Federal Register Digest: 1099-K Tips, Superfund Petitions, and Data Matching

Executive Summary: Tips, Toxics, and Tracking

Today's Federal Register unveils a trio of IRS actions impacting taxpayers and industries alike. Most notably, the IRS is proposing changes to Form 1099-K, Payment Card and Third Party Network Transactions. The delta here is significant: the form will now include lines for reporting cash tips and a corresponding Treasury tipped occupation code. This will likely affect anyone in a service industry who receives tips, as Section 6050W, which governs information returns by payment settlement entities, is expanding its reach. Also announced is a petition to add a new chemical copolymer to the list of taxable substances under the Superfund tax, as defined in Section 4672(a). Finally, the IRS is renewing its data-matching program with various federal and state agencies to verify eligibility for public benefits, a program authorized under Section 6103(l)(7) of the tax code.

The Tip Jar: 1099-K Expands to Capture Cash Tips

The IRS is intensifying its scrutiny of tip income in service industries. In an "Agency Information Collection Activities" notice regarding Form 1099-K, the IRS detailed proposed revisions to the form. This form, used to report payments made in settlement of payment card and third-party network transactions, is governed by Section 6050W, which mandates information returns by payment settlement entities.

The changes to the Form 1099-K aim to improve the reporting of tip income, specifically adding:

• A line for reporting "cash tips."
• A "Treasury tipped occupation code."

This revision reflects the IRS's ongoing efforts to close the tax gap, particularly in sectors where cash transactions and tip income are prevalent, and aligns with the aims of the Service Industry Tip Compliance Agreement (SITCA) program.

The Delta: Previously, Form 1099-K primarily captured payments processed through electronic channels. The revised form now seeks to incorporate cash tips, providing a more comprehensive view of a worker's earnings. This is important since the One Big Beautiful Bill Act (P.L. 119-21), enacted July 4, 2025, introduced the "No Tax on Tips" provision, allowing a federal income tax deduction of up to $25,000 for "qualified tips" received in customary service occupations for the years 2025-2028. To qualify for the OBBBA deduction, tips must be reported on Form W-2 or 1099-K.

Who is affected?

Several stakeholders will be impacted by this change:

• Gig workers and waitstaff: Those receiving tips, particularly in cash, will face increased scrutiny regarding their reported income.
• Payment processors: These entities will need to adapt their reporting systems to accommodate the new requirements for capturing and reporting cash tips.
• Employers: Employers will likely be incentivized to encourage participation in tip reporting programs to facilitate employee eligibility for the OBBBA deduction, and to avoid potential penalties.

The IRS estimates that these changes will affect over 13.3 million respondents, resulting in an estimated total annual burden of over 6.2 million hours. The public is invited to submit comments on these proposed changes by March 16, 2026.

Chemical Import Tax: The New Copolymer Petition

As a follow-up to our previous announcement regarding new requirements for capturing and reporting cash tips, this section addresses a pending petition that could impact importers of certain chemical substances.

AOC Resins and Coatings, Inc. and AOC, LLC, have petitioned the IRS to add a specific chemical to the list of taxable substances under Section 4672(a) of the Internal Revenue Code. Section 4672(a) imposes an excise tax on the sale or use of imported taxable substances. A substance is considered taxable if taxable chemicals constitute more than 20% of its weight.

The chemical under consideration is methyl methacrylate-ethyl methacrylate-methacrylic acid copolymer in a styrene solution ((C 5 H 8 O 2 ) x -(C 6 H 10 O 2 ) y -(C 4 H 6 O 2 ) z -(C 8 H 8 ) s ; x=75.76, y=8.46, z=1, s=168.4). The petition, filed under Revenue Procedure 2022-26, requests that this substance be added to the "List" of taxable substances.

If the petition is approved, importers of this specific thermoplastic low-profile additive would be subject to an excise tax. The petitioner estimates that taxable chemicals constitute 81.05% of the weight of the materials used to produce the substance. The proposed tax rate is $11.55 per ton.

The stoichiometric material consumption equation, based on the predominant method of production, is reported as follows:

• (x+y+z+s) C 6 H 6 (benzene)
• (x+y+z) C 3 H 6 (propylene)
• (5/2x+y+z) CH 4 (methane)
• (x+y+z) NH 3 (ammonia)
• 5/2(z+y+x) O 2 (oxygen)
• (x+y+z) H 2 SO 4 (sulfuric acid)
• x CO (syngas)
• y CH 3 CH 2 OH (ethanol)
• s C 2 H 4 (ethylene)

These react to produce: (C 5 H 8 O 2 ) x -(C 6 H 10 O 2 ) y - (C 4 H 6 O 2 ) z -(C 8 H 8 ) s (methyl methacrylate-ethyl methacrylate- methacrylic acid copolymer in a styrene solution), plus:

• (x+y+z) C 6 H 5 OH (phenol)
• (2x+3y+2z) H 2 O (water)
• 1/2x CO 2 (carbon dioxide)
• (x+y+z) NH 4 HSO 4 (ammonium hydrogen sulfate)
• s H 2 (hydrogen)

Big Data: IRS Renews Benefit Eligibility Matching

Following the previous announcement regarding the addition of new substances to the Superfund excise tax list under Section 4672(a), which taxes imported substances containing more than 20% of taxable chemicals, the IRS is also continuing its efforts in data-driven fraud prevention through renewed benefit eligibility matching programs.

The IRS has announced the re-establishment of its Disclosure of Information to Federal, State and Local Agencies (DIFSLA) Computer Matching Program, as detailed in a notice published in the Federal Register. This program, conducted under the authority of the Privacy Act of 1974 and Section 6103(l)(7) of the Internal Revenue Code (IRC), facilitates the sharing of taxpayer data with other government agencies to verify eligibility for, and prevent fraud in, various benefit programs. Section 6103(l)(7) specifically authorizes the IRS to disclose return information to federal, state, and local agencies for the administration of programs like Social Security and the Food and Nutrition Act (SNAP).

The Mechanism:

• The DIFSLA program works by extracting unearned income data from the IRS Information Returns Master File (IRMF). This data, which includes information reported on forms like 1099-DIV and 1099-INT, is then matched against the benefit rolls of participating federal and state agencies. The IRS provides a response record for each individual identified by the agency and, when a match of an individual's Social Security Number (SSN) and name control occurs, discloses specific information. This disclosed information includes the payee account number; payee name and mailing address; payee taxpayer identification number (TIN); payer name and address; payer TIN; and income type and amount.

The Stakeholders:

• Federal Agencies:
  • Department of Veterans Affairs, Veterans Benefits Administration
  • Department of Veterans Affairs, Veterans Health Administration
  • Social Security Administration
• State Agencies: A vast network of state agencies responsible for administering social services programs participate, including (but not limited to):
  • Alabama Department of Human Resources
  • Alaska Department of Health and Social Services, Division of Public Assistance
  • Arkansas Department of Human Services
  • California Department of Social Services
  • Connecticut Department of Social Services
  • ...and many others across all states (a full list is available in the Federal Register notice).

The Purpose:

• The primary objective of the DIFSLA program is to prevent and reduce fraud and abuse in federally assisted benefit programs. This is achieved by ensuring that individuals applying for or receiving benefits are accurately reporting their income, thereby ensuring proper eligibility for programs such as:
  • State programs funded under part A of title IV of the Social Security Act.
  • Medical assistance provided under a state plan approved under title XIX of the Social Security Act, or subsidies provided under section 1860D–14 of such Act.
  • Supplemental security income benefits provided under title XVI of the Social Security Act, and federally administered supplementary payments.
  • Unemployment compensation provided under a state law described in section 3304 of the IRC.
  • Assistance provided under the Food and Nutrition Act of 2008.
  • Needs-based pensions and health-care services administered by the Secretary of Veterans Affairs.

The renewed agreement is expected to cover the 18-month period from January 15, 2026, through July 16, 2027. Ninety days prior to the expiration of the agreement, the parties may request a 12-month extension, as per 5 U.S.C. 552a(o)(2)(D).