Statistics have shown that tax compliance increases significantly when the amounts involved are subject to third-party reporting. Salary and wage reporting compliance, for instance, is very high thanks to the Form W-2.
In order to help close the tax compliance gap, the IRS and Congress have tended to keep coming up with additional third-party reporting requirements, subject to some occasional reversals when the reporting burdens appear to start to outweigh the additional revenue generated. 2022 brings expanded reporting by third-party payment processors. 2023 brings expanded broker reporting of cryptocurrency transactions. 2021 reporting reintroduced Form 1099-NEC separate from Form 1099-MISC. Efforts to get banks to report account information hit a roadblock in Congress.
For 2021 tax returns, the 1099-K reporting requirements for third-party payment processors in 2022 had a reporting limit that applies if a user had more than 200 commercial transactions and more than $20,000 in payments over the course of the year. For 2022 tax returns with reporting in early 2023, the new limit is one transaction involving more than $600 in goods or services received.
These changes do not increase the amount required to be reported as income on the tax return; however, they are likely to make it more difficult for taxpayers to underreport income. These new limits will clearly greatly expand the number of 1099-Ks required to be submitted. The new reporting limits are so low that they are much more likely to apply to nontaxable personal transactions as well as business transactions.
Third-party payment processors will frequently have difficulty in distinguishing personal transactions from business transactions, so expect to receive many 1099-Ks with respect to nontaxable transactions. Taxpayers this year might help to simplify their tax reporting by using separate third-party payment processors for business transactions and for personal transactions. The taxpayer will be the one responsible for explaining to the IRS which 1099-Ks relate to nontaxable personal transactions.
The expanded reporting requirements for 1099-Ks also increase the likelihood of duplicate reporting of transactions. Taxpayers who pay for a transaction through a third-party payment processor may receive a Form 1099-K from a third-party payment processor in addition to a Form 1099-MISC or 1099-NEC from the seller for the same transaction.
It will again be up to the taxpayer to keep track of all these forms and document duplicate forms to avoid overreporting of income.
Taxpayers are also more likely to receive requests from third-party payment processors for the information necessary for them to file the additional 1099-Ks now required. This could come in the form of a request to complete a Form W-9, “Request for Taxpayer Identification Number.”
Forms 1099-NEC, 1099-MISC
IRS reporting filings in 2021 saw the reintroduction of Form 1099-NEC for payments to nonemployees, such as independent contractors, vendors, consultants and self-employed persons. These payments had formerly been reported in Box 7 on Form 1099-MISC. The reporting was separated due to different form due dates to the IRS depending on the type of payment involved. The Form 1099-NEC is due to the service by Feb. 1 of the following year, while Form 1099-MISC is due to the IRS by March 1 of the following year.
Payments remaining on the Form 1099-MISC include rents in Box 1, royalties in Box 2, other income such as prizes in Box 3, fishing boat proceeds in Box 4, medical and health care payments in Box 6, substitute payments in lieu of dividends or interest in Box 8, crop insurance proceeds in Box 9, gross proceeds paid to an attorney in Box 10, fish purchased for resale in Box 11, Code Sec. 409A deferrals in Box 12, excess golden parachute payments in Box 14, and nonqualified deferred compensation in Box 15.
Box 7, which had previously required reporting of nonemployee compensation, now requires reporting by payers who made direct sales totaling $5,000 or more of consumer products to a recipient for resale.
State tax reporting requirements vary. Some states do not require a 1099-NEC and some only require the form if it includes withholding. The IRS will generally forward Forms 1099-MISC to the relevant states.
The bipartisan infrastructure legislation enacted in November 2021 expanded required reporting on Form 1099-B to include broker reporting of digital asset transaction reporting starting in 2023, with forms to be filed in early 2024. It is expected that Form 1099-B will be revised before that time to specifically address expanded reporting on digital assets.
Reporting is required by businesses that are responsible for regularly providing any service accomplishing transfers of digital assets on behalf of another person. This could include non-fungible tokens that use blockchain technology, although the IRS has not yet adopted specific guidance on the tax treatment of non-fungible tokens.
Concern continues to be expressed that the legislative language defining a broker for digital asset transaction reporting is so broad as to include businesses that would not have access to the information necessary to comply with the reporting requirements. Efforts continue in Congress to modify the legislative language, and the IRS might also clarify the reporting requirements if it feels that it can do so within the statutory language.
Early 2023 is likely to see a massive increase in filings of Form 1099-Ks by third-party payment processors. This will require a significant effort on their part to collect the necessary information during 2022 to be prepared to comply with the filings. It will also be a significant burden on taxpayers to document and explain Form 1099-Ks for nontaxable transactions and to identify and explain when both a Form 1099-K and a 1099-MISC or 1099-NEC are reported for the same transaction.
Then, in 2023, taxpayers and cryptocurrency exchanges will be required to greatly expand reporting of cryptocurrency transactions, including non-fungible token transactions, subject to further modification of those requirements by Congress or the IRS.
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