How new IRS rules could impact Venmo, Etsy and CashApp users

WASHINGTON — This year, Washington woodworker Dennis Turbefel used mobile payment service Venmo to sell his wares, collect payments on rental property, and split personal expenses with family and friends.

He uses QuickBooks software to track the income of Austen Morris Custom Furniture and works with an accountant in order to ensure that all he owes federal government are properly paid.

Mr. Turbefel is worried that a recent tax reform aimed at reducing tax evasion by small business and those in “gig” economies will lead to more paperwork and headaches for the Internal Revenue Service. He hopes that his work will not be scrutinized if there are unintended inconsistencies.

An amendment to the tax code was passed last year to ensure that all those who use services such as Venmo, CashApp Etsy, StubHub and Airbnb to raise funds report all income to the IRS. This change was made as part of the Biden administration’s efforts to reduce the $7 trillion gap between revenue owed tax and revenue collected.

For millions of Americans, however, this new requirement means more tax forms, potentially higher taxes bills, and a lot more confusion. Some middle-class taxpayers and owners of independent businesses are concerned about this new requirement. President Biden has pledged to not increase tax scrutiny.

“It’s confusing,” said Mr. Turbefel. “It would be very stressful for someone who doesn’t have an accountant.” “I feel so clueless about it.”

The new tax policy was part of the stimulus package known as American Rescue Plan, which Democrats passed 2021. It was not noticed because it applied to income earned this year, and will affect the taxes most Americans pay in 2023. To collect approximately $8 billion in additional tax revenue over a ten-year period.

However, as the rule’s impact and potential surprise tax bills become apparent, it’s pulling away from lawmakers, business groups, and others. This prompts the Biden administration and Congress to devise a solution to avoid another chaotic year of tax season. .

Sens. Sens. Business groups are urging Treasury Department to delay the new requirements to avoid an IRS administrative crisis. The IRS has been criticised for its poor customer service.

Venmo and other services provided a snapshot about their income called Form 1099K before the rule change. This was only available to those who received more $20,000 and had over 200 transactions. These forms were to be submitted with tax returns and to the IRS. They were meant to help the taxpayer determine the amount owed.

These thresholds have been reduced to $600 for the whole year, regardless how many transactions were made. This dramatically increases the number of people who receive such payments and will likely need to pay more taxes.

Many taxpayers who own small businesses or sell side products occasionally mix up their personal and business transactions. If their tax returns show they make more income than they really do, they could be in trouble with the IRS. If they don’t have the receipts to show how the item’s value has depreciated since the purchase, they could face hefty tax bills.

Kidizen, a website for buying and reselling children’s clothing and toys, is seeing some of its sellers pull out out of fear they’ll face inflated — and incorrect — tax bills they don’t have the means to contest.

Mary Fallon (co-founder of Kidizen) said, “We fear that this burden will cause such confusion that it will deter regular vendors and parents from selling.” She explained that many sellers of used items on the site would need to locate old receipts in order to prove to the IRS that they did no profit from the sale.

She said, “They sell baby clothing that was bought years ago.” “They don’t have those receipts anymore.”

Most policymakers agree with the principle that taxpayers must pay what they owe according to the law. Republicans have another avenue to criticize Biden’s plans to give the IRS a $80 billion overhaul, despite the backlash from tax changes.

Senator Rick Scott, R-Fla. proposed a legislative amendment last week to stop IRS expansion and reverse a provision which would have required broader reporting of financial transactions on payments apps.

“The Biden administration is also changing the IRS criteria to begin tracking every financial transaction Americans make over $600, including on CashApp, Venmo and PayPal,” Mr. Scott said. This is a clear violation of Americans’ privacy. These are things we see in communist China.”

The law has been criticized by Democrats, who have taken a defensive stance, while others, such as Sen. Maggie Hassan from New Hampshire, have called to amend it. Its legislation, Cut the red tape for online sales lawThis would allow online sellers to avoid tax forms showing their sales if they sell more than $5,000 in transactions. She warned that “unnecessary confusion caused tax forms threatens granite staters with undue tax burdens.”

Lobbyists representing online sales companies and payment platforms participated in a last minute lobbying campaign to convince lawmakers to include these changes in the year-end budget package that lawmakers are expected to pass this week. It is not clear whether enough political support exists to reverse the measure.

Archie Siddiqui (a partner at AkinGump) said that she represents a coalition representing companies seeking to change tax requirements. She expects 50 million taxpayers to receive new first-time tax returns. The American Rescue Plan includes a measure.

Siddiqui said that Congress won’t act and that there will be a tsunami involving 1099s, which will impact people who are at a loss. She also stated that she believes the Treasury Department could modify or delay action.

Julia Krieger spokeswoman for IRS. She stated that both the IRS and Treasury Department are laser-focused in finding a quick solution for any tax issues taxpayers might face during this filing season.

Sen. Ron Wyden from Oregon, the Democratic Chair of Senate Finance Committee, said this week to Treasury Secretary Janet L. Yellen, that the IRS needs to improve communication with taxpayers regarding the new requirements and clarify what transactions will be taxable.

“There has been significant confusion around this provision, and the IRS needs to provide greater clarity to taxpayers as quickly as possible,” Mr. Wyden said in a statement recounting the conversation with Ms. Yellen.

The IRS issued a warning to taxpayers who will be confronted with the new requirements this month. He reminded them to make sure that all their financial documents are in order before filing their tax returns for next year.

The IRS stated on its website that extra caution could help people save more time and effort when filing an amended tax return.

The uncertainty surrounding tax reporting changes could cause stress to the IRS, which is currently working to filter millions of tax returns and is undergoing a leadership transition before the confirmation of the new commissioner.

The rule change’s size has also given critics of the IRS/Biden administration new ammunition to argue Mr. Biden is breaking his promise not increase taxes or increase audit rates on Americans earning less $400,000 per annum.

Grover Norquist, president and CEO of Americans for Tax Reform, stated that “they’re all low income people here.” “Billionaires don’t have side gigs that rent out their rooms.

Allison Soares is a California tax attorney who predicted that tax forms discrepancies would become common because of the new policy. It was also predicted that companies would be required to point out the discrepancies.

“I expect more scrutiny,” Ms. Soares said.

Big companies also prepared for the worst.

Venmo, owned by PayPal, aims to prepare its users for any tax changes that may affect them. Customers were assured by the company that payments that are not specifically classified as goods or services would not be included in the 1099K they provide to them. They will not list individual transactions.

“Whether it’s splitting the bill for dinner, getting a gift or just sending money to a loved one, PayPal and Venmo payments between two consumer accounts are defaulted as a transaction for friends and family — ensuring they’re not taxed or reported to the IRS.” A spokesperson for PayPal said Tom Hunter.

Not all users are aware of the differences in Venmo business and personal accounts. Some transactions may be bundled together.

The furniture maker, Mr. Turbeville, has decided to stop using Venmo for business this year due to the extra fees. However, he keeps track his business transactions and manually sets up Friends. He expects to receive an Etsy tax form attached to his website sales, which will complicate tax season.

Emily CochranContribute to the preparation and editing of reports.