Uncle Sam and Your Venmo Account

Update to This Blog Dated 12/26/2022:

As I suspected would happen in my original Blog post below, the IRS has now delayed this new 1099-K reporting requirement for one year.

Original Blog Dated 12/14/2022:

According to Benjamin Franklin there are only two certainties in life – death and taxes.  With the passage of the American Rescue Plan in March 2021, the third and final pandemic stimulus package, Congress brought Benjamin Franklin’s quote front and center once again. Uncle Sam is now asking for visibility into your digital payment platform accounts such as your Venmo or PayPal accounts. 

Let me explain...

In today’s digital world, it is not uncommon for anyone of us to try and sell an old couch or a collectible on eBay, Etsy or Facebook Marketplace.  We might reimburse a friend for dinner or to pay our hair stylist or nail salon using Paypal or Venmo.  Many of us order food using Uber Eats or stay in an AirBnB property for vacation.   These digital payment platforms and e-commerce websites are now an integral part of almost everyone’s day-to-day lives.

Now enter Uncle Sam…

In a very quiet fashion (this provision has received very little media attention) the American Rescue Plan (Section 9674) mandated that beginning in 2022 all digital payment platforms and e-commerce websites must report all cumulative transactions >$600 made by a person on Form 1099-K.  So, for example, if you happened to sell three home furnishing items on eBay over the course of 2022 and your cumulative sales revenue from these three transactions was >$600, eBay is required to file form 1099-K to the IRS to alert them of the cumulative revenues you have received over the course of the year. 

This new reporting requirement is only mandated for the sale of goods and services for business-type reasons. Personal gifts and/or personal reimbursements are not subject to this new rule.  However, it remains to be seen whether these digital payment platforms and e-commerce websites will be able to decipher whether a movement of money was for personal or for business reasons.

Now let’s put this new mandate in perspective…

Prior to 2022, Form 1099-K’s reporting requirements were mandated when a person had cumulative transactions >$20,000 during the calendar year and they had made >200 transactions.  Moving the cumulative transaction total down to $600/year and eliminating any minimum number of transactions has now opened most of us up to these new 1099-K reporting requirements and to possible IRS scrutiny thereafter. 

Pair this new 1099-K reporting requirement with the recent passage of the Inflation Reduction Act, which included investing $80 billion over 10 years in hiring and training more IRS agents and in modernizing their technology and improving their taxpayer services, and you start to see a pattern – Uncle Sam would like to get to know you a little better.

I get it, the IRS wants business owners and people making money from a hobby or gig to properly report their revenues.  I am all for honest and fair tax reporting, especially if it means more tax revenues being paid into the US Treasury’s coffers to help combat our growing deficits, but this new 1099-K mandate could be perceived as petty, intrusive and very hard to monitor and report. 

I used to be an Auditor for a reputable CPA Firm. When you audit a company you need to set an appropriate level of materiality based on that company’s overall size or else you would never finish the audit.  There are not enough hours in the day to review every transaction so you set an appropriate level of materiality.  In the case of this new 1099-K reporting requirement, $600 is not an appropriate amount from a materiality standpoint.  Setting this mandate this low is going to add a lot of administrative work for all of these companies, not to mention all of the questions it is going to raise when a consumer receives their 1099-K in the mail and wants to refute the amount being reported.

Couple this with the fact that this new mandate may not have given these platforms and websites enough time to get their reporting systems up and running.  In order for any of these companies to appropriately file a 1099-K on anyone’s behalf, they will need to have your social security number.  I have an eBay account, I’m on Facebook, Venmo and Paypal, yet none of these services required me to provide them with my social security number when I opened up my account.  Apparently these platforms have begun to ask for your tax identification or social security number once they felt you have passed over the 1099-K reporting threshold.  If you refuse to provide this information to them, they are putting a ‘hold’ on your current and future account balances until you provide them with this information.     

In the end, my guess is that this new mandate will need to be re-worked at some point in the near future as it is just too hard to monitor and too intrusive in its current state. Maybe that is why it is not getting any media attention.  Maybe it is a foregone conclusion that this provision of the American Rescue Plan will need to be re-worked or suspended altogether in the near future.  We can only hope.

Until then, Benjamin Franklin is rolling over in his grave.