IRS Oversight and Modernization: Navigating 1099-K Reporting and Direct File Challenges

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Navigating 1099-K FEATURED IMAGE

On February 15, IRS Commissioner Danny Werfel testified before the House Ways and Means Committee. The GOP-controlled Committee has previously expressed its disapproval of the $80 billion allocated to the IRS, later negotiated down to $60 billion during debt ceiling talks. The hearing is part of an ongoing Republican effort to reduce that amount even further.

The hearing lasted over four hours and covered a number of important issues. Here, we touch on some of the highlights.

1099-K Reporting Changes

1099-Ks are in the news—again.

Very brief background: Until 2021, third-party settlement organizations (TPSOs), such as PayPal, Uber, and Etsy, were required to file 1099-K forms only for payees who had grossed more than $20,000 and had over 200 transactions—which wasn’t very many payees. The American Rescue Plan Act lowered the 1099-K reporting threshold to $600 for tax year 2022, but the implementation was delayed, and then delayed again. Now the IRS plans to phase it in, starting with a $5,000 threshold for tax year 2024, and dropping to $600 for 2025.

Members of the House Ways and Means Committee grilled Werfel on the IRS 1099-K reporting changes. Republicans have long complained about the lower threshold; Rep. Carol Miller (R-W.Va.), for example, has said, “The change of the reporting…would have hurt over 44 million American taxpayers,” but she also called the delay, “an illegal overreach that is not found anywhere in law.”

In response, Werfel explained his concern that without adequate preparation, the new threshold might cause taxpayers to overpay their taxes. He added that the IRS has the “authority under the code to administer laws consistent with taxpayer rights,” and that historically, “to protect taxpayers from undue burden, or from potentially being overtaxed, [the IRS has] either delayed implementation or ramped implementation.”

The IRS Direct File System Pilot

Republicans also took issue with the new IRS Direct File system. Taxpayers have long had the opportunity to use the IRS’s Free File program, a partnership with private companies that allows people to file their taxes for free. Included in the $60 billion allocated to the IRS is $15 million to study the feasibility of a free IRS direct file program. Going a step further, the agency launched the IRS direct file system pilot.

Rep. Adrian Smith (R-Neb.) wanted to know what authority the IRS had to create a new, government-run tax-filing system, while Miller told Werfel, “I don’t think you should be wasting your millions of dollars when the private industry is doing a good job.”

Whether private industry is doing a good job, however, is up for some debate. Recently, some companies that have partnered with the Free File program have been accused of deceptively marketing “free” online filing. The FTC has since taken action against both H&R Block and TurboTax.

Employee Retention Credit

Introduced in the early days of COVID, the Employee Retention Credit (ERC) was designed to reward small businesses that kept their employees on payroll during the pandemic. It has since been extended three times and has proved wildly popular. Unfortunately, part of its popularity is due to misleading marketing campaigns on the part of “ERC mills,” third-party promoters that push employers to make claims they are not always eligible for.

Inundated with claims, many of them fraudulent, the IRS placed a moratorium on processing them last September. The claims just keep coming, however; Werfel said during the hearing that the IRS received between 17,000 and 20,000 the week before. “It’s challenging because it’s a very complicated program,” he said. “Eligibility is tough to weed out from the ineligible, but it’s a focal point for sure.”

Committee members expressed concern about the program’s pause. Rep. Brad Wenstrup (R-Ohio), said, “I was contacted by a constituent who tells me that their business is really in imminent jeopardy and will close … if they don’t receive the ERTC funds that they had applied for.”

“There were so many ineligible claims in what was coming in, it was getting harder to separate what’s ineligible from what’s eligible,” explained Werfel.

IRS Modernization Efforts and Funding

The Inflation Reduction Act (IRA), sometimes called the “Tax and Climate law,” gave a tremendous boost to IRS funding. The cash-strapped agency’s budget had been cut by 20% and its staff by 38% since 2010. It was further burdened by the necessity of administering COVID-related programs, such as stimulus checks and emergency rental assistance. The result was an enormous backlog of tax returns, many of which were still being entered by hand, long telephone waits, and a 25% reduction in the number of Taxpayer Assistance Centers.

Much of the new funding has been earmarked for IRS modernization. Under Werfel, the IRS has hired more than 5000 new employees and is investing in technology such as scanners and chatbots. From tax season 2022 to 2023, the IRS says it “answered 3 million more calls, cut phone wait times to three minutes from 28 minutes, served 140,000 more taxpayers in-person, digitized 80 times more returns than in 2022 through the adoption of new scanning technology, [and] cleared the backlog of unprocessed 2022 individual tax returns with no errors.”

The budget remains a sticking point, however. The IRS is fighting to keep the original $80 billion, while the Republicans try to accelerate cuts to the IRA funding and further reduce the agency’s budget.

The IRS’s base budget remains underfunded, with IRA funds being used to cover day-to-day operations. Werfel says he is asking Congress to increase the base budget. “Help us keep the lights on so that we can use those modernization funds to build the tools that taxpayers want,” he said.

Tonneson Can Help

An increase or decrease in the IRS’s budget could potentially impact various programs and credits. Whatever the outcome, though, taxes themselves won’t be going away. Tonneson + Co stay abreast of the latest news and IRS updates so that we can ensure the best possible service for our clients.

Contact us today.

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