Federal Register: 1099-K Tip Reporting Update & IRS Data Matching Protocols

New 1099-K Requirements: IRS Targets Cash Tips

The IRS is updating Form 1099-K, Payment Card and Third-Party Network Transactions, to improve the reporting of income, particularly regarding cash tips. This update reflects the evolving landscape of income reporting and the increased focus on ensuring accurate tax compliance in the gig economy and service industries. The changes come as the IRS faces scrutiny over 1099-K reporting thresholds in recent years.

The key change to Form 1099-K involves the addition of two new lines: one for reporting "cash tips" and another for the "Treasury tipped occupation code." These additions are designed to provide more granular information about income earned in tipped industries and align with new provisions aimed at incentivizing accurate tip reporting.

• Cash Tips Line: This new line requires third-party settlement organizations (TPSOs), like payment processors, to report the amount of cash tips included in the total payments processed for a payee.

• Treasury Tipped Occupation Code (TTOC): This three-digit code, established under the One Big Beautiful Bill Act (OBBBA) and tied to new IRC § 224 (allowing an above-the-line deduction for "qualified tips" of up to $25,000 annually), categorizes the recipient's occupation within the tipped industries. The IRS has identified nearly 70 occupations and assigned the TTOC.

These changes impact an estimated 13.3 million respondents, including individuals and businesses engaged in payment card and third-party network transactions, particularly those in the gig economy and service industries where tipping is common. The IRS estimates the average time per respondent will be 28 minutes, resulting in a total estimated annual burden of 6,225,378 hours.

Privacy vs. Fraud: IRS Renews Data Matching with VA and SSA

Following the implementation of Treasury Tipped Occupation Codes (TTOC) and the changes to Form 1099-K reporting, the IRS is also renewing its focus on preventing fraud and ensuring accuracy in federal benefit programs. The IRS leverages existing data through the Disclosure of Information to Federal, State, and Local Agencies (DIFSLA) program. This program allows the IRS to share certain taxpayer data with other government agencies, such as the Department of Veterans Affairs (VA) and the Social Security Administration (SSA), for specific non-tax administrative purposes.

This data-sharing is authorized under Section 6103(l)(7) of the Internal Revenue Code, which permits the IRS to disclose return information concerning unearned income to agencies that administer federally assisted benefit programs. The primary goal is to verify income eligibility for programs like Supplemental Security Income (SSI) and various VA benefits, thereby preventing improper payments and fraud.

The mechanism for this data exchange centers around the IRS's Information Returns Master File (IRMF). The IRMF contains data from various information returns, including Forms 1099-DIV (Dividends and Distributions), 1099-INT (Interest Income), and W-2G (Gambling Winnings). Participating agencies furnish the IRS with requests for records, including the Social Security Number (SSN) and the first four characters of the last name (name control) for individuals applying for or receiving benefits. This data is then "matched" against the IRMF.

When a match is found based on the SSN and name control, the IRS discloses specific information to the requesting agency. This includes the payee's account number, name, and mailing address; the payee's Taxpayer Identification Number (TIN); the payer's name and address; the payer's TIN; and the income type and amount.

The IRS is acutely aware of the need to balance program integrity with individual privacy concerns. The data matching program is conducted in compliance with the Privacy Act, and the IRS only discloses information to the extent necessary to determine eligibility for benefits. These data exchanges are governed by Computer Matching Agreements (CMAs).

Industry Impact and Compliance Outlook

As highlighted in this notice, the IRS is broadening its data collection and matching efforts, impacting both individual taxpayers and businesses. The addition of cash tip reporting to Form 1099-K and the expansion of data matching programs signal a renewed focus on closing the tax gap and ensuring benefit eligibility.

• Winners and Losers:
  • Target: Service industry workers who receive cash tips are the primary focus of the Form 1099-K changes.
  • Impacted: Platform operators and businesses utilizing third-party payment networks face new data collection and reporting requirements.

Compliance Forecast: Tax professionals should advise clients to take note of several key developments:

• Form 1099-K and Cash Tips: The modification of Form 1099-K to include cash tips means that service workers who previously may not have reported all cash tips are now at greater risk of IRS scrutiny through automated matching programs. Taxpayers will want to ensure diligent record-keeping and accurate reporting.
• Treasury Tipped Occupation Code (TTOC): Under the One Big Beautiful Bill Act (OBBBA), enacted July 4, 2025, Section 224 was introduced, which allows an above-the-line deduction for "qualified tips" of up to $25,000 annually for eligible taxpayers. The Act requires employers to use the TTOC on W-2s starting in 2026.
• Data Matching and Privacy: Clients receiving government benefits should be aware that the IRS is actively matching income data with agencies like the Social Security Administration and the Department of Veterans Affairs. These matches, authorized under IRC § 6103(l)(7), which permits the IRS to disclose return information regarding unearned income to agencies administering federally assisted benefit programs, aim to verify income eligibility for programs such as Supplemental Security Income (SSI).

In summary, the IRS is employing a two-pronged approach: tightening reporting requirements on income streams often underreported (cash tips) and enhancing verification processes for government benefit programs. Taxpayers and businesses alike should proactively adapt to these changes to ensure full compliance and avoid potential penalties.