IRS sets sights on small online sellers
Online platforms such as PayPal, Venmo, Airbnb, Facebook Marketplace and eBay — among others — have altered how individuals earn money and, more significantly, how they get paid for these goods and services. However, a short paragraph in the American Rescue Plan Act of 2021 may create unintended consequences for the IRS and big headaches for those receiving payments through these “Third-Party Settlement Organizations."
First, the Congressional Research Service points out that the rules for taxpayers reporting individual income are not new. “Reporting requirements do not change the tax obligations of taxpayers. Taxpayers are required to report all the income they receive, in any form they receive it, whether it is reported by a third party to the IRS or not, unless the income is statutorily or otherwise excepted from the computation of taxable income.”
Nevertheless, it should come as no surprise that much of the income derived on these platforms is never reported to the IRS. Why? First, millions of people use these platforms on a regular basis and do not consider their relatively few transactions to be a real business. Second, when specifically using PayPal and Venmo, users often tag payments to “friends and family” when sending money for “goods and services” to avoid fees and reporting requirements. The “friends and family” option is supposed to be selected when paying someone back a debt or gifting money – think splitting a restaurant bill or sending funds to a kid in college.
Venmo’s website directs, “Venmo may NOT otherwise be used to receive business, commercial or merchant transactions, meaning you CANNOT use Venmo to accept payment from (or send payment to) another user for a good or service, unless explicitly authorized by Venmo.” However, it is the buyer who ultimately chooses (at least for now) whether to tag a transaction as a “good or service” when paying a personal account.
They go on to say, “All payments sent to business profiles on Venmo are tagged as purchases automatically and are therefore considered to be for goods and services.” Those businesses pay a fee that typically falls in the 2% to 3% range that provides some level of fraud protection for both the buyer and the seller.
How a buyer tags a transaction with an individual, though, highlights the potential issues. Prior to 2022, it likely did not matter how a transaction was tagged because a seller had to receive at least 200 payments for “goods and services” in a year and at least $20,000 in gross payments. The law changed the reporting requirements for these TSPOs to a threshold of just $600 in a calendar year for those receiving payments for a “good or service” with no minimum transaction number.
Imagine this scenario: An individual lists a dozen items over the course of the year on Marketplace at an average price of $100. On half the transactions, the buyer completes the purchase through the Marketplace payment platform. Per the new reporting requirements, the seller will receive a 1099-K in January 2023 reporting $600 of income. The seller now has reportable income of $600 that must go on their 2022 tax return.
The IRS and most TSPOs point out that individuals can offset income by deducting the cost of the good sold – essentially the basis of the item. But how are people supposed to prove what they paid for a bicycle — or a couch, table saw or handbag— they may have had for years? What about dozens of clothing items? Should consumers now be expected to keep a receipt indefinitely for any item they may someday sell?
When reached for comment, Venmo pointed to their “2022 Tax FAQ” web page. To their credit, it is quite thorough in outlining these changes. Meta, the parent company of Facebook, did not respond to a request for comment, and their web page on 1099-K reporting has not been updated with the new tax rules as it still outlines 2021 requirements.
This new rule will only encourage tagging transactions as a payment to “friends and family” when it clearly is not, which inevitably will lead to more scammers successfully ripping people off. It is not really an option when selling through Marketplace or eBay to argue that a sale is for anything but a “good or service.” As such, selling Aunt Martha’s Hummel collection on eBay for $1,000 that she paid $10,000 for will come with the bonus of a 1099-K — better hope she kept those receipts.
Tim Sullivan is the owner of Clarity Financial LLC, a fee-only advisory firm in Columbia, a CFP practitioner and member of the National Association of Personal Financial Advisors and has earned the Enrolled Agent designation from the IRS.
This article originally appeared on Columbia Daily Tribune: IRS sets sights on small online sellers
