Small businesses are at risk due to a tax loophole claim made by Zelle.
The third-party payment processor claims that they are exempt from the new IRS 1099-K reporting rule. To business owners who are relying on Zelle to evade taxes, one tax lawyer has issued a warning.
Tax controversy lawyer Adam Brewer told Fox News Digital, “If you’re going to think of it as a Zelle loophole, think of it as a Zelle loophole.” “They are the ones who gain from it since they are no longer required to issue all of these forms and deal with these hassles. However, there have been no changes for the typical taxpayer.”
As a bank-to-bank service that handles automated clearinghouse (ACH) transactions, Zelle differs from third-party payment processors in that it does not hold funds.
According to the website for Zelle, “1099K forms are not issued for payments made on the Zelle Network.”
However, well-known third-party platforms must send a 1099-K form to the IRS along with their users if their activity meets the new threshold requirements.
Even though the IRS’s new threshold applies to small businesses that use Zelle, this does not mean that the platform’s transactions are not exempt from reporting requirements.
The IRS has a new threshold for reporting third-party payments, starting in January 2022, necessitating the reporting of transactions totaling $600 or more by services like Venmo and PayPayl. The previous guidance, which demanded that these platforms report gross payments that exceeded $20,000 and made more than 200 such transactions, has been replaced by the new threshold.
The IRS regulations are clear that this threshold only applies to payments for goods and services, not to personal expenses like paying a friend back for dinner or a roommate’s rent.
The American Rescue Plan Act’s smaller threshold hasn’t altered the essential requirement that small businesses or self-employed people disclose their income. Simply by adding what Brewer referred to as “enhanced enforcement,” the IRS now has more knowledge of small business activity.
The modification aims to crack down on Americans who underreport their gross income in order to avoid paying taxes. Unreported small-business activities cost the federal government billions of dollars in taxes, according to research found in an IRS report on federal tax compliance between 2014 and 2016. It also found Americans underreport income if it is not automatically reported.
With more knowledge, the IRS is able to keep a closer eye on online transactions, which should encourage users to report business transactions on Zelle and Venmo promptly. Taxpayers will still be responsible for truthful reporting for business activity on networks like Zelle, regardless of whether platforms issue businesses a Form 1099-K.
According to critics, these new regulations represent the worst kind of governmental overreach and could ultimately be detrimental to small businesses.
The Inflation Reduction Act increased IRS funding by $80 billion and added 87,000 agents in addition to the American Rescue Plan Act. Experts are concerned about how the new rules, extra funding, and extra agents will affect Americans who own their own businesses and self-employed people.
Although there would undoubtedly be political discussion about the “enhanced enforcement,” Brewer countered that his focus was on how to reduce taxes and get ready for tax season.
Brewer emphasized that the increased “insight” that these new regulations give the IRS could lead to more audits, which he says is a “legitimate concern for taxpayers,” but they have no bearing on small businesses’ expectations to report all taxable income to the IRS.
Brewer expressed his concerns for taxpayers who might have to deal with audits or having to prove that transactions were not related to business income in response to worries about potentially incorrect 1099-Ks. He observed that in this instance, the IRS places the “burden” of fixing the problem with the third-party platform on the taxpayers.
While Zelle may be exempt from the new IRS rule, experts including Brewer caution taxpayers from moving business transactions to the platform to evade the oversight.
