Undermining Information Reporting Requirements For “Gig” Companies and Other Online Platforms Would Hurt Honest Filers, Cost Revenue, and Reward Tax Evaders.

15 min readJun 12, 2023

By Grace Henley, Mike Kaercher, Kathleen Bryant, and Chye-Ching Huang

Tomorrow, the House Ways and Means Committee will consider a proposal to repeal recent changes to the 1099-K form affecting “gig” companies and other online platforms under the American Rescue Plan Act of 2021 (ARP). Lawmakers should reject it, as well as other bills that would weaken information reporting requirements. Otherwise, Congress will make it more difficult for honest filers to track their incomes and accurately file their taxes, while allowing tax evaders to hide income by using certain payment platforms.

As we have previously explained, third party settlement organizations (TPSOs) are platforms that facilitate transactions between buyers and sellers of goods and services, and include online marketplaces (e.g., Etsy and eBay), payment processing apps (e.g., Paypal and Venmo), and gig service platforms (e.g., Uber and Doordash). The swath of economic activity that occurs via TPSOs makes the 1099s they file important for the integrity of the tax system.

Under the ARP, TPSOs must now issue customers who receive payments on their platforms and the IRS a form 1099-K documenting business transactions over $600 — but nonbusiness transactions are exempt from this requirement. Similar information reporting requirements already apply to credit and debit card transactions and to certain payments between businesses and independent contractors so the ARP’s changes will advance parity between economically similar business transactions. The ARP’s changes did not increase taxes on anyone, but will improve compliance with taxes already owed.

Nevertheless, some large businesses that are required to furnish increased information reporting under the ARP are lobbying heavily to repeal the changes, and some lawmakers are offering bills to repeal or weaken the ARP requirements. This post explains:

Repealing the recent changes to Form 1099-K would cost the government $9.7 billion over ten years in increased tax cheating and other tax non-compliance, while making it harder for many honest taxpayers to file their taxes. The ARP’s changes will help gig workers and other filers who use TPSOs track income and accurately file their taxes, prevent many would-be tax evaders from using TPSOs to hide income and evade tax, and allow the IRS to better direct audits towards tax cheats.
Lawmakers should reject proposals to weaken 1099-K information reporting. Large online platforms lobbying for repeal can and should implement these requirements: they are similar to (though slightly more lax than) those that already apply to credit and debit card transactions, and to requirements for payments made in the course of business. Good faith implementation can reduce confusion for customers, not fuel it in the hopes of securing a repeal.
If Congress nevertheless weakens 1099-K reporting on gig and other online platforms, the least harmful approach is to increase the dollar reporting threshold — but lawmakers should understand the cost to deficits from increased non-compliance before committing to any given dollar threshold. Raising the dollar threshold creates opportunities for noncompliance and will mean that TPSOs will be subject to much weaker information reporting standards than those for credit and debit card transactions.
A threshold requiring a minimum number of transactions each year before information reporting is required would be highly gameable and would be of most benefit to sophisticated fraudsters. It would give tax evaders an easy way to hide their business income through TPSOs by arranging for small numbers of high-dollar transactions to stay under the minimum transaction number, or by spreading transactions across platforms or years.
If Congress narrows 1099-K reporting, the budgetary cost should be paid for in part by ensuring that appropriate reporting applies to all similar platforms so that tax evaders don’t simply rush to hide their income by using platforms that are entirely exempt from the rules.

Overview of ARP 1099-K Provisions, Delayed Implementation, and Legislative Proposals

Prior to the ARP, TPSOs were only required to send the IRS and their payees information returns for payees receiving more than $20,000 in payments through more than 200 transactions per platform in a given calendar year. The ARP lowered the dollar threshold to $600 and eliminated the 200-transaction threshold, bringing information reporting requirements applying to TPSOs into closer alignment with those applying to other entities and transactions. Personal transactions are exempt from these requirements (so reimbursing a friend for dinner via Venmo, for example, is not reportable). Rolling back the ARP’s changes will lose $9.7 billion in revenue over 10 years, the Joint Committee on Taxation estimates.

The new requirements for TPSOs were originally scheduled to go into effect in 2023 for payments in calendar year 2022, but in late December 2022 the IRS announced that it would delay implementing the change by a year. This poorly-communicated delay sparked confusion amongst tax filers, platforms, and other stakeholders. It was unfair to the companies who had already devoted resources to preparing for timely compliance. And it gave an unfortunate signal that companies can drag their feet on implementing future compliance measures in the hope of securing further delays. Further delay could further increase uncertainty and confusion.

Amidst vocal calls from platforms and other industry participants who oppose the change, lawmakers have introduced bills that would raise the dollar amount threshold above the $600 limit:

Representatives Chris Pappas (D-NH) and Dan Kildee (D-MI) introduced the Cut Red Tape for Online Sales Act, which would raise the reporting threshold to $5,000 with no transaction threshold.
Senators Sherrod Brown (D-OH) and Bill Cassidy (R-LA) introduced the Red Tape Reduction Act, which would raise the reporting to threshold to $10,000, while turning off reporting to taxpayers receiving 50 or fewer transactions per platform during the year, regardless of total transaction amounts.
Carol Miller (R-WV) reintroduced the Saving Gig Economy Taxpayers Act, originally introduced in 2022, which would entirely reverse the changes to the reporting threshold instated by the ARP and return to a regime that requires reporting only for payments that total over $20,000 spread across more than 200 transactions per platform. A provision with the same effect is included in the Small Business Jobs Act that the House Ways and Means Chairman has released for markup scheduled on July 10.

How the ARP Provisions Support Tax Compliance and Help Honest Filers

The tax system largely relies on taxpayers to voluntarily and accurately report their income. Effective information reporting is vital to the integrity of this system because it is a “front-end” tax compliance measure that works primarily by increasing voluntary compliance (although it can also help the IRS target audits towards tax cheats and away from taxpayers who in fact have complied with all of their obligations). While only 1% of wage and salary income, which faces “substantial information reporting and withholding” via W-2s, is misreported on tax returns, 55% of income subjected to “little or no information reporting” is misreported on tax returns. Historically, gig workers and businesses who receive payments through TPSOs have largely fallen into the category of tax filers that have little or no information reporting. The new 1099-K requirement for TPSOs supports tax compliance in three main ways:

1. Helping businesses and gig workers track and accurately report income. Businesses receiving payments through any platform — TPSOs like Venmo, PayPal, and eBay included — have always been required to report that income on their tax returns. This is also true for gig workers, who have always been required to report any income they earn through TPSOs to the IRS. But prior to the ARP, both of these groups of income earners would not receive information returns from TPSOs documenting their income unless they reached the $20,000 and 200-transactions threshold, forcing businesses and gig workers to rely only on their own recordkeeping for accurate reporting.

For gig workers this low threshold was a particular barrier to accurate reporting, as many gig workers earn less than the $20,000 threshold and may also have fewer resources to rely upon when managing their finances. Without information reporting, gig workers must manually track the income they earn through online apps, often across multiple platforms. Unsurprisingly, mistakes are common, resulting in burdensome audits and bills for back taxes and penalties for many gig workers.

For both businesses who receive income through TPSOs and gig workers who access income earning opportunities through TPSOs, information returns will ease recordkeeping burdens and increase accuracy. There’s more to be done to simplify the tax filing process, particularly for gig workers, but the reforms under the ARP are a good step.

Personal transactions are exempt from the reporting requirement. As discussed below, TPSOs and the IRS can implement the exemption in ways that promote accurate filing and reduce confusion.

2. Discouraging use of TPSOs to hide income and evade tax. Businesses who may have been tempted to use TPSOs to hide and underreport income will be less likely to do so, knowing that the IRS will now have a 1099-K documenting that business income. Information reporting requirements broadly deliver a substantial part of their compliance benefit from deterring would-be tax evasion.

3. Detecting tax evasion and targeting more audits towards tax cheats rather than accurate filers. The IRS will be able to use 1099-Ks to better detect would-be tax cheats’ attempts to evade taxes on business income generated on a TPSO, and follow up with an audit or other compliance activity. In turn, this should help improve the efficiency of audits by reducing the share of audits that select filers who are in fact paying all the taxes they owe.

Promoting Consistency Across Transactions and Platforms

Before passage of the ARP, a company like eBay or Venmo that qualified as a TPSO would only be required to issue a 1099-K if a business receiving payments through the platform earned more than $20,000 across at least 200 transactions on that platform, while credit and debit card processing companies — which also issue 1099-Ks — have to issue information returns to businesses documenting all payments made by customers using payment cards. And businesses paying a nonemployee for $600 or more in services during the year via cash or check are generally required to issue the IRS and the recipient of the payment a 1099-NEC.

This meant that very similar transactions could have different reporting requirements. Consider three different customers paying a landscaper for landscaping services prior to the ARP:

An individual customer who paid $1000 for home garden landscaping using a credit card: the credit card company would send a 1099-K documenting that payment to the landscaper and the IRS.
An individual customer who paid $1000 for home garden landscaping using Venmo: Venmo would only send a 1099-K to the landscaper and the IRS documenting the payment if the landscaper had earned more than $20,000 total across at least 200 transactions via Venmo during that calendar year. If the landscaper did not meet those thresholds (because they were a very small business, or because their other customers paid with a method other than Venmo), then under the prior rules Venmo would not send any 1099-K documenting the payment.
A restaurant business who paid $1000 for landscaping of a patio via check: the restaurant business would generally be required to send the landscaper and the IRS documentation of the payment on a 1099-NEC.

Under the ARP there will be information reporting on all of these very similar transactions.

The minimum transaction threshold for payments on TPSOs also created a way for businesses to avoid reporting income earned through TPSOs by arranging to receive payments in fewer installments or through different payment platforms. That created an incentive for the most unscrupulous businesses to drive their payments through TPSOs rather than other platforms. This disparity in reporting requirements had no sound rationale, since many TPSOs are large companies with as much capacity to track payments and issue 1099s as any credit card processing company (or business issuing 1099-NECs).

The ARP did not fully eliminate the favorable treatment for TPSOs relative to credit and debit card companies, however, since credit and debit card companies must report all payments made to businesses, even if less than $600.

And while the ARP was a marked improvement on prior law, it did not extend information reporting to similar platforms that are not currently considered TPSOs under the law. These include platforms that move funds directly from one bank account to another (e.g., Zelle) rather than holding money in accounts or settling payments. Such platforms may become attractive for filers seeking to hide income and evade tax if not included in information reporting requirements.

Promoting Consistency with and Across States

The ARP also aligned the federal reporting requirements with the reduced thresholds that many states had enacted. States that have imposed a reduced payment threshold include Arkansas, California (although their reduced threshold is currently limited to “app-based drivers”), the District of Columbia, Illinois, Massachusetts, Maryland, Mississippi, New Jersey, Vermont, and Virginia.

As a result, roughly 27% of the U.S. population is already covered by a reporting threshold of $2,500 or less. Most states have adopted a $600 threshold, some have adopted a threshold that is marginally higher, but no states have a threshold below $600. That means implementing the ARP’s $600 federal threshold will ensure information returns issued to the IRS will also comply with state requirements. Enacting a higher federal threshold, as some bills now propose, would open up confusing disparities between state and federal reporting.

Platforms Can and Should Take Steps to Exclude Personal Transactions from Reporting and the IRS Should Issue Clear and Timely Guidance

The ARP specifically states that these personal transactions are not subject to reporting requirements, and the Joint Committee on Taxation has also explained that using a platform for transactions like reimbursing a friend or family member or selling the occasional used item are not subject to reporting.

Nevertheless, the ARP’s change to reporting requirements prompted reasonable concerns that some personal transactions — personal gifts, charitable contributions, reimbursements — made using TPSOs such as Venmo or PayPal could be unintentionally included in 1099-K information returns, causing confusion for tax filers. But such concerns can and should be addressed by platforms, rather than used by them to feed confusion and undermine the law. And the IRS can help by issuing timely and clear guidance.

Platforms Are Capable of Implementing the Personal Transaction Exemption and Helping Reduce Confusion

Platforms are capable of implementing procedures to ensure that personal transactions are excluded from information reporting, and they can reduce rather than whip up confusion. Indeed, platforms including Venmo and PayPal have already put systems in place to differentiate between personal and business transactions by allowing users to identify payments that are for “goods and services” versus those that are “peer-to-peer” or “friends and family” transactions of a personal nature.

Placing responsibility for implementing these systems on platforms makes sense because platforms can help make users aware of the systems for identifying business versus personal transactions and can use the information users provide to exclude personal transactions from information reporting. Doing so will ultimately help both individuals and businesses using TPSOs.

Furthermore, credit and debit card payment processing companies have successfully implemented similar reporting requirements after initially expressing concerns about compliance burdens. In the lead-up to implementation of information reporting requirements for credit and debit card transactions, payment processing companies made many of the same scaremongering claims that TPSOs are making now. Nevertheless, reporting for credit and debit cards was implemented and is now widely accepted and readily complied with. TPSOs may face different implementation challenges than credit and debit card companies faced, but they are not impossible to overcome.

Even with systems in place to identify personal transactions and distinguish them from business transactions, some users may still receive 1099-Ks from TPSOs reporting on transactions that are not taxable. A taxpayer might sell a used item at a loss on a marketplace like eBay or misclassify a personal transaction as a business transaction on Venmo or PayPal, triggering issuance of a 1099-K. But just as a lack of access to information reporting does not mean business owners and gig workers are not responsible for reporting income and paying tax, receipt of a 1099-K for a nontaxable transaction does not make that transaction taxable. It is the transaction itself, not the information reporting, that determines tax liability, and taxpayers need not report losses for personal items on their tax returns. Taxpayers who receive a 1099-K in error can request a corrected document from the company that issued the form.

The IRS can also help lessen confusion by providing clear guidance on these and other points.

The IRS Should Issue Clear and Timely Guidance

The IRS is responsible for issuing guidance to make reporting and filing obligations clear to businesses, gig workers, and platforms. Clear guidance, plain language and multilingual explanations, and education, outreach, and services from the IRS can ensure that platforms and filers understand the law and know what to expect. Gig workers could especially benefit from clear guidance about how to track income and file their tax returns, as they may be new to filing as independent contractors rather than employees.

The IRS should issue guidance promptly so information reaches filers well ahead of the tax season. The last-minute delay in implementation for tax year 2022 caused confusion amongst platform users and inequities among platform providers. Further delay is unwarranted.

With increased IRS resources flowing from the Inflation Reduction Act (IRA), the IRS should be eager to show that it can implement new law. And it should be especially keen to do so when the new law gives it the tools to make its compliance efforts — including deployment of the IRA funding to improve service and compliance — more efficient. The IRS’s Strategic Operating Plan noted that the IRS will focus on front-end compliance and ensuring any audits are more efficiently targeted, and third-party information reporting from 1099-Ks directly supports those goals. The IRS can show that it is serious about these commitments by implementing the 1099-K requirement clearly and quickly.

Any Legislative Changes Should Be Narrow, and Lawmakers Should Understand the Budgetary and Tax Compliance Costs

Good faith platform implementation and clear IRS guidance should address concerns about 1099-Ks being issued for personal transactions. But if lawmakers nevertheless decide to take legislative action, they should target it narrowly towards small transactions that are most likely to be personal in nature. Instead, some lawmakers have proposed sweeping changes.

Full repeal of the ARP provisions, as proposed in the Saving Gig Economy Taxpayers Act (incorporated in the “Small Business Jobs Act” for markup in the House Ways and Means committee) would return businesses and gig workers to a regime without any information reporting for swathes of the economy and allow gamesmanship by unscrupulous filers through the re-imposition of a high transaction threshold. The estimated cost is $9.7 billion in revenue over 10 years.

In addition to rolling back the ARP provisions and a series of other unrelated measures, the House Ways and Means Committee would raise the reporting threshold for businesses making payments in the course of a trade or business for fixed or determinable income (such as rent for office space), or for services to non-employees from $600 to $5,000. Lawmakers should reject this change as well: it is damaging for many of the same reasons as proposals to weaken TPSO reporting. Increasing this threshold from $600 to $5,000 will also introduce more inconsistency across reporting requirements, create more opportunities for bad actors to avoid information reporting and evade taxes, and make it harder for honest filers to track and report their income. And because it will decrease tax compliance, it is also a costly change — the Joint Committee on Taxation estimates that together with conforming changes to backup withholding rules, the measure will cost $14.5 billion in revenue over 10 years.

Short of fully repealing the IRA measures, re-imposing a minimum number of transactions would be particularly damaging. It would allow filers to avoid information reporting, even when their total payments far exceed the threshold dollar amount, by arranging for payments to be made in installments that fall below the transaction threshold, or by splitting transactions across different platforms or calendar years.

For example, under the Red Tape Reduction Act a landlord who rents out four residential properties, each for $2,500 per month, could entirely avoid 1099-K reporting by having tenants pay rent with a platform like Venmo. Since the total number of Venmo transactions for the year would be 48 — below the 50 minimum transactions threshold — the rental income would be excluded from reporting despite totaling $120,000 for the year. And a larger landlord could avoid reporting on a larger number of properties by adding more payment platforms to the mix. If the landlord rented out eight properties rather than four, still at $2,500 each, and had four tenants pay with Venmo and the other four with PayPal or Cash App, the number of transactions for each platform would remain below 50. So, the landlord could still avoid 1099-K reporting even though the income would total $240,000 for the year. The proliferation of payment platforms compounds this problem.

Increasing the dollar threshold would be a more targeted, though still blunt, way to exclude more small transactions that are likely to be personal in nature. But before settling on any particular dollar threshold, lawmakers should understand how much any given increase in the threshold would increase deficits by allowing for more tax non-compliance. It is currently unknown how much of the revenue from the ARP change would be lost at different possible transaction thresholds above $600.

Should lawmakers choose to weaken the ARP provisions by increasing the reporting amount threshold, some of the cost should be offset by extending reporting rules to platforms, such as Zelle, that are not considered TPSOs despite serving a similar function. If such platforms — or any future platforms that adopt facilitating tax evasion as a business model — are left out of reporting requirements, they will be used to try to evade information reporting. There is some anecdotal evidence that this is already happening.

Lawmakers should also reject any proposals for legislative delays to implementing the ARP requirements. Delay could increase the chances of full repeal, while creating more uncertainty and increasing deficits in the meantime.

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