New IRS tax rules on Venmo, PayPal payments over $600 could 'overburden' Americans
Tax advocacy group urges Treasury to delay implementing new reporting rules
IRS to begin sending 1099-K forms for some payments
Sen. Mike Braun, R-Ind., explains the details regarding the IRS starting to send out 1099-K forms for some payments on ‘Fox Business Tonight.’
A new tax reporting requirement targeting Americans who made money online through third-party apps like Venmo or PayPal could cause serious confusion for taxpayers, according to an industry group that is calling on the government to immediately delay implementing the rule.
The National Association of Tax Professionals (NATP) this week urged the Treasury Department to wait and make some modifications before it implements a rule requiring taxpayers to report to the IRS transactions of at least $600 that are received through third-party payment apps like Venmo, PayPal and Cash App.
Third-party payment processors will now be required to provide both users and the IRS with Form 1099-K if they add up to more than $600 over the course of the year. Previously, the payment apps were required to send users Form 1099-K if their gross income exceeded $20,000 or they had 200 separate transactions within a calendar year. Democrats made the change in March 2021, when they passed the American Rescue Plan without any Republican votes.
Now, a single transaction over $600 will trigger the form. The change is intended to crack down on Americans evading taxes by not reporting the full extent of their gross income. However, critics say that it amounts to government overreach at its worst and that it could ultimately hurt small businesses.
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The Internal Revenue Service (IRS) headquarters in Washington, D.C., on Feb. 25, 2022. (Photographer: Al Drago/Bloomberg via Getty Images / Getty Images)
The NATP slammed the rule as "overly burdensome" and warned that it could create "undue issues for taxpayers" as well as the already overwhelmed IRS, which is still wading its way through a backlog of unprocessed tax returns from previous years.
The lowered reporting requirement "will not, in our opinion, address the goal the Treasury is trying to accomplish – that being accurate reporting of taxable income transactions between parties," the group said in a news release. It warned of two likely outcomes from the $600 threshold: Taxpayers either receive and ignore the form due to a "lack of knowledge regarding handling these types of transactions," or taxpayers receive the form and are unsure what type of transactions they are required to report
The new rule only applies to payments received for goods and services transactions, meaning that using Venmo or PayPal to send a loved one a gift, pay your roommate rent or reimburse a friend for dinner will be excluded. Also excluded is anyone who receives money from selling a personal item at a loss; for example, if you purchased a couch for $300 and sold it for $250, the amount is not taxable.
"This doesn't include things like paying your family or friends back using PayPal or Venmo for dinner, gifts, shared trips," PayPal previously said.
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In this photo illustration a Venmo mobile payment service logo seen displayed on a smartphone. ((Photo Illustration by Igor Golovniov/SOPA Images/LightRocket via Getty Images) / Getty Images)
To be clear, business owners are already required to report that income to the IRS. The new rule simply means that the IRS will figure out what business owners earned on the cash apps, regardless of what that individual actually reports on their 1099-K, because it broadens the scope of the threshold.
"This doesn't include things like paying your family or friends back using PayPal or Venmo for dinner, gifts, shared trips," PayPal previously said.
Form 1099-K is used to report goods and services payments received by a business or individual in the calendar year, but there are certain exclusions from gross income that are not subject to income tax, including amounts from selling personal items at a loss, amounts sent as reimbursements and amounts sent as gifts.
The NATP suggested that several changes be made to the new rule before it is ultimately implemented, including requesting that third-party settlement companies establish business and personal accounts in order to intentionally separate business transactions from users who use third-pay settlement programs.
U.S. Department of the Treasury Internal Revenue Service (IRS) 1040 Individual Income Tax forms for the 2018 tax year are arranged for a photograph in Tiskilwa, Illinois, U.S., on Monday, March 11, 2019. (Daniel Acker/Bloomberg via Getty Images / Getty Images)
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There also needs to be more public outreach in order to better educate taxpayers on how to properly fill out the form, the NATP said.
The lower reporting threshold threatens to sweep up millions of Americans who make money online. Roughly one in four Americans rakes in extra income on the side by selling something online, renting their home or using a digital platform to do work, according to the Pew Research Center.