November 21, 2023
IRS again delays $600 reporting threshold for third-party settlement organizations, plans on $5,000 threshold for 2024
In Notice 2023-74, the IRS delayed for the second time the reduction to a $600 de minimis threshold for reporting transactions by third-party settlement organizations (TPSOs) on Form 1099-K, Payment Card and Third Party Network Transactions. The IRS said in the accompanying news release (IR-2023-221) that it was planning for a $5,000 threshold for 2024 to phase in the new requirement.
The IRS said the delay "will reduce the potential confusion caused by the distribution of an estimated 44 million Forms 1099-K sent to many taxpayers who wouldn't expect one and may not have a tax obligation."
Calendar-year 2023 will continue to be treated as a "transition period," so the IRS will not enforce the new de minimis threshold for Form 1099-K reporting by TPSOs and their electronic payment facilitators (EPFs) (referred to collectively as "payors"). The IRS also released FS-2023-27, updating frequently asked questions about Form 1099-K to include this delay.
Suspending lower threshold for 2023
The American Rescue Plan Act of 2021 lowered the IRC Section 6050W threshold for reporting payments in settlement of third-party network transactions from payments exceeding $20,000 over more than 200 transactions to payments exceeding $600 over any number of transactions, beginning with calendar-year 2022. The IRS delayed implementing the new law for 2022 (Tax Alert 2023-0028).
Under Notice 2023-74, payors will not be required, for calendar-year 2023, to report payments in settlement of third-party network transactions to a payee unless the gross aggregate payments exceed $20,000 and the number of transactions with that payee exceeds 200 (as required in previous years).
The IRS said in the news release that the complexity in distinguishing between transactions that do not have to be reported, such as birthday gifts, and those that do, such as the casual sale of goods and services, factored into its decision to delay the reporting requirements an additional year and to plan for a threshold of $5,000 for 2024 to phase in implementation. The IRS also plans changes to Form 1040.
EY observes: The IRS's plan to phase in the new threshold by first decreasing it to $5,000 gives Congress time to adopt a new, higher threshold if it chooses. In the meantime, TPSOs and EPFs must remain vigilant in collecting taxpayer identification numbers (TINs) from all payees in 2024. Under the current statute, a payor that does not have a payee's TIN must withhold from payments made in settlement of third-party network transactions without regard to any exception for de minimis payments. While a de minimis threshold on third-party network transactions for backup withholding purposes was proposed in early 2022 in the Build Back Better Act, it was not enacted into law.
As payors are generally liable for any tax they should have withheld but did not, they should impose backup withholding (at the current rate of 24%) on every payment made in settlement of a third-party network transaction if they do not have the payee's TIN. Payors that performed backup withholding during calendar-year 2023 must file a Form 1099-K with the IRS and furnish a copy to the payee.
Published by NTD’s Tax Technical Knowledge Services group; Andrea Ben-Yosef, legal editor