Users of Venmo, Cash App and Other Digital Wallets Get a Tax Reprieve

For the second time in a year, the Internal Revenue Service is delaying enforcement of a contentious tax policy that would require users of digital wallets and e-commerce platforms to start reporting small transactions to the tax collection agency.

The I.R.S. said on Tuesday that it would slowly phase in the new policy, which would require individuals and small businesses to report digital transactions of as little as $600 to the federal government.

The new reporting requirement was supposed to take effect late last year, but the Biden administration abruptly postponed it following pressure from lobbyists and backlash from users of services such as Venmo, PayPal, Cash App, StubHub and Etsy.

The head of the Internal Revenue Service said the decision to delay the rule again stemmed from concern of higher tax bills among those who used digital wallets.

“We spent many months gathering feedback from third-party groups and others, and it became increasingly clear we need additional time to effectively implement the new reporting requirements,” Daniel Werfel, the I.R.S. commissioner, said in a statement.

The rule, which was included in the 2021 American Rescue Plan, was intended to help narrow a $7 trillion “tax gap” that is owed to the United States but has gone uncollected. Before the new law, services like Venmo were required to supply users only with a snapshot of their income, called a 1099-K form, if they had received more than $20,000 and had more than 200 transactions in a year. The forms were supposed to be submitted to the I.R.S. with tax returns and were intended to help determine how much a taxpayer owed.

The 2021 law lowered that threshold to $600 for the entire year, regardless of the number of transactions, significantly broadening the number of people who were likely to be required to report more income and pay more taxes.

In its announcement on Tuesday, the I.R.S. said that it would keep the old policy in place for the current tax year. And in 2024, it plans to require only taxpayers with more than $5,000 of business transactions to report that income.

I.R.S. officials said that the commissioner had discretion to administer tax law and the authority to delay its application.

The change to the law was projected to raise about $8 billion in additional tax revenue over 10 years. I.R.S. officials did not have an estimate of how much tax revenue could go uncollected because of the delay.

Democrats and Republicans in Congress have been working over the last year on new legislation that would scale back the reporting requirements to make them less onerous on small businesses.

“This red tape hits small businesses and other Ohioans selling products online, sucking time and resources from the smallest online sellers,” Senator Sherrod Brown, Democrat of Ohio, said in May when he introduced bipartisan legislation to raise the reporting requirement to $10,000. “By raising the threshold, we can prevent the I.R.S. from interfering with minor transactions and cut down on excessive paperwork.”

Many taxpayers who run small businesses, or occasionally sell goods on the side, have been fearful that they could face messy fights with the I.R.S. if their tax forms erroneously showed them making more income than they actually earned. In some cases, people who sold used items could face high tax bills for those sales if they could not find receipts that showed how the value of those items had depreciated.

Lobbying groups have been urging the Biden administration to delay the policy again so that Congress would have time to act before more than 40 million tax forms were sent to taxpayers. They have argued that there continues to be widespread confusion about whether taxpayers will end up having to pay taxes on small digital transactions between family members and friends.

“The I.R.S. decision represents a huge win for millions of consumers who would have been hit with a freight train of 1099-Ks in January and also buys more time for Congress to craft a permanent legislative solution on a bipartisan basis,” said Arshi Siddiqui, a partner at Akin Gump, who is leading an effort by a coalition of businesses trying to change the new tax requirements.