On Form 1099-K delays, Werfel says IRS must protect taxpayer rights

IRS Commissioner Danny Werfel defended his agency’s delay of the implementation of a lower threshold for reporting income on Forms 1099-K, telling a House committee on Thursday that his office has the responsibility to protect taxpayer rights.

“Again, the focus that I have and we have at the IRS is how do we do this in the best interest of taxpayers,” Werfel told the House Ways and Means Committee. “We don’t want taxpayers overpaying their taxes. We don’t want them confused. We don’t want them bombarded with forms and paper they shouldn’t be receiving. And if we go forward with implementation without being able to adequately protect against that risk, then I’m not meeting my legal responsibilities as commissioner to help taxpayers and to help protect their rights.”

Werfel was called before the committee to address delays in the new $600 threshold for reporting income on Forms 1099-K, Payment Card and Third Party Network Transactions, and several lawmakers criticized the IRS’s decisions without questioning the commissioner. When Rep. Carol Miller, R-W.Va., did engage Werfel, their discussion took just over four minutes of the four-hour meeting.

The IRS has twice delayed implementation of the lower threshold, which was enacted as part of the American Rescue Plan Act of 2021, P.L. 117-2. When the IRS does start to implement the new threshold, it is planning to phase it in, starting with a $5,000 reporting threshold for tax year 2024.

Miller described the delays as an “illegal overreach” and asked what gave the IRS the authority to set a new threshold. “We have an authority under the Code to administer laws consistent with taxpayer rights,” Werfel said, adding that he is not the first commissioner to take such actions.

Third-party settlement organizations generally include banks and other organizations that process credit card transactions on behalf of a merchant and make an interbank transfer of funds to the merchant from a customer.

Other issues discussed during the hearing included the employee retention credit (ERC), IRS funding, audits of wealthy taxpayers, IRS employees who work from home, IRS data security, and the pilot program of the Direct File system.

Employee retention credit

The IRS has paid about $1 billion in claims for the ERC since it placed a moratorium on processing claims in September, Werfel said.

The IRS processes an average of between 1,000 and 2,000 claims a week, Werfel said, although that does not mean that all are approved, just that they are handled. And the claims keep coming, with the IRS receiving between 17,000 and 20,000 last week, he said.

“It’s challenging because it’s a very complicated program. Eligibility is tough to weed out from the ineligible, but it’s a focal point for sure,” Werfel said.

The ERC was designed for certain businesses to continue paying employees during the COVID-19 pandemic while their operations were either fully or partially suspended due to a government order or had a significant decline in gross receipts during the eligibility periods. But some employers fell victim to misleading marketing campaigns that resulted in the IRS being inundated with claims.

IRS funding

Also front and center was the IRS budget and the $80 billion over 10 years that Congress appropriated to the Service as part of the Inflation Reduction Act of 2022, P.L. 117-169. The IRS is fighting to keep the full funding rather than the $60 billion that was negotiated during debt ceiling talks and its regular annual funding.

Right now, the money is paying for the day-to-day operations that the IRS base budget should cover, but that base budget is underfunded, Werfel said. He said he is asking Congress to also fund the base.

“Help us keep the lights on so that we can use those modernization funds to build the tools that taxpayers want,” he said.

For every $100 million taken from the IRS, the national deficit grows by $600 million over 10 years, Werfel said.

— To comment on this article or to suggest an idea for another article, contact Martha Waggoner at Martha.Waggoner@aicpa-cima.com.