The Internal Revenue Service (IRS) is warning American taxpayers that failure to report transactions of $600 or more from payment processing services will run the risk of an audit.
The IRS is cracking down on payments made through networks like Venmo, Paypal, and Cash App.
The move comes as the agency seeks to obtain data regarding part-time employment and side gigs.
However, critics have slammed the crackdown as government overreach.
In a recent explainer posted online, the IRS said that according to the American Rescue Plan Act of 2021, any payment made after March 11, 2021, that exceeds $600 must be reported.
The target of the new reporting rule is small business owners, and people working side hustles or part-time gigs for extra income.
Earlier the reporting threshold was $20,000 and more than 200 transactions within a calendar year.
But, the amended rule applies to a single transaction.
“You should receive Form 1099-K by January 31 if, in the prior calendar year, you received payments from all payment card transactions (e.g., debit, credit, or stored-value cards), and in settlement of third-party payment network transactions above the minimum reporting thresholds,” the agency said.
The reporting guidelines do not apply to noncommercial payments such as rent, vacation, food, or one-time transactions like selling something online.
The Form 1099-K will be sent by the payment platforms through which the transaction was done.
If a form is received by mistake, “contact the Payment Settlement Entity (PSE) listed on the Form 1099-K” or provide an explanation in the tax return, according to the agency.
Failure to report transactions on Form 1099-K could trigger an audit by the IRS since the agency receives a copy of the form.
The American Rescue Plan Act of 2021 or COVID-19 Stimulus Package is a $1.9 trillion economic plan passed by congress and signed into law by President Joe Biden on March 11, 2021.
The final amended bill was passed by the House with all, except one, Democrats voting for it, and all Republicans against it.
The recent threshold change, from the earlier $20,000 and 200 transactions, to $600 for a single transaction, was part of the bill, and it is expected to identify Americans who are not reporting the full extent of their gross income to the government.
Critics have called the bill out as part of government overreach into the personal finances of Americans, and have noted that such extreme tax measures will harm small business owners and average citizens trying to make ends meet.
This contradicts the president’s statement that greater tax enforcement wouldn’t affect lower- and middle-income Americans.
A survey conducted by the Coalition for 1099-K Fairness—founded by eBay, Etsy, Mercari, OfferUp, Poshmark, Reverb, and Tradesy—found that 86 percent of casual sellers made less than $5,000 in gross revenue from items sold in 2021.
Forty-seven percent of respondents said they were unaware of the new IRS reporting requirements.
The group said the guidelines will cause unnecessary confusion amid conflicting information with many forced to consult with costly tax consultants.
Even those who do not owe any taxes will be forced to report their income while online marketplaces will be required to collect full social security numbers from small-time sellers.
Out of the 40 percent who said that the new mandates create economic hardship, 74 percent said they sell online to meet necessary personal expenses.
Sixty-nine percent of respondents said they would consider stopping to sell online due to new measures.
“There’s an enormous tax gap in the U.S. estimated at $7 [trillion] over the next 10 years in terms of a shortfall of tax collections to what we believe are owed,” Treasury Secretary Janel Yellen said in a CNBC interview last year.
“It comes from places where the information on income is opaque and can be hidden.”
Regarding the collection of more personal financial information about taxpayers’ bank accounts, Yellen said, “It’s just a few pieces of information about individual bank accounts.”
She confirmed that the IRS has the capacity for such scrutiny.
Yellen added that the extra information will help the IRS target and do audits on “high-income and wealthy individuals that may be concealing their transactions and income.”