Tuesday, November 21, 2023
HomeFinancial AdvisorMillions Of Independent Contractors Face New IRS Reporting Mandates

Millions Of Independent Contractors Face New IRS Reporting Mandates

Americans who work as independent contractors will receive 30 million new 1099-K tax forms in their mailboxes this January, even though the IRS lacks the “centralized leadership” to use the information and it is unlikely most Americans will understand how to use the forms, according to a new report from the General Accounting Office.  

The additional reporting for gig workers and other contractors stems from the American Rescue Plan Act of 2021, which lowered the reporting threshold for Form 1099-K.

As a result, the IRS now requires third-party payment platforms such as PayPal, Venmo, Amazon and Square to issue the forms (also called information returns) to any independent contractor receiving a payment of more than $600.

Previously, 1099-Ks were only required to be issued if a taxpayer had annual payments of $20,000 and 200 transactions.

As a result, many taxpayers who never received Form 1099-Ks before will receive them this year, the GAO said in its new report.

“Thirty million more tax forms flowing into mailboxes across the country will be a new year’s nightmare for millions of Americans … a mess for the IRS … and target working families,” Rep. Jason Smith, chairman of the House Ways and Means Committee, said in a statement.

According to the congressional Joint Committee on Taxation, over 90% of this new tax will fall on middle-class families and gig workers.

The IRS itself calculated the new rule will result in 44 million Form 1099-Ks being filed in 2024, an increase of roughly 30 million.

The forms may help some taxpayers comply. But, despite IRS communication efforts, it also may exacerbate confusion among some taxpayers, such as gig workers, who may not understand the taxability of their payments and taxes owed, the GAO said.

For instance, “some of these taxpayers may not know how to calculate profit or loss and may not understand the information reported on the form. This puts them at risk of inaccurately reporting their incomes to IRS or not meeting their tax obligations, the GAO report said.

The IRS “does not have a plan” to analyze the new data to support its enforcement and outreach activities, the GAO report said. “This limits its understanding of changes in taxpayer burden,” the GAO said.

The GAO also noted that the IRS already faces significant challenges with regard to its handling of “information returns,” which are filed by third parties such as employers, businesses, banks and payment networks.

While the IRS is supposed to use this data to identify potential taxpayer underreporting and fraud, the “IRS lacks the centralized leadership to make strategic decisions related to the use of information returns across the agency,” the GAO said.

While information returns should be integral to multiple IRS compliance programs, “no office is responsible for coordinating these efforts,” the GAO noted.



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