The Government Accountability Office (GAO) released a report on Sept. 19 recommending that the IRS better prepare to implement recent changes to reporting requirements for Form 1099-K, used for third-party platform payments, and Form 1099-DA, used for digital asset transactions.

The GAO gave the IRS an example of how it could evaluate its communications efforts to ensure tax professionals receive timely and easy-to-understand information about the changes.

“Employers, banks, and other third parties file "information returns" with the IRS detailing your income and other factors that can affect your tax bill,” the GAO said. “Mismatches between this data and what you report on your taxes can indicate errors or fraud.”

In the report, the GAO found that the IRS has taken initiatives to implement information reporting changes. However, the GAO identified specific actions where the IRS could be more prepared.

One area of concern is the lowered Form 1099-K reporting threshold. The GAO noted that the American Rescue Plan Act of 2021 changed the reporting requirements for third-party settlement organizations (TPSO). The changes included some online marketplaces that connect users to goods and services. Before the revisions, TPSOs did not have to report payments on Form 1099-K unless they exceeded $20,000 and an aggregate of 200 transactions. As amended, TPSOs must report payments that exceed $600 annually.

The IRS decided to delay the full implementation of these reporting requirements for two years, but it did not consistently document risks for its decisions, the GAO report said. Documenting risks would ensure the IRS has a sound reason for its decisions and is ready for the reporting threshold change.

Another area for concern involves Form 1099-DA. According to the GAO, the IRS has started planning its outreach and education efforts for new digital asset (e.g., cryptocurrency) reporting in its communication strategy. However, the IRS is missing the chance to apply lessons from its Form 1099-K implementation initiatives, including what worked and did not work well.

The GAO added that the IRS did not plan to evaluate its communication efforts. Incorporating what lessons it learned and examining outreach and education initiatives would help the IRS better prepare for the new reporting while adjusting to communication efforts, the report noted.

While information returns—forms filed by third parties that provide information on reportable transactions—offer benefits, they can also be a burden. The GAO cited the Joint Committee on Taxation, which estimated that digital asset reporting would increase revenue by $28 billion over a decade after implementation. Yet third-party filers can face costs and challenges in tracking information for reporting.

Here are the four recommendations that GAO made to the IRS:

• The IRS commissioner should update the IRS's policies and procedures to require a documented risk assessment for substantive tax administration decisions. The policies and procedures should also include guidance on when these assessments are needed, such as when a decision can affect many taxpayers or when decisions could generate congressional or oversight scrutiny.

• The IRS commissioner should ensure that the offices implementing the lowered Form 1099-K reporting threshold develop and implement a process to comprehensively and systematically document stakeholder feedback.

• The IRS commissioner should ensure that the Communication and Liaison Office and the Office of Digital Asset Initiative consult with the offices implementing the lowered Form 1099-K reporting threshold while incorporating any lessons learned and effective outreach strategies into their communication strategy for the new digital asset reporting requirements.

• The IRS commissioner should ensure that the Communication and Liaison Office, and the Office of Digital Asset Initiative update their communication strategy to cover the periodic evaluation of their outreach and education initiatives to assess if they are meeting the agency's goals and offering timely, understandable, readily available, and accessible information to tax professionals, industry, and taxpayers.

The GAO said that the IRS agreed with these recommendations and intends to implement all four of them.