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Cash Payment Apps & New IRS Reporting Requirements
By January 31, people across the country will have received various tax forms containing information to be included in their annual federal income tax returns. Given some of the new Internal Revenue Service reporting requirements surrounding cash payment apps like Cash App, PayPal and Venmo, more taxpayers than ever before will be getting an IRS Form 1099-K for payments they received via their cash app account.
What is Form 1099-K?
The IRS relies on information provided by third parties such as employers, banks, and other payors to evaluate how much tax a person or business might owe. Based on this information, the IRS may assess taxes against the taxpayer via substitute for return (when taxpayer fails to file a tax return) or by making adjustments to the tax return (audit of a filed tax return).
Form 1099-k Payment Card and Third-Party Network Transaction is an informational tax form used to report payments received by a business or individual for the sale of goods or services that were paid via a third-party payment network.
The networks subject to the reporting requirements include payment apps and platforms such as Apple Cash, Cash App (formerly Square). eBay, PayPal and Venmo to name a few. Zelle maintains that it is exempt from reporting requirements because it is essentially an ACH network similar to a bank-to-bank network distinguishable from platform-to-taxpayer direct transactions.
Form 1099-K allows the IRS to check amounts reported on the form against amounts reported by taxpayers on their tax returns. Generally, if a payment was received for a good or service, it must be reported on your tax return.
What Triggers Issuance of a 1099-K?
The American Rescue Plan Act of 2021 changed the minimum reporting threshold for certain transactions. Beginning January 1, 2022, the IRS now requires third-party networks to report payments related to the sale of goods or services totaling $600 or more in the aggregate of the calendar year. Prior to this change, the reporting requirement threshold was significantly higher at $20,000 and only if the recipient had 200 or more business transactions within the year.
This means that if you used cash apps or any third-party payment networks like Venmo, PayPal, or eBay and received payments for the sale of goods or services exceeding $600 in 2022, those transactions will now be reported to the Internal Revenue Service.
Some people use cash payment apps for their business; however others use them for personal transactions involving gifts or reimbursements. If you failed to distinguish between gifts or reimbursements versus the sale of goods and services on your cash app account, you may receive a Form 1099-K for any such payments totaling $600 or more.
Based on the foregoing, it is anticipated that more taxpayers than ever before will be receiving IRS Form 1099-K’s. The forms for 2022 will be delivered by January 31, 2023.
What Do I Need to Report
While the new law requires new tax reporting requirements, it does not change the existing law with respect to taxable vs. nontaxable income. If you receive a 1099-K it generally includes the gross amount of all reportable payment transactions from a payment processor. You’ll receive a separate 1099-k from each processor that is reporting payments that you have received.
If you are a self-employed filer or working as an independent contractor or sole proprietor, you are required to report your 1099-K income and any other self-employment income using Schedule C of your 1040 federal income tax return.
If you have formed a separate legal entity for your business, 1099-K business income would be reported as follows: on Form 1120 for corporations, on Form 1120s for subchapter s corporations, and on Form 1065 for partnerships. LLCs will report income depending on how they are taxed (e.g., disregarded entity, corporation, or partnership).
If you sold items that you owned for personal use (e.g., an appliance, clothes, jewelry) on a third-party network like eBay, and the aggregate of payments you receive in the year total $600 or more, you will receive a Form 1099-K and you may be required to pay income tax on those payments. If you sold the personal item at a gain (sale price is greater than purchase price), that income is taxable. If you sold the personal item at a loss (sale price is less than purchase price), the loss is not deductible and such losses may not be combined to offset gains from the sale of personal items.
While you don’t need to claim gifts or reimbursements as income, and given that Form 1099-K is an informational tax form that can include amounts excludable from gross income for tax purposes, discrepancies between the income reported on your 1099-K and the income you report to the IRS on your tax return may trigger IRS scrutiny leading up to an audit.
How to Avoid the Issuance of Inaccurate 1099-Ks
If you use a credit or debit card reader or a third-party app such as PayPal in your business, you should avoid using it for non-business purposes. Otherwise, those payments will be included on your 1099-k unless the payment processor has a system for separating business and personal transactions.
Both PayPal and Venmo allow customers to tag peer to peer transactions as falling under either personal friends/family or goods and services. Users need to designate the appropriate category for each transaction.
If the network or platform does not have the ability to distinguish between personal gifts or reimbursements versus the sale of goods and services, you are encouraged to open separate accounts (business and personal) to differentiate between the two categories of payments.
Payments received as a gift or as reimbursement should not be included on Form 1099-k. However, if you fail to property categorize transactions for which you received payments on third party apps or platforms, this could result in generation of an inaccurate 1099-K. In this circumstance, you are encouraged to contact the issuer to have the form corrected or seek help from a tax attorney.
If you are unsuccessful in causing the issuer to correct the Form 1099-K, and if the IRS examines your tax return via audit to address discrepancies between your tax return and Form 1099-K, the burden will be on the taxpayer to establish that payments reported on the 1099-K do not constitute income from the sale of goods or services or capital gains income related to the sale of personal items.
Do You Need a Tax Attorney?
A competent tax attorney can help you understand your exposure to tax liability based on transactions that occur on cash apps or third-party networks, as well as address filing compliance and income reporting requirements.
At Segal, Cohen & Landis, our experienced tax attorneys have assisted hundreds of clients with IRS Form 1099-K issues by:
- Helping clients understand if their Form 1099-K is correct.
- Providing guidance as to how to correct the form and/or file the tax return notwithstanding.
- Representing clients at audit when there are discrepancies between the income clients reported on their tax return and the Form 1099-K.
- Challenging erroneous assessments via IRS administrative appeals.
- Resolving outstanding liabilities related to Form 1099-K via:
- Penalty Abatement (removal of penalties)
- Offer in Compromise (settlement)
- Installment Agreement before CSED (payment plan to fully pay the debt before it expires)
- Partial Pay Installment Agreement (payment plan based on ability to pay)
- Currently Not Collectible (hardship status)
- Tax Lien Removal
If you are interested in having a complimentary consultation with one of our partner attorneys regarding your tax matter, please feel free to contact us at 866-505-1872. We would be happy to speak with you and will advise you how we can resolve your case and how much it will cost.