Loophole Can Foil Income Reporting to I.R.S.

Kelly Phillips Erb, a.k.a. “Taxgirl,” has uncovered an interesting and potentially exploitable quirk in the tax code.

In summary: For some time now, anyone in the U.S. who pays a person $600 or more (in money or otherwise) is legally required to issue a 1099-MISC to the recipient, with a copy to the government. That way the government knows the recipient got the income and can ding them for it if they don’t report it on their tax return.

In , a new reporting rule was added, saying that third-party merchants (like credit card companies and PayPal) would also have to report payments to recipients, using 1099-K if those payments exceed $20,000 for the year and they represent more than 200 transactions.

The new rule apparently quietly cancelled out the old one to some extent. You are not required to file a 1099-MISC to report any payments over $600 if they are paid in a way that would require you to file a 1099-K if they were over $20,000 and represent more than 200 transactions.

This seems to suggest that if you can arrange to be compensated in a particular manner (through certain types of third-party payment processors, by fewer than 200 payers or in a sum less than $20k per third-party), it should be fairly easy for you to avoid having that income reported to the IRS.

Alas, it seems that word of this loophole hasn’t gotten around, and some such businesses may be filing unnecessary 1099-MISC or 1099-K forms just to be on the safe side. To put this technique into practice may require a cooperative payor, or one who is willing to sit down with you (and perhaps a trusted accountant) to verify the details.

You can learn more in Erb’s article, and can see where she got verification from an IRS spokesperson that her interpretation is correct.

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