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1 1 (May 3, 2022)

handle is hein.crs/govefrn0001 and id is 1 raw text is: aCongressional Research Service Inforring the legislative debate since 1914 0 May 3, 2022 Payment Settlement Entities and IRS Reporting Requirements The Internal Revenue Code (IRC) requires entities making certain types of payments, including wages paid to employees and business payments to contractors, to file information returns with the Internal Revenue Service (IRS). Information returns are intended to improve voluntary compliance with tax law by providing information about potentially taxable transactions to the IRS and taxpayers. The information reporting requirement for certain transactions processed by payment settlement entities has been of legislative interest in the 117th Congress. This In Focus reviews that reporting requirement (codified at IRC §6050W), its legislative history, current legislative proposals, and related policy considerations. Payment Settlement Entities Section 6050W applies to payment settlement entities. Payment settlement entities broadly include merchant acquiring entities and third party settlement organizations. As the IRS has explained, a merchant acquiring entity is the bank or other organization that has the contractual obligation to make payment to a merchant or other business ... in settlement of payment card transactions. For example, if a customer pays for a good or service with a credit card, the credit card company that pays the merchant would generally be the merchant acquiring entity. Third party settlement organizations include entities that make payments to payees of third party network transactions. They generally function as intermediaries between buyers and sellers of goods or services, and charge a fee for serving as an intermediary. Examples of these types of entities include some online auction or marketplace services (such as eBay and Amazon), some gig economy platforms (such as Uber and Airbnb), and some cryptocurrency processors (such as BitPay and CoinBase before 2020). Whether a specific entity is a third party settlement organization partially depends on the entity's legal structure. Two entities may perform a broadly similar service while one takes the position it is a third party settlement organization, whereas the other does not. For example, the payment service Venmo will issue an information return to applicable users under Section 6050W, while the bank transfer service Zelle maintains it is not a third party settlement organization and will not issue an information return under Section 6050W. Reporting Requirements for Payment Settlement Entities Generally, merchant acquiring entities are required to file a Form 1099-K with the IRS (and send a copy to the taxpayer) reporting the gross amount of reportable transactions for all payees. There is no de minimis exception. Starting in 2022, third party settlement organizations are required to report to the IRS the aggregate amount of payments to users that exceed $600 in a calendar year. This reporting threshold is the same as the threshold for payments made by other businesses that are not made through a third party settlement organization (26 U.S.C. §6041). Reporting requirements do not change the tax obligations of taxpayers. Taxpayers are required to report all the income they receive, in any form they receive it, whether it is reported by a third party to the IRS or not, unless the income is statutorily or otherwise excepted from the computation of taxable income. The reporting changes do not mean that taxpayers will need to pay taxes on the whole amount reported to the IRS. Taxpayers may claim any allowable deductions against their receipts for amounts reported to the IRS by payment settlement entities. For example, suppose a seller receives $1,000 from a third party settlement organization for selling goods. Although the $1,000 would be reported to the IRS, the seller could deduct the cost of making the goods. If the materials to make the goods cost $700, then the taxable income (profit) would be $300. Legislative History Section 6050W, which was enacted in the Housing and Economic Recovery Act of 2008 (P.L. 110-289), required an information return to be filed by a third party settlement organization for payees whose gross amount of reportable transactions exceeded $20,000 and who settled over 200 transactions. These payments were also reported to the IRS on Form 1099-K. With these thresholds, only relatively frequent users of third party payment networks would exceed both thresholds, and thus have payment information reported to the IRS. The provision was intended as a revenue offset for the bill. The Joint Committee on Taxation (JCT) estimated that the new reporting requirements would increase revenue by $9.5 billion from FY2008 to FY2018. This estimate largely reflects anticipated increased tax compliance. IRS studies suggest that a substantial portion of uncollected taxes are the result of underreported business and self-employment income that is not subject to third-party reporting to the IRS. ittps://Crsreports.congress.gt

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