A couple of weeks ago, the Government Accountability Office (GAO) released a report to the Senate Finance Committee describing the issues the IRS faces in enforcing income tax compliance for gig economy workers. The report highlighted long-standing issues the government has been grappling with in receiving tax information necessary to enforce compliance along with specific recommendations for improvement.
Of the seven recommendations, four of them were centered around enhancements to 1099 information reporting and voluntary tax withholding for income paid to gig economy workers.
Why did GAO study the gig?
The Senate Subcommittee on Taxation and IRS Oversight requested information on what is known about the gig economy and what can be done to improve the IRS data, what challenges gig workers are facing in complying with their income tax obligations and how the IRS is addressing them and, recommendations for how to promote increased tax compliance by these taxpayers.
The Senate Finance Committee requested this information in response to the S.700 NEW GIG Act of 2019. Among other details, the bill proposes a set of defined criteria for determining worker classification status as either an independent contractor or employee, the voluntary withholding tax stipulations under Section 3402 of the internal revenue code, and the threshold reporting changes to Forms 1099-MISC and 1099-K for payment card and third party network transactions.
Measuring tax compliance by platform workers is dicey
A key issue discussed throughout the GAO report is the reliability of the current data available to the IRS for purposes of measuring income tax compliance by these new online workers.
In 2017, the Bureau of Labor Statistics (BLS) estimated that there were approximately 1.7 million electronically mediated workers. But in 2019, the GAO released a report disputing those BLS figures based on how the data was collected, and instead cited a notable J.P. Morgan Chase (JPMC) study that estimated 2.3 million online workers. In this May 2020 report, the GAO states there is clear indication that the platform economy is growing and cites a fivefold increase in recipients of income from platform companies from 2012 to 2018.
Seven recommendations, four were rejected by IRS
Recommendations in the report range from instructional and tax form changes to tracking measures that the IRS should consider to better enforce compliance by gig economy workers. The IRS rejected four of the recommendations including three that were aimed directly at information reporting requirements on Forms 1099-K and 1099-MISC.
Specifically, the IRS rejected Recommendation 4 where the GAO suggested that the IRS and Treasury amend the 6050W “tie-breaker rule” that applies to duplicative reporting requirements between Forms 1099-K and 1099-MISC. The GAO recommended that when payments by a Third Party Settlement Organization (TPSO) (through the third-party payment network) are reportable under both Section 6050W and 6041, that the tie-breaker rule be amended to require reporting on Form 1099-MISC (rather than on Form 1099-K).
This recommendation is significant because the current requirement for a TPSO to report Form 1099-K is when the total of payments to a single recipient equals at least $20,000 paid over 200 transactions in the calendar year. Conversely, the Form 1099-MISC is required to be reported when the aggregate of $600 is paid to a recipient in the calendar year (with no transaction limits). TPSO’s are able to reduce tax information reporting obligations by leveraging the current Form 1099-K threshold, and a change to the tie-breaker rule would result in increased costs associated with issuing more tax forms to recipients and filing more tax information with the IRS and the states.
“Available tax data from tax year 2016 suggest that only around 30 percent of platform workers who were known to IRS had gross platform-related earnings higher than $5,000. Hence, most platform workers are likely not receiving an information return from the company. As a result, workers may not be aware that their income is taxable and IRS is less able to check the workers’ tax compliance.”
Also rejected by the IRS was the GAO recommendation that a review of the current regulatory thresholds for reporting both Form 1099-MISC and Form 1099-K should be completed. And if necessary, work with the Office of Chief Counsel and Congress to make regulatory changes to those thresholds. The GAO cited this as necessary because the available research on the reporting thresholds for these forms dates back to 1959 and 2008 respectively.
The IRS rejected these two recommendations citing the lack of resources to prioritize these issues for guidance, especially with recent congressional action impacting other areas of tax (i.e., CARES Act, etc.).
Unemployment claims could trigger congressional action regarding the 1099-K reporting requirements
The COVID-19 pandemic has significantly impacted the gig economy and other freelance workers. Unemployment claims surged more than 50% above the Bureau of Labor & Statistics (BLS) forecasts for gig workers, according to Caroline Bruckner at American University’s Kogod Tax Policy Center. “In the middle of a pandemic…platform workers couldn’t get their earnings substantiated because platforms don’t give them any kind of Form 1099,” she said in a recent interview with Forbes.
Although it may not be a priority for the IRS now, Congress may make it one for them sooner rather than later.