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Small business owners worried as IRS targets digital payments: Thousands could be owed in 2022

The Internal Revenue Service is cracking down on digital payments. In an effort to collect on unpaid taxes the IRS is set to start tracking transactions on platforms like PayPal, Venmo, and Square beginning January 1, 2022.

The tax reporting change is meant to bolster tax collection and catch evaders. Progressives have called on lawmakers to give the IRS the tools and staff it needs to go after billionaires for unpaid taxes. Instead, the agency appears poised to go after small businesses and freelancers who make less than $25,000 per year.

How will the IRS track Venmo activity? How much will it take to get their attention?

Before the change digital payment apps only had to report users with at least 200 transactions and $20,000 in gross payments. If that happened — the digital payment apps sent out a 1099-K form to the user. 

The change was actually included in the American Rescue Plan, which was the most recent stimulus package intended to help Americans recovering from the coronavirus pandemic. In an ironic twist, the very package of legislation that intended to put money in the pockets of small business owners and individuals will result in more money being paid to the federal government.

The change on January 1, 2022 means that any business owner who has more than $600 per year in transactions will receive the 1099-K form. It means more income will have to be reported to the IRS. The responsibility will be of the payment platform to provide the user or business with the form. 

However, the liability will be on the individual or business if they do not follow through with filing it along with taxes for any given year. It would be like leaving out a part-time job when an individual completes their tax return.

DiSanto Propane (Billboard)

What does this mean for individuals or businesses?

It doesn’t change a lot in the short-term. Businesses all along were expected to pay taxes on income collected through digital payment platforms. However, there could be an unintended consequence for individuals.

To be clear, individuals have no responsibility in this process. As an example, if a shopper enters a store and pays through one of these payment platforms — the responsibility is on the business to report the income. The individual has no liability using the payment platform.

However, business advocates say this is another example of government overreach — noting that many small businesses are using these platforms due to ease and convenience. Adding more regulation is viewed as a potential disruption for them — or for the small businesses trying to recover from the coronavirus pandemic.

Finger Lakes Partners (Billboard)

What are people saying about the IRS move to track payments?

It could get complicated for freelancers or small businesses. There’s a reasonable chance that income will be reported multiple times. This could create a nightmare situation for small business operators, or even sole proprietors who use payments platforms like Venmo for some transactions. 

If a freelance worker receives a 1099-MISC from a client they do work for, but that client paid over an app like Venmo or Square — then the money made from that would be reported twice, or appear twice. In that scenario, the freelancer or small business owner would have to explain that discrepancy in their tax filing.

How that would happen isn’t totally clear. 

“These third-party settlement entities may not know for sure if they are dealing with a business or an individual or if they are dealing with a payment for goods or services, or a non-taxable transaction. It is going to be up to the taxpayer, if they receive a 1099 in any form for a nontaxable event, such as splitting rent among roommates, splitting a dinner bill, or even selling something on eBay for less than you paid for it, to explain to the IRS that the 1099 was received for a non-taxable transaction,” explained Mark Luscombe. He’s an analyst for Wolters Kluwer Tax & Accounting.

Are small business owners worried about the IRS cracking down on these transactions?

Yes. Many say they are worried about the long-term impact of this and the back-ups already reported by the IRS. “They haven’t been able to keep up with the regulatory changes that happened as result of the first or second stimulus packages,” Mark DeThomas told Over the summer and fall the IRS reported historic backlogs of tax returns and stimulus checks due to staffing issues and technical changes that came from the American Rescue Plan. “How are they going to manage these changes? Are small business owners who are already stretched thin going to have any recourse in this process? I’m skeptical and concerned.”

As many have learned over the last several months — the IRS can make errors. Over the summer they sent out math error letters to thousands of Americans. Many of those issues were unfounded, but tax professionals across the U.S. said that responding and paying up what the IRS said was owed is the only recourse. For DeThomas, he says small business owners don’t have that luxury.

“The smallest of business owners are operating on razor thin margins,” he explained. “If the IRS suddenly decides to delegitimate thousands of dollars of business, or argue that I didn’t file it properly — I’m supposed to come up with the money first to repay them, then try to get it back? That’s not fair. That’s not fair at all.”

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