The Internal Revenue Service said Friday that it was delaying by one year a new tax policy that will require users of digital wallets and e-commerce platforms to start reporting small transactions to the tax collection agency.
The delay followed bipartisan backlash from lawmakers and an uproar from small-business owners, who only recently became aware of the tax change.
The IRS said the delay was intended to provide a smooth transition period for taxpayers to comply with the policy, which was part of the American Rescue Plan of 2021 and which was supposed to take effect this year. Many users of services such as Venmo, PayPal, Zelle, Cash App, StubHub and Etsy only recently became aware that they would be receiving IRS tax forms associated with their transactions, sowing fears of surprise tax bills.
"The IRS and Treasury heard a number of concerns regarding the timeline of implementation of these changes under the American Rescue Plan," Douglas O'Donnell, the acting IRS commissioner, said in a statement. "To help smooth the transition and ensure clarity for taxpayers, tax professionals and industry, the IRS will delay implementation of the 1099-K changes."
He added: "The additional time will help reduce confusion during the upcoming 2023 tax filing season and provide more time for taxpayers to prepare and understand the new reporting requirements."
Before the rule change, services such as Venmo supplied users with a snapshot of their income called a 1099-K form only if they had received more than $20,000 and had more than 200 transactions. The forms were supposed to be submitted with tax returns to the IRS and were intended to help determine how much a taxpayer owes.
Those thresholds were lowered to $600 for the entire year, regardless of the number of transactions, significantly broadening the number of people who are likely to be required to pay more taxes.
The IRS said that the old tax-reporting rules that had been in place before the new law would remain in effect until the change takes effect next year.
Lawmakers from both parties scrambled this week to scale back or reverse the tax measure in the congressional spending package, but none of the changes were included in the final legislation.
The Treasury Department, which oversees the IRS, has been under pressure from lobbyists and lawmakers to find a solution to the widespread confusion before taxpayers begin receiving the tax forms in the coming weeks.
"I urge the IRS to use their authority now to delay the implementation and allow Congress to continue working to find a lasting solution that prevents this harmful regulation from impacting small businesses," Sen. Joe Manchin, D-W.Va., said in a statement Thursday.
Confusion over how the change to the tax code would be applied had created widespread concern in recent weeks and threatened to create another chaotic tax season next year. Taxpayers were bracing for 1099-K forms that might inaccurately characterize their earnings, creating a customer service crisis for the IRS just as it is embarking on an $80 billion modernization project.
In its statement Friday, the IRS emphasized that the law was "not intended to track personal transactions such as sharing the cost of a car ride or meal, birthday or holiday gifts, or paying a family member or another for a household bill." However, it defended the policy change as a "hugely important" way to ensure better compliance with the tax code.
The resistance to the tax change demonstrates the challenge that the Biden administration faces as it tries to crack down on tax evasion and narrow the $7 trillion "tax gap" of revenue that is projected to go uncollected over the next decade.
The administration has said that efforts to reduce tax-dodging will be focused on big companies and the rich, but the policy of requiring digital wallet users to report small transactions to the IRS primarily hit people working in the "gig economy" and those operating small side businesses. The change is projected to raise about $8 billion in additional tax revenue over 10 years.
Arshi Siddiqui, a partner at the law firm Akin Gump who is representing a coalition of businesses trying to change the new tax requirements, said Friday that consumers and small businesses "dodged a bullet" with the delay but that more must be done.
"We look forward to working with our bipartisan champions in Congress for a permanent fix," Siddiqui said.