1099-Ks From Venmo and PayPal: Ignore Them at Your Peril

Most people have contact with service providers such as Paypal, Venmo, EBay and Stubhub.  Paypal and Venmo are examples of third-party settlement organizations.  EBay and Stubhub are examples of third-party payment organizations.  Prior to 2023, third-party settlement and payment organizations were obligated to send Forms 1099-K only to payees who received more than $20,000, and had more than 200 transactions.

Starting in 2023, third-party settlement and payment organizations are obligated to send Forms 1099-K to payees who receive more than $600.  The purpose of the law change is to capture tax revenue from the underground economy.  However, the net which the IRS is casting to catch the big fish will ensnare a lot of innocent small fish as well.  People who use services such as Paypal, Venmo, EBay and Stubhub will very likely receive more Forms 1099-K in the mail early each year, starting in 2024 for the 2023 Forms 1099-K.

It goes without saying that one must report income whether or not one receives a Form 1099.  That is not the point of this blog post.  Here is the point: if you get a Form 1099-K for a nonbusiness transaction, you cannot ignore the Form 1099-K when you file your income tax return.  If you ignore a Form 1099-K, the IRS will computer-match the Form 1099-K with your income tax return and will send an inquiry letter if there is a mismatch.  Unless you pay the income tax the IRS says is due in the letter you receive, it could be a long, expensive process to clear things up with IRS.  It is common for the IRS to ignore taxpayer responses and issue statutory notices of deficiency.  Once a statutory notice of deficiency is issued, the only way to resolve the issue without having to pay the tax is to file a petition in the United States Tax Court, which for most people will result in engaging an attorney.

Here is Q & A 8 from IRS Fact Sheet 2022-41 dated December 8, 2022:

Q8. My friend and I went to a concert, and my friend reimbursed money to me for her concert ticket through an online application. If I get a Form 1099-K for the reimbursement, do I need to pay taxes on it? (added December 28, 2022)

A8. Because the money is not payment for the sale of goods or the provision of services, generally the reimbursement would not be taxable to you.

If you believe the information on Form 1099-K, is incorrect, the form has been issued in error, or you have a question relating to the form, contact the filer, whose name and contact information appears in the upper left corner on the front of the form. You may also contact the payment settlement entity whose name and phone number are shown in the lower left side of the form. [Good luck contacting the filer or payment settlement entity along with the millions of others trying to do so!]

If you cannot get the form corrected, the error should be reported on Form 1040, Schedule 1, Part I, Additional Income, Line 8z, Other Income, with an offsetting entry in Part II, Adjustments to Income, Line 24z, Other Adjustments.

For example, if you received $800 from a friend reimbursing you for a concert ticket and you received a Form 1099-K reporting this as gross proceeds, your Schedule 1 should reflect the following:

Form 1040, Schedule 1 Part I – Line 8z, Other Income. List type and amount: “Form 1099-K Received in Error…. $800” to show the proceeds reported on the Form 1099-K.

Part II – Line 24z, Other Adjustments. List type and amount: “Form 1099-K Received in Error…. $800” to offset the proceeds reported to you in error. Not reporting this adjustment could result in you improperly reporting gain on the reimbursement.

If you sell a personal item at a loss, i.e. for less than you paid for the item, you follow the same procedure.  For example, if you sell a refrigerator for $700 and the purchase price was $1,000 and you receive a Form 1099-K for the $700, you should report the loss transaction as follows: Form 1040, Schedule 1, Part I – Line 8z, Other Income. List type and amount: “Form 1099-K Personal Item Sold at a Loss …. $700” to show the proceeds from the sale reported on the Form 1099-K and, Form 1040, Schedule 1, Part II – Line 24z, Other Adjustments. List type and amount: “Form 1099-K Personal Item Sold at a Loss…. $700” to show the amount of the purchase price that offsets the reported proceeds.  Personal losses are not deductible.  Thus, the $300 loss on the refrigerator cannot be deducted.

If you engaged in multiple transactions some of which resulted in net income and some of which resulted in a net loss as the refrigerator discussed above, the personal losses do not offset the personal gains, and you must report each transaction separately.  However, if the transactions are regular and continuous enough to constitute a trade or business, all the transactions of the trade or business should be reported on a Schedule C.