1099-K Thresholds, Crypto Reporting, and the Future of IRS Filing

Special guest Wendy Walker, VP of Regulatory Affairs at Sovos and Chair of IRSAC's Information Reporting Committee, breaks down the latest developments in 1099-K reporting thresholds and the upcoming 1099-DA form for digital assets. The discussion explores the practical challenges facing tax professionals as payment platforms struggle with reporting requirements, while also examining how the IRS is modernizing its systems to handle electronic filing.

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• (00:00) - Welcome to Federal Tax Updates
• (02:04) - Special Guest Introduction: Wendy Walker
• (03:14) - Discussion on IRS Advisory Council and Information Reporting
• (04:28) - Deep Dive into 1099K Reporting
• (05:43) - Challenges and Uncertainties in 1099K Reporting
• (08:46) - Impact on Taxpayers and Tax Professionals
• (11:43) - Platform Issues and Reporting Complexities
• (25:12) - IRS Matching and Compliance
• (27:07) - Future of Electronic 1099s
• (29:24) - New 1099 DA Form Explained
• (30:10) - Challenges with Current Reporting
• (32:22) - Future of Cryptocurrency Reporting
• (40:36) - IRS Modernization Efforts
• (50:48) - Wrap Up and Future Plans

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Creators & Guests

Host

Annie Schwab, CPA

Franchisee Operations Manager at Padgett Business Services

Host

Roger Harris, EA

President at Padgett Business Services

Guest

Wendy Walker

VP of Regulatory Affairs at Sovos

What is Federal Tax Updates?

CPAs, Enrolled Agents, and Tax Preparers can keep up-to-date with the latest federal tax information while earning NASBA approved CPE credits and IRS approved CE credits by listening to the bi-weekly Federal Tax Updates podcast. The hosts Roger Harris and Annie Schwab have over 75 years of tax experience between them, which has been featured in various media outlets including Wall Street Journal, USA Today, The Morning Business Report, Bloomberg Business News, and Accounting Today.

There may be errors in spelling, grammar, and accuracy in this machine-generated transcript.

Roger Harris: Hello everyone. Welcome to another Federal Updates podcast. This is Roger Harris. I'm joined as always by Annie Schwab. Annie, how are you doing today?

Annie Schwab: Pretty good. Roger. How about you?

Roger Harris: Not too bad, not too bad. Glad we're past all the tax deadlines. I think, you know, unless you're in a disaster area where you've got a few more months. But, uh, [00:00:30] we're very lucky. Today we have a special guest joining Andy and I. Andy, why don't you introduce our guest for today?

Annie Schwab: Hello. My pleasure. So today we have the pleasure of having Wendy Walker here. Um, Wendy is the VP of regulatory Affairs at Sovos for the Regtech business. Um, over 15 years of industry experience leading tax operations and compliance teams in financial service organizations. And now she plays a pivotal role in driving Sovos regulatory and policy [00:01:00] strategy throughout the the IRS and state agencies. She proactively develops and advocates for service related positions and influence emerging strategic issues in tax legislation and regulation. She is on a chair of SAC and is also an active member of the Council for Electronic Revenue Communication Advancements, as well as a member of Nacp. Wendy advocates for improvement in tax policy [00:01:30] and administration with members of the IRS and state tax authorities. Welcome, Wendy. We're so happy to have you here today.

Wendy Walker: Thank you very much, I appreciate that.

Roger Harris: Yes, Wendy is, as Annie mentioned, is on Earth SAC, which is the IRS Advisory Council, which I was on many, many years ago. And I thank you, chair. What used to be its own committee or PAC, which is the Information reporting committee, kind of got merged into two Earth SAC because I don't think people realize the amount [00:02:00] of information, reporting and all the challenges that are faced, you know, by companies, businesses, the IRS. Of gathering information and and the old idea that third party reporting always enhances compliance and balancing that with burdens that it creates. So, uh, good to talk to a another RSK member.

Wendy Walker: Thank you. You're right. It used to be such a dedicated topic for the IRS. Right. And now we're a committee of just [00:02:30] a little subgroup of five. Yeah.

Roger Harris: And I don't know why they got rid of it, but, you know, I guess they wanted to get down to, I guess, primarily the one advisory committee. Well, I guess there's still itac, which is the electronic filing. So I guess there's there's still two. But yeah, they merged it in because it used to be a subcommittee basically the same size as RSK. And so you got to do the five of you got to do the work of what a whole committee used to do.

Wendy Walker: That's right.

Roger Harris: Well. And so Wendy's background is, as [00:03:00] Annie mentioned, is in the information reporting. And and I think we'll start by talking about a topic that Annie and I discussed, I guess, about this time last year when the whole 1099 K stuff was.

Annie Schwab: I feel like it never goes away. It just keeps, keeps changing, reverting, going forward, new ideas proposed. And and here we are again.

Wendy Walker: AhHuh

Roger Harris: Yeah. And we'll talk about it from two perspectives, obviously. What are the what are the current rules to the extent that we know what they are because, you know, they can change at any [00:03:30] minute. And then the impact both on the taxpayer and the tax practitioner. So, um, Wendy, why don't why don't we get started? Well, Annie, why don't you remind people what a 1099 can go through the basics about what 1099 K is and what we're talking about?

Annie Schwab: Sure, sure.So 1099 K has been around for for a while. It's the reporting of third party settlements. So think picture like Venmo sent some of those kind of financial institutions [00:04:00] where you're sending money back and forth, and there's been ups and downs with thresholds. Um, and so, Wendy, where do we stand now on that?

Wendy Walker: Yeah. The answer today is we don't know.

Roger Harris: Yeah.

Wendy Walker: No, the IRS the IRS again, has not provided the industry with any clear guidance yet for 2024 reporting. So, you know, just like the last two years, we're kind of expecting an 11th hour communication drop that might change the reporting [00:04:30] threshold we think to $5,000 for 2024 transactions. So still.

Roger Harris: The legislation that created this, I think it was 600. Right. And and then Congress didn't get around to changing it. So the IRS just took it upon themselves last year to change it. And that's what we're waiting on for this year. Am I correct in thinking that.

Wendy Walker: So it actually it's section 6050 W of the code that we're talking about. And it was changed by Congress [00:05:00] in the American Rescue Plan Act. So the third party platforms that Annie mentioned, they that reporting threshold used to be 20,002 hundred transactions right in the calendar year and now, and it was reduced to $600. But the IRS the first two years basically, um, I think well, they, they basically gave um, an exemption or a delay in the implementation of that $600 threshold because [00:05:30] there were a variety of issues that people in the industry, um, you know, were reporting with the implementation. So in, I think, notice 2023 Dash ten in January of 23 is when they, um, gave a relief for the 2022 transactions that we would report. And then later that same year, in November of last year, they gave another notice and said for 2023, transactions were delayed. What's interesting, and this is why we don't really know, is that [00:06:00] in the official guidance that they released in that notice last November to delay in the news release when they, you know, with the notice attached to it, they indicated in the news release they were considering a $5,000 threshold for 2024. But that's it, right? It was just this little blurb in a news release that's not official guidance. That's just like a one line sentence in a news release. So all year, people have sort of assumed it's going to be $5,000. But [00:06:30] here we set on November 6th, and we still don't have, you know, that actual, uh, what.

Roger Harris: The real number.

Wendy Walker: Is yet. Yeah, exactly. Yeah.

Roger Harris: Which, you know, what I find really interesting is obviously Congress dropped the threshold, started it. Um, then as groups complained about that threshold, Congress got all upset and talked about changing it and fixing it legislatively. Of course, as Congress tends to do, didn't get around to it. So the IRS did it on their own. And then Congress got mad [00:07:00] at the IRS for doing it on their own. But, uh, you know, if Congress won't act, the IRS felt like they had to do something.

Wendy Walker: They have to follow the law, right? They have to administer the law, as it currently reads today. So.

Roger Harris: Right. Yeah.

Roger Harris: Now, how does a something like that like a company like yours who has to prepare for this? So what do you do?

Wendy Walker: Yeah I mean, so if you think about this, if you know, the company you mentioned at the top of this, Annie was Venmo, right? If you think about Venmo, for example, as an as an example here, they you know, there [00:07:30] was a lot of work from an industry perspective with Congress to say, what is the right threshold? Right is is $600, right is 20,000 right. Like, how did we get to $600? Because as you know, you know, or maybe you don't. Those thresholds for information reporting of 1099 in general haven't been reviewed since like 55. So, so I think there's been a lot of like, where do we get this $600 from? Right. And I think it was well, because that's the way we've always done it. And so I do think that, you know, there's an [00:08:00] opportunity for the IRS here to really look at whether or not that's the right threshold for reporting, um, in, you know, future years.

Roger Harris: Yeah. Congress, I think, just pulled the number that was already out there, you know, for, you know, a business that pays a subcontractor $600. That's right. 1099. So there's a number. So let's use it whether it made sense or not. So any talk a little bit about because again let's go back and reflect on last year. What we were concerned about was people getting a 1099 for $600 [00:08:30] that they've never seen before. Yeah. And it might be from a yard sale.

Annie Schwab: Well, that's.

Annie Schwab: The whole thing is, you know, things like Venmo, they track the the dollar amount, but the purpose is very hard to track on Venmo. So you could get a 1099 K for, like you said, a yard sale or, um, you know, just sending money to your mom or friend or something for services performed, um, babysitting or something like that. And so you've kind of left trying to decipher, okay, is this reportable? [00:09:00] What? Where would you report it if it is reportable or is it even accurate or correct? And I will say the IRS did put out quite extensive FAQs, um, kind of with scenarios and explanation. But but that doesn't change the fact that they're still going to be confusion. There hasn't been enough education done, um, with individuals who are receiving these, you know, 1099 k oh, I don't need that in the trash. It goes. Um, and so there's going to be some, I suspect, [00:09:30] some matching issues associated with this. Um, I don't know any other thoughts on that one. Yeah. Yeah.

Wendy Walker: I mean, well, first I would say, you know, obviously the law requires payments of goods and services to be reported. Uh, but I think that many of these companies out here, They don't separate out their accounts into consumer accounts versus commercial accounts. So, Wendy. Can, you know, Wendy can be a sole prop running business payments through her online Venmo account. And Wendy [00:10:00] can be an individual taxpayer running her personal payments through that same online platform account. Right. The platform doesn't distinguish between commercial transactions and consumer transactions. And so that's a platform issue in terms of the reporting aspect that they can't separate those out. Some of the platforms tried to get Wendy to tell them which transactions were goods and services and which weren't right, by selecting like from a drop down box when the transaction was happening. Yeah. But frankly, I mean, you know, [00:10:30] as well as I do, asking a taxpayer to delineate whether a transaction represents goods and services is really a terrible way to go. About 1099 K reporting. Um, I mean, in the average conversation I have with my own family of non-tax people, they they would answer yes to that goods and services question, if that, if they were simply reimbursing me for lunch, you know. Um, so the answer is no. Platform should not be reporting personal payments, right? They shouldn't be doing that. But whether they've done the work to make sure they don't incorrectly [00:11:00] report is another question that only they can answer.

Roger Harris: You know I've noticed that some of the people are getting pretty good at telling me how I should code it when I pay them, you know, because I don't, you know, I just do whatever they say. I don't, you know, I'll leave that up to them. But, you know, they don't they don't want me to make the choice. So they say, please pay me, but call it this, you know. So friends.

Annie Schwab: And family? Yeah.

Roger Harris: Friends and family. It doesn't matter what it's for, you know, like. Yeah.

Wendy Walker: It's just so interesting to me because, you know, in the financial services world, like in banking, for example, [00:11:30] the banks don't get to go to their customer and say, is it interest or is it not okay? It's not interest. We won't give you a 1099. Right. Like it just doesn't work like that. So yes, I do think the approach is probably going to be challenged from a legal perspective down the road because it's not. It's really on the platform to distinguish what is a reportable transaction and what isn't. It's not on you as a taxpayer.

Roger Harris: Yeah.

Roger Harris: Um, and I know from being on Earth, there's some things you can talk about and some things you can't, but so don't, [00:12:00] don't, don't cross over any lines here. But is this something that you guys have been talking to the service about the uncertainty. And do they just feel like they're kind of caught in the middle or you know, what, are they just waiting on Congress or do you think they're going to actually do? I mean, again, we're getting close to the end of the year.

Wendy Walker: Yeah, I mean, they definitely have the legislative authority already, right? So they don't need anything from Congress to do this. What they need to have is systems that can handle it. And what they needed for the last two years was better guidance. And so I think they believe, and I know [00:12:30] this from associations I'm a member of. They came out after the first delay. They spent the entire 20, 23 year interviewing a variety of people in the industry and associations to sort of figure out what the concerns were for taxpayers that Annie was talking about that have never received these before. And that's where all of those FAQs were born out of. I mean, there was there was maybe one little page there when this all started, and now there's like four tabs and a lot of, you know, information. [00:13:00] So I do think that they're ready to implement. I am not sure though. Again, back to that $5,000 threshold. That's the part that we're still waiting to hear about. I, I think that, you know, just if you if you flip this on its head and you go the other way and you look at like the Government Accountability Office, the Treasury inspector general, they've made recommendations in this area to the IRS going back to that threshold around, hey, you need to evaluate what kinds of things are happening when you lower [00:13:30] the threshold so that you understand how to better administer the tax law for these taxpayers, go forward. Right. You need to have like a plan to say, you know, now all of these taxpayers are receiving tax forms. These are the challenges. And I think that's the thing is the IRS was really just, oh, new threshold, new reporting. And they weren't really thinking of downstream about all of those impacts to taxpayers systems. You know, all of those things.

Roger Harris: Yeah.

Roger Harris: Because I mean, I think the intent here was that there was a gap, particularly [00:14:00] with the expansion of the gig economy, that people were, you know, there was a lot of money changing hands, and there was no, no reporting of it. I don't think anybody thought we needed to worry about catching the grandmother that sold a sofa at a yard sale.

Wendy Walker: Agreed.

Roger Harris: But, you know, we're kind of caught between getting the compliance and the proper place, not burdening the individual taxpayer with. But, I mean, the reality is, I mean, not that most people make a profit selling a sofa, but if they did, that [00:14:30] was always taxable. The form didn't change anything. So, I mean, is there any idea of the I guess the benefit is in the gig economy. I mean, why are we even being put through this? Yeah.

Roger Harris: Yeah.

Wendy Walker: You were right. I mean, for years leading up to the American Rescue Plan Act for a good 3 or 4 years, there were a variety of not only watchdog agencies like Tigta and Gao that, you know, do audits or do reports for Congress on these types of [00:15:00] things. So there were there were reports about a growing tax gap with independent workers that were using online platforms as their primary source of employment. There was an obvious gap when you look at the tax gap numbers in both self-employment taxes as well as income taxes associated with these individuals. So it was very clear, when you look at those tax gap reports how much it had been growing in that sector. But and I think this is where the IRS missed it. Is that or [00:15:30] Congress did the Government Accountability Office one of the reports they did they did a very good job of breaking down the different types of independent contractors we have in this country. Right. And I think that's part of the issue is our regulations are one size fits all, as if all independent contractors are the same. And and the problem is we have a 1099 neck and we have a 1099 miscellaneous and we have a 1099. And these all report non employee compensation in some shape or form. And so I think that's part of our issue here is [00:16:00] that the IRS took these rules one size fits all to independent contractors. And what they should have done is taken a look at that Gao report from a few years ago that really said, there's this other bucket out here, and these are these platform independent contractors versus your traditional independent contractors. That's what they were after, not the person selling their sofa at the online marketplace. So, um, I think there's an opportunity to refine it. In my mind.

Annie Schwab: It's going to be a struggle when somebody gets it and they're [00:16:30] like, I don't know what this is for. I don't I don't even think it's right or I don't even, you know, I don't even remember what to do with this or why. What I bought, what I sold, what, what whatever happened here? Um, and I don't they used to, I believe, like Zell I think got better. And, um, cash app, maybe two with getting some sort of statements or reports out of those apps so that you could refer back to. But I don't think they all have, you know, the documentation or, you know, that [00:17:00] you can go back and kind of figure out what happened, which makes it difficult.

Wendy Walker: Of course, I agree, I agree, like I don't think it tags the type of transaction that it was for you to know, you know, is it goods or services or is it expensive? I think the other issue is that there are, um, um, you know, limited sets of data. So they only hold the data for a certain period of time. So somebody might come back needing something for the whole year, and they maybe only have the last few months of data.

Roger Harris: Yeah.

Roger Harris: Am I right [00:17:30] that in Zelle somehow get out of. I mean, I'm trying to think back because it's been a while that somehow if you use Zelle, you didn't get a 1099 K, but if you use Venmo, you did that somehow. Zelle convinced I don't know if that's still true, convinced somebody that their transactions weren't reportable.

Wendy Walker: I don't think they convinced anybody. I think Zelle convinced themselves. Okay. And then they they published a statement on their website that said they're not subject to the reporting. And frankly, there's a whole [00:18:00] lot of hoopla behind the scenes about that, because then what ended up happening is people, all of these self-employed or, you know, independent contractors said, well, don't use Venmo to pay me, use Zelle because I won't get a 1099. And there was a lot of discussion. You asked me about it before, and the answer is yes. I mean, we did work with the IRS not only on the FAQs, but on this topic as well, that, you know, there should not it should not be so hard for people to know who is required to report a 1099 K that they would say that that Zelle doesn't have to, but [00:18:30] Venmo does. That's not true. And that's not how this works. And so, um, there is there is a movement behind the scenes to they've got. We've asked several times for the IRS and Treasury to really look at the regulations around who is a third party settlement organization, what that definition requires, because I don't think, you know, the average taxpayer has no idea that, for example, PayPal, some of the products PayPal offers, they do not issue a 1099 K, but other products they do. [00:19:00] How would you know that as the average taxpayer, you wouldn't? So yeah, I think there's a lot of argument behind the scenes with IRS and Treasury around that issue.

Roger Harris: So it was a Zelle decision. It wasn't an IRS. Yeah, yeah. That's right. I thought that was right. But I kept thinking, how could they be different? I mean, why did I guess it was great for business? Everybody, as you said, started using Zelle instead of Venmo.

Wendy Walker: That's right. You know what's interesting is the banks all partner with Zelle. And so the. Right. And so I had a lot of banks coming to me because I come from financial [00:19:30] services. So a lot of my clients are or just colleagues in the industry who are like, wait, so we use Zelle, does that mean we should be doing the 1099 since they're not doing it?

Roger Harris: Well.

Annie Schwab: Good question. Yeah. Yeah.

Wendy Walker: So you can see there's a bit of a this going on in the industry. Do you think we're.

Annie Schwab: Going to get before the end of the year, or do you think we're going to get any more clarification or guidance?

Wendy Walker: I think we're going to I do hope that we get a notice around the $5,000 threshold. Right. I know I personally have [00:20:00] asked the IRS for several weeks about this. I posted on LinkedIn about it this week because I'm trying to pressure them. But, you know, I just it's November 6th. It's ridiculous. I, I come from an organization. We were doing 30 million 1099 a year. I don't want to wait until the 11th hour to know that I have to do something that could cause, you know, a hundred times more ten, 99 forms to be issued than they were last year, you know? So. Right. Um, we've asked for it. We're hoping they're going to give official guidance on the 5000. But I've told people is, you know, the law [00:20:30] requires $600. The filer Instructions for form 1099 K for this year, say $600. Yeah. So, you know, we have what.

Annie Schwab: It is until then.

Wendy Walker: That's right.

Roger Harris: So based on your background, if if we don't get guidance, which I'm comfortable, the IRS will, but let's assume just for fun that they don't. I guess these companies then would issue them based on the 600. So we would have this massive amount of 1099 KS going out because that's right. The companies have to start preparing for this. It's not [00:21:00] like they can wait till, you know, December.

Annie Schwab: 22nd if they don't file on time. So they have to crank them out.

Wendy Walker: We had many last year because the notice didn't come until the week of Christmas last year, very late into the season. We, um, or I'm sorry, the year before, actually, it was for the 2022 returns. We had many clients who couldn't reverse. They were right. But the good news is we could help them reverse it in our application. But they couldn't stop it from coming to us, which was good. We were able to stop it for [00:21:30] them. But not all companies can do that. So some people did report at the $600 even though they weren't required to.

Roger Harris: So from a company standpoint, there's no harm in giving out a 1099 if you don't have to. Whatever that means. But it does create then a problem on the taxpayer level that gets it and doesn't know what it is and doesn't know what to do with it. And so now they've got to go pay somebody to help them report it. So when the company is doing what the company needs to do for their best interest, it could [00:22:00] shift a burden down to a to a taxpayer. But again, I'm just trying to think of how many people would get that and look at it and go, I have no idea what this is.

Wendy Walker: And I would say the vast majority and would I notice. I don't know about you, but I volunteer for Low Income Taxpayer Clinic or Jovita clinics with the IRS every year. And I see some of those folks coming through those clinics with their 1099 K. And so yeah, I it is a burden. They some of them were doing driving services and couldn't get access to everything they needed to claim business [00:22:30] expenses on the schedule. See, so I do think that there is an issue here. I Congress tried to propose that the that the filers be required to actually produce out all of those transactions on the 1099 form so that they could see what made up that gross amount that was being reported. But that legislation, like the others, kind of died in Congress somewhere. So, yeah, I don't know.

Roger Harris: Yeah. One last inside the IRS question. I don't think I know the answer to this, but because it would seem obvious [00:23:00] that the IRS matches everything on tax returns, do they really match 1099 KS against individual tax returns?

Wendy Walker: They do. Um, they they match all information returns. They have an automated underreporting system and then they have a nonfiler system. So they have two different systems they use to match. But the issue is they don't always follow up. Right. They don't have the resources to follow up on every mismatch that happens. They just don't. And so their systems have, you know, maybe a level of criteria [00:23:30] that they're looking for a taxpayer that has this much income or more. Right. That's what they're looking for.

Annie Schwab: That makes sense.

Roger Harris: Anything any other from from your because you got such a unique perspective of both from the SAC and from your company standpoint. Anything else we're missing on 1099 KS as we sit here, kind of in the unknown world of where we are. Is there anything else, our listeners, our listeners primarily being tax professionals? I mean, again, Annie and I talked about last year, make sure you ask the questions because some of these [00:24:00] forms are out there. They're not going to know to bring them to you. They're not going to know what they are. You hope they if they get something that looks important, they bring it to you. But if.

Roger Harris: They don't.

Wendy Walker: I think I think the only other thing I would mention is that electronic 1099 are kind of the wave of the future, right? That we, with the one we're going to talk about here in a minute, the 1099 da and this 1099 K people don't want to print and mail hundreds of millions, billions of tax forms. So I think one thing I'm wondering about, or I'm hoping that CPAs can think through is how can they [00:24:30] accept an electronic version of a 1099 as evidence from their client? Right. For purposes of preparing their return, I am and we'll talk about this with with the digital assets side. But I'm surprised at how many preparers, um, kind of insist on paper copies from their clients in order to prepare returns. And I'm sure there's risk reasons for that. But, you know, in this electronic world, um, I think it would be interesting if we could find a way to help the preparers get information electronically to do that. That's a good.

Annie Schwab: Point. Yeah.

Annie Schwab: Good point.

Roger Harris: And one other thing that I [00:25:00] know we saw a lot last year in talking to people, and it's not just 1099 KS. A lot of companies, for obvious reasons, are going away from mailing forms if there's different ways to make them available. You know, whether it be your broker statement, you know, from your investment. And a lot of people, just for whatever reason, if they don't get it in the mail, they don't think to go look at their broker account and see that it's there to be downloaded. You know, we all have got to do a better job to make sure we we compare [00:25:30] last year to this year to make sure if there's something's missing. And the client says, well, I didn't get anything, so there must not be anything. No. Go back and look, you know, so this whole idea of converting from paper to electronic is going to take some transition time for practitioners to learn how their procedures are. To your point, can change to accept electronic taxpayers understanding that just because it doesn't show up in the mailbox doesn't mean it doesn't exist anymore. You know it's still there. It's just not being mailed to you like [00:26:00] you you're used to. So it's going to take some adjusting for all of us.

Wendy Walker: I agree, I agree and the IRS yeah.

Annie Schwab: Any any everyone involved.

Roger Harris: Yeah for sure.

Roger Harris: All right Annie she gave us a great transition to digital assets.

Annie Schwab: And we've talked about this, the whole idea of cryptocurrency and all the different terms for trading and and what to do with it. But there is a new form coming out. It's the 1099. Da stands for Digital Assets. Um, [00:26:30] I don't think it's been finalized. Has it?

Wendy Walker: It has not. I think the second or third version of it, of the draft version. But we are hoping by the end of the year. Okay.

Annie Schwab: So this would then provide information related to cryptocurrency transactions. Um, I think Bitcoin thing, you know, those types of things. Am I correct.

Wendy Walker: Yes. So this is this is going to be uh, it's going to the the regulations are being phased in. So it's a phased approach here. So this first round of [00:27:00] reporting on the new 1099 Da will be uh, will gross proceeds reporting. So no cost basis details. It'll be gross proceeds for sales or trades of digital assets. So, you know, tax preparers need to be aware that their clients need to provide all the transaction details, right. The sale and the trade amounts, the dates that the that the sales or trades happened, what was what they sold or traded in each transaction. So they're going to need those [00:27:30] details because that will enable the preparer to properly calculate the gains and losses for income tax purposes. So that's for 2025 transactions. So they won't start issuing that new 1099 Da until early 2026.

Roger Harris: So don't look for it this year.

Annie Schwab: Yeah, we're still stuck with the old way of doing the things as we were last year, which is very difficult.

Wendy Walker: That I will say though, Annie, there are some exchanges out there, some bigger ones that that actually [00:28:00] worked over the last year to to provide gain loss statements. So they're not official 1099, but they are something that the client can bring to the preparer that, you know, sort of from the company that issues out all the transactions.

Annie Schwab: Yeah, we've had we had a lot of our franchisees. The clients didn't even know how to explain what was on these pieces of paper. You know, they're the ones doing all the trading, but then they drop off a report and they can't even say, you know, I did this and this is this, and you know this. Who knows? [00:28:30] It's a lot. And I and I think it's confusing. And I do think it's necessary to have.

Wendy Walker: If you think about there's so many different exchanges out there and these transactions, you know, whether it's a fee they're being charged or sometimes when you trade a digital asset because digital assets can be traded in fractional shares, sometimes when you trade digital assets, one trade could result in three 1099 or more. And so I think when these taxpayers are trying [00:29:00] to piece together what they did, and they're looking at all of this detail in a download report that they got from an exchange, it's hard to know that these 25 lines are just one trade. It's just these are all the things to get that trade cleared. And so you're right. I mean, this is a real kind of black hole right now I think for for preparers and taxpayers alike. Yeah.

Roger Harris: And I'm going to make a selfish plug for a future federal tax update podcast. We actually have, uh, I'll [00:29:30] call him an expert that we're going to do a whole podcast on the reporting and the things of cryptocurrency. But to your point, it's you've got different reports from different people, and some people have reports and even these new forms. I think if I heard you correctly, it's just going to be the total of all the transactions. You're still not going to have the background information. Uh, but again, when you hear about that podcast, I would encourage you to listen, because we found him through an office who [00:30:00] got referred a client who the IRS thought the and and correct me if I get these numbers wrong, but I want to say that based on an audit, they were going to owe over $1 million in taxes for trading crypto. And this gentleman stepped in. And because the statements weren't really clear. He says the IRS even don't know how to read them. When he finished, the audit was down to something like 100,000.

Wendy Walker: I am not surprised by that.

Roger Harris: Just from clearing up the [00:30:30] understanding what the what the statement said.

Wendy Walker: Yeah, the.

Wendy Walker: Irs is, um, they have, over the last year or so, deployed two technology providers that track cost basis details for digital asset transactions specifically. So not your typical traditional finance, uh, cost basis provider, right. These are providers that built platforms that are interacting just with the blockchains that are transacting these. And the IRS is using that for audit purposes [00:31:00] and to verify what taxpayers are reporting on their taxes. So it's your to your point, your colleague that you mentioned, like people like that who are able to parse through that detail and prove out the transaction, they're going to be the ones that really help these taxpayers through this trying time until we can get to a more transparent tax process.

Roger Harris: Yeah, because it's going to require some people who really I mean, this is and it's not all he does, but he is really focused on it. And I think that's what you have to do, because crypto [00:31:30] for most of us is still it's hard to understand. It's hard to grasp it just, you know, I don't get it. And now we have businesses dealing in crypto. Right. Where what is it Tesla. You can pay for a Tesla with Bitcoin or something. I mean.

Roger Harris: It's just likeyeah.

Wendy Walker: And in some states you can pay your taxes with it apparently.

Roger Harris: Yeah.

Roger Harris: So I mean I don't know.

Wendy Walker: Colorado's I think.

Roger Harris: World's changing way too fast for an old guy like me, you know.

Roger Harris: Yeah.

Roger Harris: Yeah, I'm going to buy this car with something that I don't even [00:32:00] know what it is or where it is or how you get money for it, but here. Yeah, take this and I'll drive a car off. Um, so what else do we. I mean, it's not till next year. I mean, and this crypto.

Wendy Walker: And this is phase one, right? So like I said, this just includes and this is Says what we're what's known as centralized exchanges that are going to be doing this reporting. So we're talking about like Coinbase or Kraken, these US exchanges, they're the ones that have to do this. What isn't included [00:32:30] is many of the transactions that we see happen on what is known as a decentralized protocol. So these are these are platforms where there's no single owner, there's no there's layers. There's usually three layers of technology that are working in conjunction with one another to automatically execute trades for buyers and sellers, but there's no third party involved in actually settling the money, settling it up. So who reports, right. Who's going to report the 1099? [00:33:00] And they don't know. Right now IRS is still trying to figure out, well who should report it, when should it be reported. And there are various transactions that can happen, not just trading in that mechanism that I just described. And so there's 4 or 5 key transactions they're trying to figure out, well is what kind of income is that? And, you know, is it is it gains and loss or is that I don't know, you know, just other income, uh, or what.

Wendy Walker: So, um, that will be the next phase of reporting. [00:33:30] Um, and if you're a preparer, you have to be asking about what they're doing in crypto. Are they using a centralized exchange or a decentralized platform? If somebody is using a decentralized platform, they're pretty savvy in crypto. And so that, you know, if they're buying and selling NFTs on a marketplace, non-fungible tokens, um, or if they are lending out their crypto to others and they get paid an incentive for that, these are just some of the transactions [00:34:00] that still are not required to land on a 1099, but for which taxpayers, you know, need to report and pay income taxes on. So preparers really need to be asking like, okay, you know, centralized exchanges, do you do decentralized? Do you lend your crypto? Do you buy NFTs? Preparers need to understand the various transactions and ask the right questions because again, without 1099, the taxpayer may not remember or you know, know that they need to disclose that.

Annie Schwab: That's why you need a tech organizer. [00:34:30] Real proponents of tax organizers, at least the yes and no questions, you know, for for things like for crypto or for I mean, there's some really high penalty questions there that a simple yes or no can can really help you. Yes, yes, exactly.

Roger Harris: And be careful if you're dealing with if you have clients who are dealing in a lot of money in crypto and you're not familiar with all the ins and outs of crypto, that's probably a client. You should refer to someone who's more knowledgeable [00:35:00] about it because, uh, there can be significant amount of unreported income if you don't know what you're doing and how to do it and where to look for it.

Wendy Walker: And, and this is a this.

Wendy Walker: Is a really hot topic with the IRS actually. They they know that the vast majority of taxpayers use a tax preparer. And they have been hearing that tax preparers are turning away crypto clients. And it's because of the risk, right? With all of this data and lack of reliable tracking for tax purposes, no [00:35:30] 1099, you know, can you blame them? Right? In the past, though, the IRS was concerned about taxpayers not reporting. Now they're concerned about preparers refusing to help taxpayers.

Annie Schwab: Or preparers reporting it incorrectly because the guidance isn't there.

Wendy Walker: And I want to plug for the IRS and for your, your, uh, preparers that on November 21st, the IRS is holding a webinar for practitioners for digital assets specifically. Um, so I do recommend [00:36:00] listeners to to look for that, tune in for that. They're going to do one on November 21st and another one in early December is really geared toward the taxpayer. Um, the one in November is for the practitioner.

Annie Schwab: Nice. Thanks for the heads up.

Roger Harris: Yeah, thanks.

Roger Harris: Because again, it is something that's just it's not something people have dealt with in a lot of instances. And, uh, there's not a lot of great information. I mean, even this 1099 I think everybody's hoping when they heard ten nine 1099 for digital assets, it was going to be like, what we get for stocks. You know, here's what it [00:36:30] is. Here's when you bought it. Here's when you sold it. Here's what you paid for it. Here's what your cost was. Here's your getting lost. But that's not the case. So you're still going.

Wendy Walker: To have will eventually eventually remember you know as well as I do Roger way back before like 2008 or 2007. Right. We reported gross proceeds amounts on A 1099 B, and it wasn't until Congress changed that law in 2008 that we started to phase in and get.

Roger Harris: All the other pieces.

Wendy Walker: Yeah, but oh my gosh, it took like six years. I don't think we started reporting basis on a 1099 B until like [00:37:00] 2012 or 2013. So you know, to your point, this is just like that. We're starting with that gross proceeds. But cost basis reporting on the 1099 Da is required for 2026 transactions. So starting in 2027, preparers should start to receive 1099 that actually have the information they need to calculate.

Roger Harris: So if you if you don't want to do them this year, you can start back next year because it'll be something you can actually. Because again, people are just, you know, it's it can be a lot of money [00:37:30] and it can.

Wendy Walker: Yeah.

Roger Harris: And a lot of confusion. Um, there's also some work going on. Let's talk a little bit about what the IRS is doing. They're trying to modernize their systems. And we'll talk about 1099 e-filing. I mean, obviously the IRS, we always hear that paper is their Kryptonite, you know, and that everything that they can avoid getting paper for, they don't want to get paper anymore. And so we're all going to have to learn how to take advantage of systems. So talk a little [00:38:00] bit about from because being on our side, you hear about this stuff before a lot of us.

Wendy Walker: Ad nauseam.

Wendy Walker: Yeah.

Roger Harris: Where are they going. What are they doing.

Wendy Walker: We're seeing a major transformation of so many systems. So many things are being made available online and so forth. In the 1099 reporting world, we are experiencing a really massive change in that the IRS is in the middle of transitioning to a new 1099 filing system called IRS. Right. And [00:38:30] this new system is going to replace the fire system, which has been around since the late 1980s. And that system struggles to keep pace with what now is 5 billion information returns that it's consuming annually. Right. Um, and so Iris is a more modern platform. It uses APIs and XML formatting language to intake the data, and it ultimately is a smoother process for filers that are, [00:39:00] you know, submitting a lot of 1099 returns. But in the interim, you know, they're still building it out. So it's a little bit bumpy. Not all of the returns that we need to file are actually supported. Yet in the system. So many taxpayers are still using fire for that reason. And in fact, for 2023 tax season, the IRS received about 10 million forms in that new IRS system, compared to the about 5 billion that the fire system received.

Wendy Walker: So [00:39:30] it's still ramping up in use, but we're seeing them eliminate a lot of paper form processes and make them automated with new online solutions. So separate of the, um, 1099 filing solution. Uh, we're also seeing another change. So in order to file 1099 with the IRS, you know, you have to go through kind of an authorization or authentication type of process. Um, you need what's called a transmitter control code. And in in the past you would [00:40:00] submit a form and the IRS would mail you your code, and that's what you would use when you filed your returns. Now you have to go through a system that's called IR application for TCC, and you have to provide personal information. You have to go through a background check or, you know, other authorizations in order to get access just to file your returns. So there's definitely not just that 1099 system, but also just the process for accessing IRS systems. Is is really changed quite a bit in the last couple of years as they've been modernizing.

Roger Harris: Yeah. Which is [00:40:30] good. I mean we look the world is changing. We all they're, they're they're playing catch up. Their systems are not as modern as I'm sure a lot of the companies you deal with are.

Wendy Walker: Yeah.

Roger Harris: And but you know, getting information in electronically is, is the way they're going. They're pushing, you know, online accounts. I mean we're moving into a completely different world. And yet a lot of people I saw a comment on one of our podcasts the other day where, oh, I still want to pick up the phone and talk to somebody and do all this. Well, I mean, yeah, it's great, [00:41:00] but the world is changing and we're going to do so many things electronically and the IRS needs to get their systems caught up as best they can. And, um, I know there were some issues because I think the other thing you're going to see in and help me remember through this, the other thing, as they get systems, they're also going to make more requirements that things have to be done electronically as their systems. Because I think it was last year, Andy, that what was it, ten W-2s and 1099 or something required you to do them electronically? [00:41:30] Yep.

Annie Schwab: And it wasn't ten of each. It was like the accumulation of all of them. And I think I think for the most part, as we can respond by notices or log into our portals and change our address or payment schedule or respond to to something, I think all of that is going to be beneficial. And I know that made a lot of changes just last year, but also over the last two years. Um, you know, with having all these online tools and better capabilities and increased service, [00:42:00] um, you know, with the phone service and the callback feature and all that, they're trying really hard to to remove whatever they can from being in paper and needing someone to handhold it into putting it into some sort of modernized system. Um, I hope there's more to come on that, because I think that there's still some work to be done.

Wendy Walker: Yeah, I think right now there's a big emphasis or push on the business tax account. Right. We've seen a lot of work on that individual. The Iola the individual online account, um, which we've had since like 2016, but they had no funding to really [00:42:30] make that, you know, as great as it could be. And I think these first couple years of funding that they've had, they've really built out the individual account last year, so much better, so much better, so much. And then last year turned their focus to a business actually building a business tax account. And they did launch it for like sole props right.

Roger Harris: Yeah.

Wendy Walker: Partnerships and S Corp's are coming next if they're not already there. Um where they've been struggling the most with that business tax side has been with just knowing who to give access to. Right. Like [00:43:00] for a partnership, if you think about like an investment partnership that many of us might be in, right? We might be one of thousands of partners in a fund. Right. That trades. But does that mean that we should have access to the fund's tax returns? I don't know, you know, maybe just, you know, and so the IRS is trying to figure out, like, how who do we give access to? How do we authenticate that somebody is able to receive that business tax account information.

Annie Schwab: And then maintaining it too, you know.

Wendy Walker: Yep, yep. We've done a lot of work not just [00:43:30] in RSK but in industries association groups that I'm in and helping them recognize how businesses work and giving them suggestions on how they could go about it. I think the thing to remember is they've had so many things living on paper somewhere in their world that, um, you know, to sort of start a system process. It's kind of hard to know where to start from. Yeah. So.

Roger Harris: Yeah.No, I was you know, we primarily serve the small business community, you know, and I guess a lot of people call them the really [00:44:00] small businesses that, you know, in a lot of instances, the fact that they're incorporated, they're just the same as a sole proprietor. They just happen to form a corporation. So, you know, I try I've tried to encourage the service to look into where these really small businesses, where maybe there's 1 or 2 owners, there's not 100, you know, go ahead and and let them be part of the system and, you know, try to find some sort of ownership or size or something to bring a lot of those small businesses into those accounts, [00:44:30] even if they're not sole proprietors, because a lot of their problems relate to the business, not to them individually. That's right. And yet they don't have access to him. So, I mean, they're they're trying and I'm trying not to get political. But as we record this last night was the election. Um, elections have consequences. And a lot of this is because of money that the IRS got, you know, from the Inflation Reduction Act, with a change of of parties controlling Washington, is the money to continue these upgrades going to continue [00:45:00] to be there because, you know, we can play politics with everything, but not all the money that the IRS got was to hire auditors. It was to. That's right. It was to help improve systems, to give us capabilities that I think would all benefit us. But you know, you know.

Wendy Walker: Yeah, it's a it's a.

Wendy Walker: Difficult one because I, you know, much of what the IRS has delivered, at least in our in the information reporting space and even even the infrastructure for security that they've been delivering around just protecting [00:45:30] our data. Much of that actually came about under the last admin, not under the the it came about under Trump's last administration in the 2019 Taxpayer First Act. Right. So Congress, you know, red or blue Congress knew in 2019 that the IRS needed to put the taxpayer first. They needed to improve taxpayer services. And so to your point, Roger, I do hope that, you know, lawmakers, despite what we hear a lot, I'm hoping behind the scenes they do recognize Cognize that the vast majority [00:46:00] of work that's been done here has been to help taxpayers, and it has been a tremendous help.

Roger Harris: And, you know, they're really good at spending money. So you need to help the agency that collects the money and do their job.

Wendy Walker: The right way. Yeah.

Roger Harris: Yeah. Because they they need to collect a lot to cover what you're spending. But yeah. No, they do. They, you know, it's just not something you get elected by running around saying, hey, I gave the IRS more money.

Roger Harris: Vote for me.

Annie Schwab: Exactly. Right, right. But but.

Wendy Walker: You know what though Roger, I argue this with people a lot because I'm like, if you step outside the United States, [00:46:30] there is no other country in the world that puts their tax regulator on blast like ours do. Oh I know. So I it for me, it's just it's frustrating as a tax professional because you're just like I just want to do my job, you know. Yeah. They're making it very hard to do my job.

Roger Harris: And I and I've said this, you know, again, when I was on, I was on earth like back in the early 2000. And it was the first time I really got to work with and see inside the IRS. You know, up until then, it's almost like it's us versus them kind of mentality.

Wendy Walker: Yeah, absolutely.

Roger Harris: And then when you [00:47:00] realize there's some great people that have a very difficult job to do from the outside world, you know, you don't go home and tell people, I work for the IRS. They really try to do now. They make mistakes. We all make mistakes, but they really do try to do a good job and they're trying to do better. And we should. This I guess I'm on my soapbox, but you know, we should go after the things that are bad and wrong. But we have to support the mission and make sure that, you know, for our country to function, we have to collect the money. [00:47:30] And, you know, we shouldn't let people get away with cheating.

Wendy Walker: Agreed. Agreed.

Roger Harris: I'm assuming that the three of us all pay our taxes, so I expect others to pay theirs. You know, that's..

Wendy Walker: To be on Earth. Like you have to.

Roger Harris: Yeah, you kind of have to. Yeah, well, I think they probably want you to, whether you're on our slack or not, but.

Roger Harris: Yeah. Yeah.

Roger Harris: All right. And we're about to run out of time. What else I.

Annie Schwab: Know? No, I think this has been fantastic.

Roger Harris: This has been fun.

Annie Schwab: Any any final remarks, [00:48:00] comments, anything that you thought you wanted to share and didn't get a chance to?

Wendy Walker: Um, you know, the only thing I would say is just more like reiterate, right? As we're coming into tax season here, keep a lookout for the 1099 K threshold change. And if you're if you're going to prepare taxes for folks in digital assets, make sure you ask them every question possible to get all the information you need.

Roger Harris: Right.

Roger Harris: Wendy, this has been great. Thank you for doing this. Thank you for for volunteering to do this. This is great. I know it'll be a lot of it'll be helpful to [00:48:30] a lot of our listeners. And, uh, we'll have to get you back because this is not going away. How much longer do you have on ask? How much longer are you on the inside?

Wendy Walker: This is it. Actually.

Roger Harris: You're done.

Wendy Walker: I've done four years. I, uh, here in a few weeks. I'm going to go and deliver this year's report to the commissioner. And this is my last year. But I keep telling people, and I'm making it public here. I'm going to. I'm going to apply for Itac next, so.

Roger Harris: Okay.

Annie Schwab: Oh, fun.

Wendy Walker: Stay on the inside. We'll see.

Roger Harris: You're a shoe in. You'll. They'll pick you. I hope.

Roger Harris: So.So you go to your last one. You [00:49:00] get the little, you get to walk up to the commissioner, get your certificate, get a picture.

Roger Harris: Yeah. There you go. There you go.

Wendy Walker: A handshake.

Roger Harris: And a handshake and a picture.

Annie Schwab: Yeah, exactly.

Roger Harris: Any final thoughts from you, Andy, before we wrap it up? No.

Annie Schwab: This is I've thoroughly enjoyed this today. Thank you so much for your time. And thank you for all of our listeners who continue to tune in. As Roger mentioned, we are going to have someone come on about cryptocurrency, so stay tuned for that and I'm sure we'll be bringing you more information as the year comes to a close. [00:49:30]

Roger Harris: Yeah. Thanks to everyone for listening. Wendy, thank you for joining us and tell your friends about the Federal Tax Update podcast, and we'll be back soon with another version. Thanks, everyone.