A tweak to the tax code enacted last year was intended to ensure that those who use services such as Venmo, CashApp, Etsy, StubHub and Airbnb to collect money are reporting all their income to the IRS. The change was part of the Biden administration’s efforts to narrow the $7 trillion “tax gap” between revenue that is owed but not collected.
But for millions of Americans, the new requirement means that they will be faced with additional tax forms, potentially higher tax bills and a lot of confusion. That is stirring anxiety among some of the middle-class taxpayers and independent business owners who President Joe Biden promised would be spared from greater tax scrutiny.
The new tax policy was tucked into the stimulus package known as the American Rescue Plan that Democrats passed in 2021. It has gone largely unnoticed because it applies to income earned this year and affects taxes that most Americans will pay in 2023. It is projected to raise about $8 billion in additional tax revenue over a decade.
Before the rule change, services like Venmo supplied users with a snapshot of their income called a 1099-K form only if they received more than $20,000 and had more than 200 transactions. The forms were supposed to be submitted with tax returns to the IRS and were intended to help determine how much a taxpayer owes.
Those thresholds were lowered to $600 for a single transaction this year, significantly broadening the number of people who receive such payments and who will likely be required 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 face messy fights with the IRS if their tax forms erroneously show them making more income than they actually earned. In some cases, people who sell used items could face high tax bills for those sales if they cannot locate old receipts that show how the value of those items depreciated from the time that they were purchased.
Most policymakers agree that taxpayers should pay what they owe according to the law.
The IRS issued a warning this month to taxpayers who will be facing the new requirements for the first time. It urged them to make sure that they have all of their financial documents in order before they file their tax returns next year.
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