2 Crucial (tax) Legislative Changes You Could Have Missed Due to the Holidays
The holidays are a time for family, friends, and festivities. Taxpayers like you usually take some time off to enjoy the company of their loved ones. However, as you were having this quality time with your family, the government was busy signing some legislation that may affect your tax returns.
And in this article, we discuss two key changes that affect your taxes and were passed in December 2022.
1. Delay in implementing the 1099-K $600 reporting threshold
In recent months and building up to this year’s tax season, taxpayers, professionals, and third-party payment networks have been inundated with news that they will be required to send 1099-K forms to workers or sellers who earned more than $600 in a year through one or more transactions, down from previous thresholds of $20,000 per year and 200 transactions.
This new approach was prompted by a provision in the March 2021 American Rescue Plan, which was the Democrats’ $1.9 trillion COVID-19 aid package.
However, things changed in December, adding to the list of Christmas gifts for the would-be-affected parties.
The IRS announced a delay in implementing the 1099-K $600 reporting threshold until 2023. This came about as taxpayers were busy preparing for Christmas celebrations. And the news came much to the relief of taxpayers, payment providers, and tax professionals.
This delay, however, means that payment platforms, such as PayPal and Venmo, no longer have to implement the 1099-K $600 minimum reporting threshold for the tax year 2022. But they will do this for the tax year 2023, giving them only one year to implement reporting systems and ensure a seamless process when this is fully implemented.
What does this mean for taxpayers?
For taxpayers, this means it is possible to underreport your income and think you can get away with it. However, you should know that no underreporting of income will go unnoticed simply because of a regulatory freeze such as this one. You are better off using this delay to streamline how you get paid. For example, make sure your e-commerce business shifts to a single merchant for payments to avoid more paperwork and headaches in the future.
When reporting under the new threshold is finally implemented for the tax year 2023, it would help if there were no unexplained discrepancies in your numbers. This means that, if you underreport your income now, and suddenly, when PayPal submits your transactions to the IRS by January 2024 (for 2023 tax returns), there is a huge difference between the income you will report this year (for 2022 tax returns), you will be audited.
In fact, this freeze could see many taxpayers being audited next year. And when you get audited, the IRS will investigate your finances going back years, especially if they suspect you have been underreporting your income.
Let me shed some light on IRS audits.
IRS audits
The IRS may choose to audit a taxpayer’s return for a variety of reasons, including when there are discrepancies or inconsistencies on the return, or when the return is randomly selected for review.
There are three types of IRS audits:
- Correspondence audits
- Office audits
- Field audits.
I will explain each of them and, while reading, take note of some common elements in all the audits. Understanding these commonalities will help you decide how you will file your taxes – accurately.
A correspondence audit is the least intensive type of audit, and it involves the IRS sending a letter to the taxpayer requesting additional information or documentation. The taxpayer can usually resolve a correspondence audit by simply responding to the letter and providing the requested information.
An office audit is more intensive than a correspondence audit, and it involves the taxpayer meeting with an IRS auditor at an IRS office. The auditor will review the taxpayer’s records and may ask for additional documentation or clarification.
A field audit is the most intensive type of audit, and it involves an IRS auditor visiting the taxpayer’s home or place of business to review records and documentation.
During an audit, the IRS auditor will review the taxpayer’s records and ask questions to verify the information reported on the tax return. The auditor may also ask to see receipts, bank statements, and other supporting documents. It is important for taxpayers to cooperate with the audit and provide the requested information in a timely manner.
In the above, you may have noticed a repeat of “additional information” or “documentation” and “verification.”
So, you may think just because the reporting threshold freeze (of $600) could help you get away. Not at all. Future audits may get you caught pants down because there will always be paperwork lying somewhere just waiting for IRS auditors to find it. And the worst part is they know how to find it.
Start being fully transparent about your taxes or income now.
2. Biden Signed the $1.7T Spending Bill and Brought the Secure 2.0 Act to Life
Apart from the above, President Biden officially passed the Secure 2.0 Act, a retirement reform legislation. Some of the provisions in this act will took effect on January 1, 2023.
The Secure 2.0 Act will result in an increase in the savings potential for all of us. However, as a tax professional, I am interested in the parts that have anything to do with your taxes. See below.
Some provisions of the Secure Act
Starting January 2023, the required minimum distribution age has been increased from 72 to 73, and will increase to 75 in 2033. More so, the Secure Act increases the small business startup tax credit from 50% of administrative costs to 100%, up to $5,000. This is welcome news for small businesses and entrepreneurs.
There is also a provision for auto-enrollments of 401(k) and 403(b) plans. Plans must begin enrolling members with a salary deferral of at least 3% of pay, but no more than 10%, and rise at 1% every year of service up to a minimum of 10% and a maximum of 15%.
An employee has the option to opt-out of auto-enrollment and escalation. However, this clause does not apply to small enterprises, new firms, religious plans, or government plans.
Conclusion
Given the above, we can see that the government does not rest, even during the holidays. They are making sure that there are laws to govern your money – sometimes to help you save and invest safely, plan your taxes, or to make sure you pay!
Therefore, you should also not rest. Make sure that you catch up with all these changes and stay ahead of the game. That’s how you protect your income. You can read more about the Secure 2.0 Act HERE. You can also read about the delay in implementing the 1099-K $600 reporting threshold HERE to stay informed about laws that affect you.
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Frequently Asked Questions
1. What is Tax Legislation?
Tax legislation refers to laws that govern the assessment and collection of taxes. These laws can be federal, state, or local in nature and can cover a wide range of tax types, including income taxes, sales taxes, property taxes, and more. Tax legislation can also include rules and regulations related to tax exemptions, credits, deductions, and other tax-related matters. The purpose of tax legislation is to provide a framework for the fair and consistent taxation of individuals and businesses in a jurisdiction.
2. What is an example of tax law?
An example of tax law is the Internal Revenue Code (IRC), which is the federal statute that sets forth the rules and regulations for the assessment and collection of taxes in the United States.
The IRC may also contain other specific tax laws in it, covering a wide range of tax-related matters, including the calculation of income tax, the allowable deductions and credits that can be claimed by taxpayers, and the rules for the collection and enforcement of taxes. Other examples of tax laws include state and local tax codes, which may impose additional taxes or have different rules for the assessment and collection of taxes.
3. What are the types of taxes?
Besides common types of taxes such as income, property, and sales tax, you also have the following:
- Estate tax: a tax on the transfer of property upon the death of the owner.
- Gift tax: a tax on the transfer of money or property to someone without receiving something of equal value in return.
