only recently taking notice of the tax change.
The IRS said the delay was intended to give taxpayers a smooth transition period to comply with the policy, which was part of America’s 2021 bailout plan and was due to take effect this year. Many users of services like Venmo, PayPal, Zelle, Cash App, StubHub, and Etsy only recently became aware that they would receive IRS tax forms associated with their transactions, raising fears of surprise tax bills.
“The IRS and Treasury Department have heard a number of concerns about the timing of implementing these changes under America’s bailout plan,” Douglas O’Donnell, acting IRS commissioner, said in a statement. “To ease the transition and ensure clarity for taxpayers, tax professionals and the industry, the IRS will delay implementation of the 1099-K amendments.”
He added, “The additional time will help reduce confusion during the upcoming 2023 tax filing season and give taxpayers more time to prepare and understand the new reporting requirements.”
Before the rule change, services like Venmo only provided users with a snapshot of their earnings, called a 1099-K form, if they received more than $20,000 and had more than 200 transactions. The forms should be filed with the IRS along with tax returns and help determine how much a taxpayer owes.
Those thresholds have been lowered to $600 for the full year regardless of the number of transactions, significantly increasing the number of people likely to pay more in taxes.
The IRS said the old tax return rules that were in effect before the new law would remain in effect until the change goes into effect next year.
Lawmakers from both parties scrambled this week to reduce or reverse the tax measure in the spending package that Congress is expected to pass this week, but none of the changes made it into final legislation.
The Treasury Department, which oversees the IRS, has been pressured by lobbyists and lawmakers to resolve widespread confusion before taxpayers receive tax forms in the coming weeks.
“I urge the IRS to use its powers now to delay implementation and allow Congress to continue working on a lasting solution that prevents this harmful regulation from affecting small businesses,” said Senator Joe Manchin III , Democrat of West Virginia, in a statement Thursday.
Confusion over how the tax code amendment would be applied had sparked widespread concern in recent weeks and threatened to create another chaotic tax season next year. Taxpayers braced themselves for Form 1099-Ks that may mischaracterize their earnings and cause a customer service crisis for the IRS as it begins an $80 billion modernization project.
In its Friday statement, the IRS emphasized that the law “is not intended to track personal transactions such as sharing the cost of a car ride or meal, birthday or Christmas gifts, or paying a household bill to a family member or another.” However, she defended the policy change as a “hugely important” way to ensure better tax compliance.
Resistance to the tax change highlights the challenge the Biden administration faces as it seeks to crack down on tax evasion and close the “tax gap” of $7 trillion in revenue that is expected to go uncollected over the next decade.
The government has said efforts to reduce tax evasion will focus on large corporations and the wealthy, but the policy of requiring digital wallet users to report small transactions to the IRS primarily hit people living in the “Gig Economy” work, and those who run small businesses businesses. The change is expected to bring about $8 billion in additional tax revenue over 10 years.
Arshi Siddiqui, a partner at law firm Akin Gump, who represents a coalition of companies trying to change the new tax requirements, said on Friday that consumers and small businesses “dodged a bullet” with the delay, but that more is being done must.
“We look forward to working with our bipartisan advocates in Congress to find a lasting solution,” said Ms. Said Siddiqui.