New Internal Revenue Services rules could cause a sizable increase in audits and taxes on Americans, especially those using transaction services like Venmo and PayPal for fantasy sports, according to tax experts.
CPA and Tax expert attorney Bruce Willey told Fox News Digital that the new changes constituted one of the largest “cash grabs” by the IRS in recent memory and were likely to hit taxpayers “like a truck.”
“Most Americans are about to get run over, and they have no idea. If they’re not prepared for it, things could get pretty ugly for people,” he said.
The American Rescue Plan Act (ARPA) of 2021 amended a code section that decreased the minimum threshold for reporting on third-party settlement organizations (TPSOs) from $20,000 and 200 or more transactions to any transaction of $600 or more.
The code change, approved by Democrats and signed by President Biden in March 2021, will require TPSOs like Venmo, PayPal, Etsy, AirBnB and more to send 1099-k forms to the IRS and users if their transactions exceed the amount. If a sports betting application like FanDuel or DraftKings uses these payment systems, you will face taxes there, though sports betting is already included under the current tax code.
“It’s this huge fishing net that’s just going to sweep up a vast amount of people in America,” Willey said.
The code change will likely burden those engaged in sports fantasy leagues and sellers of professional sports tickets with additional obligations come tax season.
BakerHostetler Nationwide Tax Chair Jeff Paravano described a situation in which an individual sells preseason games at a loss but still gets a 1099 for gross proceeds. IRS oversight will not consider what they paid for those tickets or their losses on games and will have to provide further details,
The taxpayer may or may not have taxable income because of that reporting but could get a form for even selling one ticket, depending on the sale amount.
“Somebody that engages in a lot of fantasy sports. You can only deduct the losses to the extent of your winnings. So, you better be keeping receipts of your losses. That’s going to be a deduction for you on the money you received,” Paravano, a former Senior Adviser to the Assistant Treasury Secretary for Tax Policy, said.
Paravano said the changes were also likely to impact fantasy sports leagues with money wagers conducted by coworkers, friends and family members. He suggested the 1099 would be doled out for the gross amount and would not include the wager. Tax penalties are likely for the persons that held onto the money, who will receive a 1099 alongside the third-party payer used by the group.
“The fear is that the 1099 will be sent out for things that are not taxable income and the IRS doesn’t have the capability to easily figure that out,” he said.
Both tax experts suggested that the code changes could result in more audits and taxes for Americans or, at the very least, an increase in correspondence with the IRS.
Government leaders have repeatedly pushed back on the idea that the IRS changes would negatively impact any Americans making under $400,000.
“Legislators are being disingenuous,” Willey said. “This is one of those things where they say one thing while they are taking your campaign donation and then they turn around and go to Washington and do something completely different.”
“The reality of it is they said nobody making under $400,000 a year was going to have an increased chance of audit or pay more on taxes. That’s a flat lie. That’s not accurate. They’re lying to you,” he added.
National Taxpayer Advocate Erin Collins projected last week that the number of 1099s being filed would double once the code change goes into effect.
The Joint Committee on Taxation estimated that the new provision will raise 8.1 billion in revenue over a 10-year budget window.
Calling it a “stealth tax increase,” Willey said it is a “fantasy world” to think that the move will not increase audits and taxes.
“If it didn’t increase anybody’s taxes and didn’t increase their chances of an audit, then what are the 87,000 new employees going to do, where’s’ the 9.1 billion that the estimated it’s going to recover—where’d that number come from? It’s going to affect the fabric of American life,” he said.
Outside of fantasy sports, Willey and Paravano also asserted that the IRS changes would impact Americans in various other ways.
For example, sending money to a kid in college can be considered a gift under the current US tax code unless it exceeds $17,000. However, both parents and the student will still receive a 1099 to ask for proof.
“The horror is that a parent who pays rent to a college student every month, guess what, they may get a 1099,” Pavalano said.
The code changes will also cover transactions on Facebook marketplace, lending money to a friend, reimbursing a roommate for rent, paying a colleague for going out to dinner, repaying a bar tab, a mother sending a child gas and raising money to get a coach a gift.
If a transaction provider like Venmo or PayPal is being used and the amount compounds to over $600 within a year, a 1099 will likely follow.
Interestingly, taxpayers will not get a 1099 if they use Zelle because of the technical definitions of third-party settlement organizations. Generally, a check is the safest option to avoid triggering a 1099.
The IRS’ current information return volume is 4 billion annually, with 99% filed electronically. They just rolled out a 1099 electronic information return portal.
The new system is expected to increase the paperwork and cause more instances of mismatch between the IRS and the taxpayer.
“In a vacuum, one of those transactions doesn’t seem bad, but if we’ve got 4 billion information returns now, and we think that might double, there’s just going to be a lot of compliance burdens,” Paravano said.
“The thing that comes up in my mind is the image of the dog catching bus. You caught the bus, what do you do with it. You’ve got all this information out, and you’ve got all the reporting. What will the IRS do with it,” he added.
There is support in the House and Senate from both parties to raise the threshold to $5,000.
Republicans, according to Paravano, would prefer to go back to the previous threshold of 20,000 and 200 transactions, but it will be challenging to put old rules back in place given the concern around spending.
Willey described the situation as an “enforcement nightmare” for the IRS and a nightmare for the taxpayer.
“You should be calling your legislature and complaining if they voted for this bill to all ends,” he added.
A 2022 IRS tax audit data study found that a taxpayer in the lowest income bracket is five times more likely to face an audit than a member of the highest income bracket.
“The IRS correspondence audit process is structured to expend the least amount of resources to conduct the largest number of examinations – resulting in the lowest level of customer service to taxpayers having the greatest need for assistance,” taxpayer advocate Collins said of the report during an annual report to Congress.
The IRS in December said that it is the new tax reporting requirement by one year and would likely impact tax filings occurring in early 2024.
The IRS said the change was intended to home in on Americans evading taxes by not reporting their full gross income. However, critics have labeled it as government overreach likely to hurt middle-class Americans and small businesses.