Taxpayer Warning: IRS Obtaining Records from Third Parties, Will Trigger an Audit on You If Numbers Don't Match
Workers in the gig economy might gag on the new forms they will be receiving at the end of 2022.
The Biden-era American Rescue Act, rammed home in 2021 by a Democratic-majority Congress, makes a major change in how Americans who are paid through third-party companies are taxed. Companies include Cash App, Venmo, and PayPal, according to the New York Post.
The Internal Revenue Service has a summary of the changes and their implications.
Before 2022, the rule was that a worker had to receive more than 200 payments and receive more than $20,000 from those payments to trigger a form 1099-K. The form is sent by a third-party processor to the worker who was paid for services as an independent contractor. But the form also goes to the IRS.
Beginning in 2022, the rule on who gets a 1099-K was changed so that everyone who makes over $600 in a year is issued a form. The form still goes to the IRS, which means that taxpayers ignore the form at their peril.
“It’s going to be a new form for a lot of people,” said Adam Markowitz, an enrolled agent and vice president at Howard L Markowitz PA, CPA in Windermere, Florida, according to CNBC. “And the worst thing they can do is ignore it.”
#Thread There’s alot of confusion around whether the new #1099K threshold change affects ALL transactions through third-party apps. Check out this thread for a simplified explanation on the topic ⬇️ pic.twitter.com/ymjk055BrV
— Gig Wage (@GigWage) January 27, 2022
Tommy Lucas, a certified financial planner and enrolled agent at Moisand Fitzgerald Tamayo in Orlando, Florida, said if the income is not listed on a tax return, an automatic IRS notice or audit could be triggered.
Justin Miller, national director of wealth planning at Evercore Wealth Management in San Francisco, said the form could include other income, such as selling concert tickets at a profit if the transaction when through a third-party processor.
“The challenge with the new lower threshold amount of $600 for Form 1099-K is that personal payments and reimbursements could be incorrectly reported as taxable transactions,” Miller said.
The Center for a Free Economy is calling upon Congress to use its lame-duck sessions to amend the law, saying that due to the change, “both very small business ventures and unwitting non-business taxpayers have found themselves caught in the 1099-K reporting net.”
“Congressional policymakers have several bills before them to restore the old 1099-K thresholds, or at least greatly increase them from where they are now. We urge you to consider and adopt these policies before the end of this Congress and the next tax filing season,” the group wrote.
“Millions of Americans who have never received a 1099-K form before, and don’t know what to do with it, will get one. If they seek help from the IRS, they will quickly run into an overwhelmed agency trying to process this gusher of new 1099-K returns, keep up with filing season, clear out prior backlogs, respond to correspondence, and even answer the 800-number telephone line,” the group said.
“Even a $5K threshold would provide significant relief for families and microbusiness. The hope is that the threshold will be raised as part of a #tax extender package in the lame duck session,” #1099K #IRS https://t.co/hisGaYsW7O
— Deborah Fox, CPA (@DebFoxFinancial) November 7, 2022
“Taxpayers receiving a 1099-K may not know what to do with it, and may be apt to ignore it on their tax return. Doing so will result in the IRS assessing tax on the full amount found on the 1099-K, even if the taxpayer has basis or business expenses that would reduce or eliminate the ultimate amount of tax owed,” the group said.
The group said failure to change the law will impact many Americans.
“The new 1099-K rules are a textbook example of how a well-functioning tax system must have tradeoffs between complexity and enforcement. This targeting of Lilliputian pockets of income will result in bad outcomes for taxpayers, 1099-K issuers, and the IRS. It will fuel illegal and cash economy transactions which often lead to more serious crimes,” the group said.
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