Congress recently appropriated money in the American Rescue Plan to increase staffing and resources for the IRS. The goal was to help the service collect billions of dollars in taxes owed by individual and companies who are evading their legal tax liabilities.
One way that some people evade paying taxes on income is through the use of third-party payment apps. Until now, these apps have not been required to report an individual’s transactions to the IRS if they have fewer than 200 transactions or the total dollar amount is less than $20,000. The lack of reporting makes this income effectively like receiving cash.
While the tax law requires all individuals to report and pay taxes on any payments for goods or services, it’s hard to track income that comes in the form of cash or online apps. In an effort to eliminate hiding income on these apps, the IRS has now lowered the reporting requirements to one transaction or a total dollar amount of $600. This change, which was to apply to 2022 transactions, was delayed and now applies to transactions that occur beginning January 1, 2023.
Since earned income is taxable regardless of the method of payment, the new reporting requirements may seem relatively insignificant. What could possibly go wrong? While it is intended to crack down on people that have side hustles, not those sending money to kids or a friend, some fear that the IRS isn’t going to know the difference.
According to a December 7, 2022, article in the DailyMail by Ronny Reyes, taxpayers who have total transactions of over $600 will receive a 1099-K form from each of the third-party payment companies through which they received payments.
The article quotes Republicans on the House Ways and Means Committee condemning the change, who wrote, “If you sold a couch, re-sold tickets at the price you paid, or just did some extra work on the side, you could trigger greater scrutiny from the Internal Revenue Service (IRS).”
Any “extra work on the side” is, of course, already taxable. The concerns are that individuals who received cash outside of business transactions could inadvertently receive a 1099-K. It will be your job to carefully examine any 1099-K you receive to be sure that the income being reported to the IRS is actually earned income or profits subject to taxation. Otherwise, you may end up paying taxes on income that is truly not taxable.
Anyone who believes they received the form in error is encouraged to contact the payment company for a correction. However, this adds a whole new layer of cost, complexity, and frustration around trying to correct a wrongly received form.
Tax experts have raised concerns that the IRS is not equipped to handle the estimated 20 million new 1099-K forms expected after January, as the agency already faces big delays during tax season.
Several lawmakers have introduced bipartisan legislation to reverse the change. One proposal in both the House and the Senate, called the Cut Red Tape for Online Sales Act, seeks to raise the 1099-K reporting threshold to $5,000.
Others are submitting proposals to revert the reporting threshold back to the previous $20,000 and 200 transactions. One is called the Saving Gig Economy Taxpayers Act and another is the Stop the Nosy Obsession with Online Payments (SNOOP) Act.
Until the issue is settled, you may want to limit your transactions on these sites if you can use a credit card, check, or cash instead.