How the IRS says to handle 1099-K reporting mistakes on tax returns
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Over the past year, there’s been a wave of confusion around tax reporting for payment apps like Venmo and PayPal, along with e-commerce companies such as eBay, Etsy and Poshmark. But the IRS provided clarification in an update this week.
The 2022 threshold for Form 1099-K, which reports third-party business payments to the IRS, is still more than 200 transactions worth an aggregate above $20,000.
That’s slated to change for next tax season when the 2023 threshold drops to $600 for even a single transaction.
In the meantime, you still need to report business income, regardless of whether you receive Form 1099-K, the IRS said in a news release on Thursday. “All income must be reported unless it’s excluded by law,” according to the federal agency.
The problem with 1099-K reporting mistakes
While more taxpayers are expected to receive Form 1099-K next season, it’s possible some companies may have issued the 2022 form to certain filers by mistake for personal transfers, or reported incorrect amounts.
Here’s why it matters: If the IRS receives tax forms and you don’t include those on your return, it creates a “matching error” for the agency, explained certified financial planner Jim Guarino, a CPA and managing director at Baker Newman Noyes in Woburn, Massachusetts.
“In effect, the IRS compares the information it receives from third parties to the information included on a tax return,” he said. “To the extent the amounts do not match, it could potentially trigger a tax notice.”
How to handle 1099-K reporting errors
If you mistakenly received Form 1099-K or the amount was incorrect, the IRS updated guidance on how to handle it this week.
Some taxpayers may have incorrectly received Form 1099-K, the agency said. “In other cases, the form may have been issued in error — such as for transactions between friends and family, or expense sharing,” the IRS wrote.
The agency suggests contacting the issuer direct to correct 1099-K mistakes. But if you can’t get a timely update, the agency suggests addressing the error on your return by zeroing out the income on two lines of Schedule 1 with the description “Form 1099-K Received in Error” for both.
- Part I – Line 8z – Other Income – (add income)
- Part II – Line 24z – Other Adjustments – (offset income)
Alternatively, for tax year 2022, you can include both the gross proceeds and the offsetting negative amount on Line 8z, the IRS said in the FAQs page updated this week.
“Of course, providing an appropriate and clear explanation for the offsetting adjustment is also an important factor to reporting this information correctly,” said Guarino.
You can follow the same steps if you received Form 1099-K after selling personal items at a loss, the IRS said. You can use the description “Form 1099-K Personal Item Sold at a Loss” for both.
However, you need to report profits as a capital gain on Form 8949 and Schedule D.