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Most people are familiar with Form 1099 for miscellaneous income. For independent contractors, this form plays a role comparable to what a W-2 does for an employee.

There are, however, other types of 1099 forms. In this two-part post, we will discuss Form 1099-K, a fairly new and rather confusing form used by credit card and other third-party payment businesses to report payments made.

In this part of the post, we will explain what Form 1099-K does. We will also take note of a recent Treasury Department report on how the form is used to detect noncompliance by taxpayers with income reporting requirements.

Several years ago, Congress passed legislation intended to encourage businesses to do a better job of reporting all of their income. The idea was to close the “tax gap” between the income a business makes and the income that is reported by making income received from credit card companies and other payment services more transparent.

The legislation took effect at the beginning of 2012. It requires “payment settlement entities” (i.e., credit card companies and other third-party payment networks) to file informational returns on certain types of third-party payment transactions. Form 1099-K is the form used for these reportable transactions.

The fact that a copy of the 1099-K goes to the IRS is supposed to encourage more accurate income reporting of income from third-party payment services.

Recently, the Treasury Inspector General for Tax Administration (TIGTA) conducted a study of how well this is working to improve income-reporting. TIGTA found that many taxpayers were not in compliance with the requirements for backup withholding of amounts reported on Form 1099-K.

In addition, TIGTA also found that many taxpayers did not file tax returns even though third-party payers had filed 1099-K forms on payments to those taxpayers. This non-filing included more than 84,000 individuals and more than 443,000 businesses.

In short, Form 1099-K is hardly a silver bullet to solve the tax gap. In part two of this post, we will look at TIGTA’s recommendations on how to make the 1099-K process more effective. We will also discuss how Form 1099-K has begun to affect participants in the social-sharing economy, such as drivers for Lyft and Uber.