WASHINGTON — This year Dennis Turbeville, a woodworker in Washington, used the mobile payment service Venmo to sell his wares, collect payments for a rental home, and share personal expenses with family and friends.
He carefully tracks earnings for his company, Austen Morris Custom Furniture, using QuickBooks software and works with an accountant to make sure everything he owes the federal government is paid properly.
But Mr. Turbeville worries that a recent tax change designed to crack down on tax evasion by small businesses and companies operating in the “gig” economy will create more paperwork and headaches from the Internal Revenue Service. He’s hopeful that if there are any unintended discrepancies, his company will be too small to attract an audit.
An adjustment to the tax code introduced last year was designed to ensure that those who use services like Venmo, CashApp, Etsy, StubHub and Airbnb to raise money report all of their income to the IRS. The change was part of the Biden administration’s effort to narrow the $7 trillion “tax gap” between revenue owed and revenue collected.
But for millions of Americans, the new requirement means extra tax forms, potentially higher tax bills and a lot of confusion. That raises concerns among some middle-class taxpayers and independent entrepreneurs whom President Biden promised would be spared more tax scrutiny.
“It’s very confusing and I imagine it would be very stressful for someone who doesn’t have an accountant,” said Mr. Turbeville. “I’m very in the dark about it.”
The new tax policy was tucked into the stimulus package known as the US bailout, which Democrats passed in 2021. It has gone largely unnoticed because it applies to income earned this year and affects the taxes most Americans will pay in 2023. to raise about $8 billion in additional tax revenue over a decade.
But as the rule’s impact and the prospect of surprise tax bills become apparent, it is meeting resistance from business groups, lawmakers and others, leading to a battle within the Biden administration to come up with a solution to avoid another chaotic tax season next year. appearance. .
Senators Joe Manchin III, Democrat of West Virginia, and Bill Hagerty, Republican of Tennessee, are expected to try to scale back the tax measure by making changes to the $1.7 trillion spending package that Congress is expected to approve this week . Business groups have urged the Treasury Department to act on its own merits to delay the new requirements to avoid an administrative crisis at the IRS, which has been criticized by an internal watchdog for woeful customer service.
Before the rule changed, services like Venmo only provided users with a snapshot of their income, called a 1099-K form, if they received more than $20,000 and had more than 200 transactions. The forms were intended to be filed with the IRS with tax returns and were intended to help determine how much a taxpayer owes.
Those thresholds were lowered to $600 for the entire year, regardless of the number of transactions, significantly expanding the number of people receiving such payments who are likely to pay more taxes.
Many taxpayers who run small businesses, or occasionally sell goods, often combine their business and personal transactions. They can face messy battles with the IRS if their tax forms falsely show they earn more income than they actually earned. In some cases, people who sell used items may face high tax bills for those sales if they can’t find old receipts that show how the value of those items decreased from the time they were purchased.
Kidizen, a website that buys and resells children’s clothes and toys, is seeing some of its sellers pull out over concerns they’ll face inflated — and inaccurate — tax bills they can’t challenge.
“We fear that this burden will create so much confusion that it will deter casual sellers and parents from selling,” said Mary Fallon, co-founder of Kidizen. She explained that many people who sold used goods on the website would have to find old receipts to prove to the IRS that they didn’t profit from the sale.
“They sell children’s clothes that were bought years ago,” she said. “They don’t have those receipts anymore.”
Most policymakers agree that by law, taxpayers should pay what they owe. Opposition to the tax changes, however, has given Republicans another opportunity to criticize the Biden administration’s plans to empower the IRS through an $80 billion review.
Florida Senator Rick Scott proposed a bill last week to block the IRS expansion and overturn the provision requiring broader reporting of financial transactions on payment apps.
“The Biden administration is also changing IRS standards to begin tracking every financial transaction Americans over $600 make, including on CashApp, Venmo and PayPal,” Scott said. “It is an outrageous invasion of Americans’ privacy. They are things we see in communist China.”
Democrats have also defended the bill, with some, including New Hampshire Senator Maggie Hassan, calling for it to be changed. Her legislation, the Cut Red Tape for Online Sales Act, would change the law so that online sellers would not receive tax forms showing their sales until those transactions surpassed $5,000. She has warned that “unnecessary confusion caused by unnecessary tax forms threatens to burden Granite Staters with unnecessary taxes.”
Lobbyists representing online sales and payment platforms have launched a last-minute push to convince lawmakers to include such changes in a year-end spending package that lawmakers expect to approve this week. But it is not clear whether there is enough political support to reverse the measure.
Arshi Siddiqui, a partner at the law firm Akin Gump that represents a coalition of firms seeking to change the new tax requirements, said she expected as many as 50 million first-time taxpayers would face new tax returns as a result of the measure in the US Rescue Plan.
“If Congress does nothing, we will see a tsunami of 1099s going out to people who will be confused,” Ms. Siddiqui said, adding that she thinks the Treasury Department could potentially amend or delay the measure itself.
Julia Krieger, a spokeswoman for the department, said that “Treasury and the IRS are laser-focused on finding a resolution quickly to address any challenges taxpayers may face this filing season.”
Oregon Senator Ron Wyden, the Democratic chair of the Senate Finance Committee, told Treasury Secretary Janet L. Yellen this week that the IRS needs to improve its communication with taxpayers about the new requirements and explain more clearly what types of transactions are taxable .
“There is great confusion about this provision and the IRS should provide more clarity to the taxpayer as soon as possible,” Mr Wyden said in a statement recounting 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 make sure they have all their financial documents in order before filing their tax returns next year.
“A little extra caution can save people extra time and effort when filing an amended tax return,” the IRS said on its website.
The uncertainty surrounding the tax return amendment may put pressure on the IRS as it has worked to clear a backlog of millions of old tax returns and is in the midst of a leadership change awaiting the confirmation of a new commissioner.
The magnitude of the rule change has also provided new fodder for critics of the IRS and the Biden administration to argue that Mr Biden is violating his pledge not to raise taxes or raise audit rates on Americans earning less than $400,000. earn per year.
“It’s all low-income people here,” said Grover Norquist, the president of Americans for Tax Reform. “Billionaires don’t have side gigs where they make money by renting out their room.”
Allison Soares, a California tax attorney, predicted that discrepancies on tax forms would be widespread because of the new policy and that the burden of proof would be on companies to resolve them.
“I expect more audits,” Ms Soares said.
Large companies are also bracing for the worst.
Venmo, which is owned by PayPal, has been trying to prepare its users for tax changes that could affect them. It has reiterated to customers that payments not specifically intended to be for goods and services will not be included in the 1099-K the company provides to users and will not list individual transactions.
“Whether it’s splitting the bill for dinner, paying for a gift, or sending money to a loved one, PayPal and Venmo payments between two consumer accounts are executed as a friends and family transaction by default – to make sure to ensure they are not taxable or required to be reported to the IRS,” said Tom Hunter, a PayPal spokesperson.
But not all users are aware of the differences between Venmo’s business and personal accounts. There is concern that some transactions may be lumped together.
Mr. Turbeville, the furniture maker, stopped using Venmo’s business service this year because of the extra fees the company charges, but manually records the business transactions he uses in the “friends” setting. He also expects to receive an additional tax form from Etsy related to his sales on his website, which will make tax season even messier for him this year.
Emily Cochrane reporting contributed.
