IRS Crackdown on Digital Payments

Written by Jennifer Clark
Posted November 10, 2021

You’ve probably transferred or received money through a digital payment app like PayPal (NASDAQ: PYPL), Venmo, Square (NYSE: SQ), Cash App, and other similar apps. 

Using these apps has been an easy way for roommates to split the rent or friends to split the dinner bill. It’s even been a good way to send a payment or tip to someone for goods or services. 

Well, starting in January, you might be affected by a tax reporting alteration. Now, payment app providers will need to report to the IRS in regards to users’ business transactions. If a user's transactions total $600 or more for the year, that means that payment is defined as a good or service and will need to be taxed.

This hasn’t always been the case. Things were much simpler for these digital payment apps and their companies in the past. Currently (but only for a few more months), app providers only needed to send the IRS a Form 1099-K if an individual had at least 200 business transactions in a year and if they resulted in gross payments of at least $20,000. 

This is all an effort to enforce the reporting of taxable income and identify people who aren’t reporting. We all pay taxes. I’ve been getting taxes taken out of my paycheck since I started working at 16, so if anyone isn’t having their taxable income taxed it's a little infuriating and highlights an obvious loophole that has been encouraged through these digital payment apps. Even if you are tipping someone who provided a good or service, that qualifies as taxable income. 

Technically, it has always been an individual’s responsibility to report their income and any tips on their tax return, but probably not many people have been doing so. Now digital payment companies will have to provide information to the IRS to make sure that these individuals are fulfilling their responsibility and reporting their income correctly.

Scott Talbott, a spokesperson for the Electronic Transaction Association, said that "those who are tax evaders, who violated the self-reporting rules and utilized the old thresholds to avoid paying taxes" are the only people who should be worried about this new rule change in January, since they weren’t reporting their business transactions and income.

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However, the change could also cause some issues for users of these payment apps that don’t use the apps for business transactions. Mark Luscombe, a principal analyst for tax publisher Wolters Kluwer Tax & Accounting, raised the issue by saying:

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. 

It appears that things could get complicated for users of these payment apps. No one wants to get in trouble with the IRS because of their taxes, and it appears that there is going to be some confusion when it comes to filing them. 

PayPal is taking action to make sure that users of its Venmo app understand the upcoming procedures and changes. It put out a Q&A and made sure that its users know that the company will need additional personal information from them. PayPal said:

In the coming months, we may ask you to provide tax information like your employer identification number (EIN), individual tax ID number (ITIN), or Social Security number (SSN) if you haven’t provided it to us already.

The point of these apps was to simplify payments and give people an easy way to send money to someone else without visiting the ATM and taking out cash. Digital payment companies will need to be clear on what is changing and what users need to do to ensure that they don’t have to go through the headache of dealing with the IRS when it comes time to file their taxes.

I remember getting an email from PayPal, but I skipped over it, and I’m thinking it might be time to go back in and read that email, as things are about to change for these apps and deciphering business transactions from personal ones.

This news could be a factor as to why PayPal stock plummeted 10% on Tuesday.

Until next time,

Jennifer Clark
Pro Trader Today
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