A tax policy created under the American Rescue Plan of 2021 is intended to ensure that taxpayers fully report proceeds that run through payment apps and e-commerce sites. Responding to blowback on the implementation of the measure this year, the Internal Revenue Service (IRS) delayed the effective date of the rule until 2024.
Electronic commerce is an attractive environment for businesses of all sizes, including taxpayers who buy, sell, and work on the side. Payment apps generally provide a 1099-K form to individuals who earn or received more than $20,000 over a significant number of transactions. Ideally, taxpayers submitted the forms to the IRS along with their annual return to substantiate their income. Problems arise when taxpayers forget that side or digital income is taxable or deliberately keep electronic income off their books. The result is an income tax return that does not reflect full income figures and poses a potential for tax fraud.
Filing a false income tax return is risky business. In addition to their income, many taxpayers underestimate the resources available to the IRS when comparing actual to reported income. Tools like the IRS Automatic Underreporter have access to a broad swath of resources for confirming actual income figures. The new rule was intended to narrow the $7 trillion U.S. tax gap—the amount of tax owed verses what is collected. When the payment app rule is in effect, the U.S. Treasury believes it may be able to collect approximately $8 billion in unpaid tax for transactions going through Venmo, Etsy, Zelle, PayPal and others.
Taxpayers, gig and freelance workers, small business owners, and legislators have expressed concern about the new rule. Going forward, the IRS will require taxpayers report income from transactions where more than $600 was exchanged. Given the ease of digital commerce, many people buy and sell used goods, cars, or provide services on the side. When the rule goes into effect, third-party apps will be reporting those transactions and taxpayers will need to do the same.
Since the rule was announced, lobbyists and legislators from both sides have called for change to the rule to reduce red tape and ease taxpayer concerns. The result is the delayed enactment of the law until 2024. Notes the acting IRS Commissioner, Douglas O’Donnell, “To help smooth the transition and ensure clarity for taxpayers, tax professionals, and industry, the IRS will delay implementation of the 1099-K changes.”
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