WASHINGTON — Dennis Turbeville, a carpenter in Washington, used mobile payment service Venmo this year to sell his wares, collect payments on rental properties and share personal expenses with family and friends.
He uses QuickBooks software to carefully track the income of his business, Austen Morris Custom Furniture, and works with an accountant to make sure all the money he owes to the federal government is being paid correctly.
But sir. Turbeville worries that a recent tax overhaul aimed at cracking down on tax evasion by small businesses and those operating in the “gig” economy will mean more paperwork and headaches for the IRS. He hoped that if there were any unexpected discrepancies, his business would be too small to attract an audit.
Changes to the tax code enacted last year were designed to ensure that those who receive payments using services like Venmo, CashApp, Etsy, StubHub and Airbnb report all of their income to the IRS. The change is part of the Biden administration’s efforts to close the $7 trillion “tax gap” between revenue owed and collected.
But for millions of Americans, the new requirements mean additional tax forms, potentially higher tax bills and a lot of confusion. That has stoked anxiety among some middle-class taxpayers and independent business owners whom President Biden has promised to exempt from stricter tax scrutiny.
“It’s very confusing and I can understand how stressful it can be for someone who doesn’t have an accountant,” Mr said. Turberville said. “I’m very confused by this.”
The new tax policy was included in a stimulus package called the America Rescue Plan, which Democrats passed in 2021. It goes largely unnoticed because it applies to this year’s income and affects what most Americans will pay in taxes in 2023. Approximately $8 billion in additional tax revenue is expected to be raised over ten years.
But as the impact of the rules and the prospect of a surprise tax bill become clear, it is drawing opposition from business groups, lawmakers and others, prompting a scramble within the Biden administration to come up with a solution to avoid another mess next year tax season.
Sens. Joe Manchin III, Democrat of West Virginia, and Bill Hagerty, Republican of Tennessee, are expected to try to scale back the tax measure by attaching amendments to the $1.7 trillion spending plan Congress is expected to pass this week. Business groups have been urging the Treasury Department to act on its own, delaying the new requirement to avoid an administrative crisis at the IRS, which has been blamed by internal regulators for poor customer service.
Before the rule change, services such as Venmo would only provide users with a snapshot of their income, known as a Form 1099-K, if they earned more than $20,000 and made more than 200 transactions. These forms should be filed with the IRS with tax returns and are designed to help determine how much a taxpayer owes.
The threshold for a single transaction was lowered to $600 this year, greatly increasing the number of people who accept such payments and potentially paying more taxes.
Many taxpayers who run small businesses or occasionally sell goods part-time often confuse their business transactions with their personal transactions. They could end up in a messy spat with the IRS if their tax returns incorrectly show they earn more than they actually do. In some cases, people selling used items can face hefty tax bills if they can’t find old receipts showing how the items’ value has depreciated since the day they were purchased.
Some sellers on Kidizen, a site for buying and reselling children’s clothing and toys, quit fearing they would face inflated — and incorrect — tax bills that they would not be able to fight.
“We were concerned that this burden would create so much confusion that it would deter casual sellers and parents from selling,” said Kidizen co-founder Mary Fallon. People need to find old receipts to prove to the IRS that they didn’t make a profit from the sale.
“They’re selling children’s clothing that they bought years ago,” she said. “They don’t have those receipts anymore.”
Most policymakers agree that taxpayers are legally required to pay what they owe. However, the backlash against the tax changes gave Republicans another avenue to criticize the Biden administration’s plans to empower the IRS with $80 billion in overhaul.
Florida Republican Sen. Rick Scott last week proposed legislative changes to block the IRS expansion and roll back a requirement to report financial transactions on payment apps more broadly.
“The Biden administration also changed the IRS standards to start tracking every financial transaction by Americans over $600, including CashApp, Venmo and PayPal,” he said. Scott said. “This is a shameless invasion of American privacy. This is what we saw in Communist China.”
Democrats are also on the defensive about the law, with some, including Sen. Maggie Hassan of New Hampshire, calling for changes to the law. Her legislation, the Cut Online Red Tape Act, would change the law so that online sellers won’t receive tax forms showing their sales until the transaction exceeds $5,000. She warned that “unnecessary confusion created by unnecessary tax forms could burden Granite Staters with undue taxation.”
Lobbyists representing online sales and payments platforms have engaged in a last-minute pressure campaign to persuade lawmakers to include such changes in a year-end spending plan lawmakers are expected to pass this week. But it was unclear whether there was enough political support to roll back the measure.
Arshi Siddiqui, a partner at law firm Akin Gump, representing a coalition of businesses trying to change the new tax requirements, said she expected as many as 50 million taxpayers to get new tax returns for the first time because of the measures in the U.S. rescue package.
“If Congress doesn’t act, we’re going to see a tsunami of 1099s for people who are going to be confused,” she said. Siddiqui said, adding that she thought the finance ministry could change or delay the measure on its own.
“Treasury and the IRS are focused on quickly identifying solutions to any challenges taxpayers may face this filing season,” said Treasury spokeswoman Julia Krieger.
Sen. Ron Wyden of Oregon, the Democratic chairman of the Senate Finance Committee, told Treasury Secretary Janet L. Yellen this week that the IRS must increase its communications with taxpayers about the new requirements and explain more clearly which ones Transactions are taxable.
“There is a lot of confusion about this rule, and the IRS needs to provide taxpayers with more clarity as soon as possible,” Mr. Wyden said in a statement in which he recounted the conversation with Ms. Yellen.
The IRS issued a warning this month to taxpayers facing the new requirements for the first time. It urged them to ensure all financial documents are ready before filing their tax returns next year.
“Being more careful can save people even more time and effort associated with filing an amended tax return,” the IRS says on its website.
Uncertainty surrounding tax reporting changes could weigh on the IRS as it struggles to clear a backlog of millions of old tax returns and undergoes a leadership transition before a new commissioner is confirmed.
The scale of the rule change also provides new fodder for critics of the IRS and the Biden administration, who argue Mr. Biden reneged on his pledge not to raise taxes or increase audit rates for Americans earning less than $400,000 a year.
“It’s full of low-income people,” said Grover Norquist, president of the American Tax Reform group. “Billionaires don’t have side jobs renting out rooms to make money.”
Allison Soares, a California tax attorney, predicts that discrepancies on tax returns will be common because of the new policy, and that the burden of proof will be on businesses to smooth them out.
“I expect there will be more audits,” she said. Suarez said.
Large corporations have also been preparing for the worst.
Venmo, which is owned by PayPal, has been working to prepare users for tax changes that could affect them. It has consistently reiterated to customers that payments not specifically designated as goods and services are not included in the 1099-K that the company provides to users, nor does it list individual transactions.
“Whether it’s splitting the dinner bill, pooling money for a gift, or simply sending money to a loved one, PayPal and Venmo payments between two consumer accounts default to friends and family transactions — ensuring they don’t have to be taxed or reported to the IRS, said PayPal spokesman Tom Hunter.
But not all users know the difference between Venmo’s business and personal accounts. There are concerns that some deals may be merged together.
gentlemen. Furniture maker Turbeville stopped using Venmo’s commerce service this year because of the company’s extra fees, instead manually tracking the commerce transactions he uses in his “friends” setup. He also wants an extra tax form from Etsy related to his sales on its site, which will make his tax season even more confusing this year.
Emily Cochran Contribution report.