Tax litigation attorney Adam Brewer breaks down the Zelle “loophole” to the new IRS rules on third-party payment processors and what it means for taxpayers.
Tax loophole lawsuit by Zelle puts small businesses at risk.
The payment network says the new IRS 1099-K reporting rule does not apply to them. However, one tax attorney issued a warning to business owners who rely on Zelle to avoid the taxman.
“If you want to think of it as a Zelle loophole, think of it as a loophole for Zelle,” said tax litigation attorney Adam Brewer. “They’re benefiting because now they don’t have to issue these forms and deal with these headaches. But nothing has changed for the average taxpayer.”
Unlike third-party payment processors, Zelle is an Automated Clearing House (ACH) banking service, meaning it does not hold cash.
Zelle said it does not issue 1099K forms (LightRocket via Rafael Henrique/SOPA Images/Getty Images/Getty Images)
According to Zelle’s website, it “does not issue 1099K forms for payments made on the Zelle network.”
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However, popular third-party platforms must file Form 1099-K with the IRS along with users if their activities meet the new threshold guidelines.
In an interview with tax dispute attorney Adam Brewer, he discusses the new IRS rules on third-party payment processors. ( / )
“Zelle is more like a check payment because it’s bank-to-bank. And check payments are never reported on a 1099-K, whereas Venmo is some of the other apps, they say, ‘Okay, it’s legal. debit card, credit card purchase. We are caught up in this new regulation. We’ll report it,” Brewer explained. “Zelle couldn’t say why it didn’t apply to us.”
Even though Zelle doesn’t file a 1099-K for small businesses to meet the new IRS threshold, that doesn’t mean transactions made on the platform aren’t exempt from reporting.
“You have to pay all your income, whether it’s reported on a 1099-K or not,” Brewer explained. “So I think these taxpayers, they’re really putting themselves at risk, getting a tax bill that they can’t afford, or if they don’t report all of their income, the possibility of that there’s an audit on the way for them.”
Zelle did not respond to a request for comment.
Internal Revenue Service (IRS) Building ((Kent Nishimura/Los Angeles Times via Getty Images)/Getty Images)
From January 2022 The IRS has a new limit To report third-party payments that require reporting of transactions of $600 or more from platforms like Venmo and PayPal. The new limit replaces previous guidelines that required these platforms to report gross payments that exceeded $20,000 and made more than 200 such transactions.
However, IRS rules make it clear that this limit is for goods and services, not personal payments for things like paying for dinner for a friend or paying rent to a roommate.
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The smaller threshold, created as a provision of the American Rescue Plan Act, did not change the basic requirement that small businesses or sole proprietors report their income. He simply added to Brewer’s “robust enforcement,” which encouraged the IRS to learn more about the activities of small businesses.
“Where [IRS regulation] It’s unclear how these platforms decide between a business transaction and a personal transaction, or what happens if a personal transaction is misclassified as a business transaction,” Brewer said.
“And I think legitimately a lot of people are concerned because it’s a brand new regulation and we haven’t seen it implemented yet,” he said.
The amendment aims to combat tax evasion by underreporting Americans’ gross income. at the IRS Federal tax return Research conducted between 2014 and 2016 found that unreported small business activity costs billions of dollars in taxes each year. It also found that Americans underreport income unless it is automatically reported.
The expanded understanding will allow the IRS to pay more attention to online transactions, which should encourage users to be more vigilant when reporting business transactions on Venmo and Zelle. Although platforms provide businesses with a 1099-K form, taxpayers are responsible for accurate reporting of business activity on networks like Zelle.
Grover Norquist, president of Americans for Tax Reform, discusses the impact of third-party payment processor apps reporting transactions over $600 to the IRS.
Critics say the new rules are the government’s worst and could hurt small businesses.
“I can tell you that the people who make $600 in Venmo transactions a year or sell $600 on eBay aren’t the richest people, they’re billionaires,” said former investment banker Carol Roth. “It’s squarely in the middle class and probably lower class to some extent.”
In addition to the American Rescue Plan Act, the Inflation Reduction Act increased IRS funding by $80 billion and added 87,000 agents. Experts are worried about how the new rules, additional funding and additional agents will affect small businesses and self-employed Americans.
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“The burden is very much on independent workers, independent contractors, freelancers, anyone who makes up the gig economy, because they see them as this unknown workforce, this wild workforce that needs to be tamed,” Independent Women said. senior researcher of the forum. Gabriella explained in an interview with Hoffman.
“They think we’re not taxing enough, even though we’re paying more than our fair share.”
However, Brewer said that while it’s natural to have a political conversation around “enhanced enforcement,” his main focus is on minimizing taxes and getting ready for tax season.
“For my clients, I don’t want them to focus too much on political motivations or why this happened or why Venmo is doing this or Zelle is doing it another way. We really want to look at the basic level, What is your reporting requirement? … And from my perspective, it doesn’t change anything.”
Sen. Mike Brown, R-Ind., on “Fox Business Tonight” explains the details of how the IRS began sending out 1099-K forms for some payments.
Brewer said these new rules do not affect small businesses’ expectations of reporting all taxable income to the IRS; Instead, it would increase the IRS’s “understanding” and potentially require more audits, which it said are “legitimate concerns for taxpayers.”
“If we take a big picture, step back, that doesn’t change the reporting requirement. They’ve always had to report. [income]. The IRS just has more information to investigate them.”
In response to fears about potentially inaccurate 1099-Ks, Brewer shared his concerns for taxpayers who have the added headache of proving that audits or transactions are not business-related income. can have . He argued that in this case, the IRS would put the “burden” on taxpayers to resolve the issue with the third-party platform.
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While Zelle may be exempt from the new IRS rule, experts, including Brewer, caution taxpayers against transferring business transactions to the platform to avoid scrutiny.
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“My advice is, you can call it a loophole, you can call it what you want, but at the end of the day it doesn’t change the basic tax reporting requirements that a small business will have, and that’s on you. report all your income,” Brewer said. “So whether it’s Venmo, PayPal, Zelle, some other app that I don’t know about, it has to be reported on the tax return.”
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Bloomberg’s Arianne Cohen and FOX Business’ Kristen Altus, Megan Henney and Hillary Vaughn contributed to this report.