IRS loses oversight on small business income reporting

In a significant shift affecting tax reporting, the IRS's oversight of income reporting from small businesses and independent contractors has been drastically reduced due to new legislation. Previously, payment platforms were mandated to report via 1099-K forms on transactions exceeding $20,000 or more than 200 transactions per year. However, under the American Rescue Plan Act, these requirements were modified to require reporting for any transactions over $600, with the number of transactions no longer a factor, reflecting a more stringent approach to reporting. This new requirement was originally slated for implementation in 2021 but faced postponements. The full effects of these changes will now only be partially felt in 2024 and 2025, when payment applications must report only business transactions exceeding $5,000 and $2,500 respectively. This indicates a move back toward less stringent enforcement, contradicting earlier intentions to increase transparency in income reporting for non-employees. The implications of reducing the reporting requirements are significant. For businesses, especially small ones, this could lead to substantial relief from the burden of issuing forms like the 1099-NEC or 1099-MISC. Businesses are required to submit these forms for any non-employee compensation paid on a one-off basis to vendors and contractors throughout the year, which includes payments that might fall below $2,000 annually. Removing this requirement could mean a reduction of as much as 30% in the overall number of forms businesses need to issue. However, this also raises concerns about underreporting of income among freelancers, contractors, and vendors, primarily because they will have less incentive to maintain accurate records of their earnings. The reduction in reporting requirements adds to the existing issue of the tax gap, which according to IRS estimates for 2022, was around $696 billion, with a substantial portion of that due to underreported income. The tax gap reflects the revenue owed but not paid, raising questions about compliance and the ability for the IRS to collect owed revenues effectively. Overall, the changes created a significant shift in the regulatory landscape surrounding income reporting for small businesses and independent contractors, reflecting a broader trend towards deregulation. In summary, the changes enacted by the Trump administration have resulted in poorer oversight for the IRS regarding income from small businesses and freelancers, which may increase the prevalence of underreporting and exacerbate challenges in tax collection for the government.