WASHINGTON, D.C. — The Internal Revenue Service (IRS) issued Notice 2024-85 this week, granting transitional relief for third-party settlement organizations (TPSOs) regarding transaction reporting and backup withholding requirements. This guidance sets new thresholds for transaction reporting and offers a phased approach to compliance for TPSOs, including payment apps and online marketplaces.
Updated Reporting Thresholds for TPSOs
Under the new rules outlined in Notice 2024-85, TPSOs will be required to report transactions based on a progressively decreasing threshold over the next three years. Specifically, TPSOs must report transactions in the following manner:
- Transactions exceeding $5,000 in total payments during calendar year 2024.
- Transactions exceeding $2,500 in total payments during calendar year 2025.
- Transactions exceeding $600 in total payments beginning in calendar year 2026 and beyond.
Previously, a $600 threshold was intended to take effect earlier. However, this gradual implementation allows TPSOs additional time to adjust their systems and processes to align with these regulatory requirements. The changes will apply to payment processors facilitating peer-to-peer transactions, gig economy platforms, and other online marketplaces.
Impact on Reporting and Compliance
The transitionary reporting thresholds are a significant adjustment for TPSOs, which were initially informed to prepare for the $600 threshold to apply uniformly starting in calendar year 2023. By delaying full implementation of the lowest threshold until 2026, the IRS aims to mitigate administrative burdens while ensuring compliance readiness across the industry.
TPSOs will continue to use Form 1099-K to report qualifying transactions to both the IRS and the payee involved. Entities and individuals receiving these forms should be aware of their increased likelihood of receiving tax-related documentation in the coming years, particularly as the thresholds lower over time. According to the IRS, improved reporting will enhance clarity and reduce tax underreporting associated with digital transactions.
Backup Withholding Penalty Relief for 2024
Notice 2024-85 also provides temporary relief related to backup withholding obligations under sections 6651 and 6656 of the Internal Revenue Code. Specifically, the IRS confirmed that no penalties will apply to TPSOs for failure to withhold and remit backup withholding tax for calendar year 2024. While the relief applies broadly, TPSOs that do perform backup withholding during 2024 must meet reporting requirements by filing Form 945, Annual Return of Withheld Federal Income Tax. They must also issue Form 1099-K to the IRS and provide documented copies to payees.
From calendar year 2025 onward, however, this leniency will end. The IRS will fully enforce penalties under sections 6651 and 6656 against any TPSOs that fail to meet withholding and payment obligations. Companies are urged to assess their compliance structures as penalties could involve substantial costs for noncompliance.
Challenges and Opportunities for TPSOs
While the transitional measures provide breathing room for TPSOs to prepare for lower reporting thresholds and stricter withholding obligations, they also underscore the increasing responsibility placed on these organizations in a rapidly growing digital economy. Compliance costs are expected to rise, particularly for platforms that process millions of small transactions annually. However, robust implementation of these measures may also foster increased trust and transparency in the gig economy and online marketplaces.
With the gradual implementation timeline, TPSOs have a critical opportunity to strategize on updating systems, ensuring employee training, and improving customer communication to minimize disruptions. Early steps toward compliance will help TPSOs avoid penalties in 2025 and create a smoother transition to the $600 threshold by 2026.
Looking Forward
The phased approach introduced through Notice 2024-85 reflects the IRS’s attempt to balance enforcement with the realities of modern commerce infrastructure. By offering an incremental compliance schedule, the agency seeks to foster industry-wide adherence while accommodating the operational challenges that come with these regulatory upgrades.
Taxpayers and organizations should keep a close eye on these changes, as they are expected to have far-reaching implications for tax reporting in the digital era. TPSOs, in particular, are encouraged to take proactive steps to align their internal processes with the evolving requirements to ensure compliance well ahead of the deadlines.
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