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

WASHINGTON — This year, Dennis Turbeville, a woodworker in Washington, used mobile payment service Venmo to sell his goods, collect payments for a rental property, and share personal expenses with family and friends.

He carefully tracks the earnings of his company, Austen Morris Custom Furniture, using QuickBooks software and works with an accountant to ensure that any debt he owes to the federal government is paid correctly.

But Mr. Turbeville worries that a recent tax change aimed at cracking down on tax evasion by small businesses and those operating in the “gig” economy will mean more paperwork and headaches at the Internal Revenue Service. He’s confident that if there are unintended deviations, his company will be too small to attract an audit.

An amendment to the tax law enacted last year should ensure those who use services like Venmo, CashApp, Etsy, StubHub and Airbnb to raise money report all of their income to the IRS. The change was part of the Biden administration’s effort to close the $7 trillion “tax gap” between income owed but not collected.

But for millions of Americans, the new requirement means they’ll face additional tax forms, potentially higher tax bills, and a lot of confusion. That’s raising concerns among some middle-class taxpayers and independent business owners, who President Biden has promised would be spared a stricter tax audit.

“It’s very confusing, and I imagine it would be very stressful for someone who doesn’t have an accountant,” Mr. Turbeville said. “I’m groping in the dark there.”

The new tax policy was plugged into the stimulus package known as the American Rescue Plan, which Democrats passed in 2021. It went largely unnoticed as it relates to income earned that year and affects the taxes most Americans will pay in 2023. It is projected to raise about $8 billion in additional tax revenue over a decade.

But as the rule’s implications and the prospect of surprise tax bills become clear, it faces opposition from business groups, lawmakers and others, leading to a scramble within the Biden administration to find a solution to another chaotic tax season next year to avoid.

Senators Joe Manchin III, a West Virginia Democrat, and Bill Hagerty, a Tennessee Republican, are expected to seek to scale back the tax measure by appending amendments to the $1.7 trillion spending package that the government is planning to make which Congress is expected to adopt this week. Business groups have urged the Treasury Department to act on its own to delay the new requirements to avoid an administrative crisis at the IRS, which has been faulted by an internal watchdog for abysmal customer service.

Before the rule change, services like Venmo only provided users with a snapshot of their earnings, called a 1099-K form, if they received more than $20,000 and had more than 200 transactions. The forms should be filed with the IRS along with tax returns and help determine how much a taxpayer owes.

Those thresholds were lowered to $600 for a single transaction this year, greatly expanding the number of people who receive such payments and are likely to pay more taxes.

Many taxpayers who run small businesses or occasionally sell goods on the side often mix their business and personal transactions. They could end up in messy battles with the IRS if their tax forms falsely show they’re making more income than they actually earned. In some cases, people selling used items could face large tax bills for those sales if they can’t find old receipts that show how the value of those items has decreased since the time of purchase.

Kidizen, a site for buying and reselling children’s clothing and toys, is seeing some of its sellers quitting out of concern they’ll face inflated — and spurious — tax bills they can’t dispute.

“We’re concerned that this burden will create enough confusion to discourage casual sellers and parents from selling,” said Mary Fallon, co-founder of Kidizen, explaining that many people who sell used goods on the site do a search first must have old receipts to prove to the IRS that they did not benefit from the sales. “They sell children’s clothes that were bought years ago, they don’t have those receipts anymore.”

Most policymakers agree that taxpayers should pay what they owe under the law. But the backlash over the tax changes has given Republicans another opportunity to criticize the Biden administration’s plans to bolster the IRS through an $80 billion overhaul.

Florida Republican Senator Rick Scott last week proposed a change in law to block IRS expansion and reverse the provision requiring broader reporting of financial transactions in payment apps.

“The Biden administration is also changing the IRS standards to begin tracking every financial transaction Americans make over $600, including on CashApp, Venmo and PayPal,” Mr. Scott said. “This is an outrageous violation of American privacy. We see that in communist China.”

Democrats have also been defensive about the law, and some, including New Hampshire Senator Maggie Hassan, have called for a change. Her legislation, the Cut Red Tape for Online Sales Act, would change the law so online sellers would not receive tax forms showing their sales until those transactions exceeded $5,000. She has warned that “unnecessary confusion from unnecessary tax forms could burden Granite Staters with improper taxes.”

Lobbyists representing online sales and payment platforms have engaged in a last-minute pressure campaign to persuade lawmakers to include such changes in a year-end spending package that lawmakers are expected to pass this week. However, it is not clear if there is enough political support to reverse the measure.

Arshi Siddiqui, a partner at law firm Akin Gump, who represents a coalition of companies trying to change the new tax rules, said she expected up to 50 million taxpayers to receive new tax returns for the first time under the measure in America’s bailout plan.

“If Congress doesn’t act, we’re going to see a tsunami of 1099s coming at the confused people,” Ms. Siddiqui said, adding that she believed it was possible that the Treasury Department could potentially change or delay the measure itself .

Julia Krieger, a spokeswoman for the Treasury Department, said, “The Treasury Department and the IRS are focused on finding a solution quickly to address any challenges taxpayers may face this filing season.”

Sen. Ron Wyden of Oregon, the Democratic chair of the Senate Finance Committee, spoke to Treasury Secretary Janet L. Yellen this week and told her the IRS needs to improve its communication with taxpayers about the new requirements and explain more clearly what types of transactions will be involved do will be taxable.

“There has been significant confusion about this provision and the IRS needs to provide more clarity to taxpayers as soon as possible,” Mr. Wyden said in a statement describing the conversation with Ms. Yellen.

The IRS this month issued a warning to taxpayers new to the new requirements. It urged them to make sure they have all their financial documents in order before filing their tax returns next year.

“A little extra caution could save people additional time and hassle associated with filing an amended tax return,” the IRS said on its website.

The uncertainty surrounding the tax reporting change could weigh on the IRS at a time when it has been working to clear a backlog of millions of old tax returns and is in the midst of a leadership change before confirming a new commissioner.

The magnitude of the rule change has also provided fresh fuel for critics in the IRS and the Biden administration to argue that Mr. Biden is breaking his promise not to collect taxes or raise audit rates for Americans who make less than $400,000. earn dollars a year.

“This is where all the low-income people are,” said Grover Norquist, president of Americans for Tax Reform. “Billionaires don’t have side jobs where they make money by renting out their room.”

Allison Soares, a California tax attorney, predicted that discrepancies on tax forms would be widespread due to the new policy and that the onus would be on companies to resolve them.

“I would expect further audits,” said Dr. said Soares.

Even large corporations have prepared for the worst.

Venmo, which is owned by PayPal, has been trying to prepare its users for tax changes that could affect them. It has repeatedly advised customers that payments not specifically for goods and services will not be included in the 1099-K that the company provides to users and will not list individual transactions.

“Whether it’s splitting the dinner bill, contributing to a gift, or just sending money to a loved one, PayPal and Venmo payments between two consumer accounts default to a friends and family transaction — to make sure they’re not taxable or reportable to the IRS,” said Tom Hunter, a spokesman for PayPal.

But not all users are aware of the differences between Venmo’s business and personal accounts. There are concerns that some transactions could be lumped together.

Mr. Turbeville, the furniture maker, opted out of using Venmo’s business service this year because of the additional fees the company charges, but manually tracks the business transactions it uses in the Friends setting. He also expects to receive an additional tax form from Etsy linked to his sales on his website, which will make tax season even more chaotic for him this year.

Emily Cochrane contributed reporting.

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