“Will I Have to Report Money to the IRS That I Receive From Friends and Family, and Be Taxed On It?”
With the passage of the American Rescue Plan that was passed in March 2021, the threshold for 3rd party processors to report transactions to the IRS via a 1099-K was reduced from $20,000 to $600.
The New IRS Reporting Law
That is a significant reduction in the reporting threshold. And it is not reporting a single transaction over $600, but if the totality of your transactions exceeds $600, then you will receive a 1099-K and a copy of it will be reported to the IRS. But what does that actually mean and what real impact does that have on Americans?
1. The IRS has always required reporting.
For starters, the IRS has always required a taxpayer to report all of their taxable income regardless of receiving a 1099 or not. We have clients all the time ask us:
“Well, if the client pays me in cash, do I have to report it?”.
And our snarky response is:
“If you would like to stay out of jail, then yes, you should report it.”
But what is the practical application of not reporting $200 of cash sales? While technically still tax evasion, it really is not a significant amount that will get the ire of the IRS to care and prosecute.
2. So, why does the IRS focus on it now? Two words–Gig Economy.
There has been a huge increase in people making money on the side in what is now called the “gig” economy. Perhaps the pandemic thrust this into the mainstream as so many people were laid off due to the pandemic and looked for other ways to make income. Or perhaps because of the pandemic, people realized that they could make money easier than they thought and pursued this avenue.
Regardless of what caused this, the end result is that there is a significant amount of transactions that were not being reported properly on a taxpayer’s tax return and were flying under the radar of IRS scrutiny. And now the unpaid taxes are of an amount that has caught the attention of the IRS to force a crackdown to enforce the already existing rule: you must declare all your taxable income.
3. Sending Family Money & Reimbursing Friends
“But what about when I send my daughter $500 per month to help with her college expenses? Does she have to report that as income now? Or what about if my friends reimburse me for dinner and Broadway show tickets? Do I have to declare that as income?”
The short answer is: No, that type of payment is a reimbursement and therefore not taxable income. Taxable income would be derived from selling goods or services through these apps, not reimbursing a friend for dinner or giving your daughter an allowance.
“But what if Venmo does not know that and issues you a 1099-K anyway? Then what? Do I have to report it?”
And here is the longer and more complicated answer:
- No, but you need to be able to prove/defend that the payments were not taxable income. Meaning that you will have to show the IRS, via documentation (i.e. proof), that these payments were not for goods and services, but merely reimbursements.
- And to add to the complexity, you do not send in that documentation until you are asked by the IRS. The IRS will send you an audit letter asserting that you did not claim all of the income that you should have and send you a revised return with a bill and associated penalties plus interest.
- When will they send this? Who knows, but they have up to 6 years in some cases to conduct an audit.
4. What should you do to protect yourself?
The IRS is hiring 87,000 agents to conduct audits on small business owners.
And whether you are or not, if you get a 1099-K the IRS is going to think you are a business and look to audit you. Even if you received the 1099-K in error, you will still be on the IRS radar.
First thing–If you use VENMO or PayPal, then you need to call us and sign up for our new product offering: Tax Shield. This product covers our fees for representing you through an audit and includes suggestions to protect yourself now so that you are prepared to fight and win an audit with your CPA having your back. No one wants to fight the IRS alone – so DON’T!