by Andrew Wilford
All taxpayers are dealing with a disastrous filing season this year, with the IRS backed up on processing millions of returns and refunds from last year and communication from the agency nonexistent at best. But some taxpayers will have an added headache in the future as a result of an unnecessary new paperwork requirement that went into effect this year. Fortunately, however, legislation introduced by Sen. Bill Hagerty (R-TN) would address this issue by removing the burdensome new requirement.
Ever since IRS Commissioner Chuck Rettig claimed last year that the “tax gap,” or the gap between what the IRS collects and what it believes it is owed, could be as large as $1 trillion, politicians and legislators have been scrambling to propose ways to collect all that missing revenue. That’s despite the fact that more sober analyses show that the $1 trillion figure is probably wildly exaggerated, that it is functionally impossible to wholly prevent tax evasion, and that a far greater concern is the IRS’s inability to handle its taxpayer service responsibilities.
But as far as proposals to collect all this supposed “extra revenue” go, most of the focus has rightly been on schemes to drastically increase the IRS’s enforcement budget and allow the IRS to snoop on taxpayers’ financial accounts. But another more targeted change has already gone into effect, and is already causing problems.
The American Rescue Plan Act (ARPA), signed into law a year ago, contained a provision that changed the threshold for reporting income received through third-party vendors. Where previously these vendors, such as eBay or Etsy, only had to generate a copy of Form 1099-K for taxpayers with over 200 transactions exceeding $20,000 in revenue, ARPA lowered this threshold to $600.
That change means a significant change in the number of Form 1099-Ks that have to be generated and sent to the IRS, as well as the affected taxpayer. What’s more, it’s easy to imagine that most of these newly covered taxpayers won’t actually have any tax liability from the sales being reported.
That’s because taxpayers do not incur tax liabilities for the sale of used personal property that is sold for less than it was originally purchased for. So if you’ve ever done some spring cleaning by selling off your used textbooks, old video games, or other miscellaneous used goods, you weren’t cheating the IRS when you didn’t report that income on your taxes.
The $20,000/200 transaction threshold effectively excluded these kinds of normal, nontaxable sales, preventing unnecessary paperwork. For an IRS that is backed up on processing forms and taxpayer correspondence it already receives, that’s a major deal. What’s more, taxpayers receiving a 1099-K, even one that includes no taxable income, may be confused and report it as taxable income.
And if that $600 number looks familiar, that’s because it’s all the rage for tax enforcement hawks. Not only was it the original cash flow threshold for the aforementioned proposal to allow the IRS to snoop on taxpayer financial accounts, but the Affordable Care Act also included a $600 threshold, requiring businesses to report any transactions exceeding $600 — also eventually set aside after even its proponents acknowledged it was too burdensome.
Senator Hagerty’s well-named Stop the Nosy Obsession with Online Payments (SNOOP) Act would undo this error in policymaking by repealing the 1099-K provision in ARPA, returning the relevant thresholds to 200 transactions exceeding $20,000 in revenue. Not only would this restore the old, more logical safe harbor, it would also ease some of the pressure on the IRS.
Congress’s obsession with going after the tax gap puts the cart well before the horse. Until the IRS can handle its most basic responsibilities of processing tax returns and answering taxpayer correspondence in a timely manner, new tax enforcement powers should be off the table.
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Andrew Wilford is a policy analyst with the National Taxpayers Union Foundation, a nonprofit dedicated to tax policy research and education at all levels of government.