IRS to Crack Down on P2P Payments

september 09, 2021 | internet security
2 people using peer-to-peer payment apps on their smartphones

If You Sell Goods or Services Using P2P Apps To Get Paid, the IRS Wants Its Overdue Taxes

If you use a peer-to-peer (P2) payment system for sales or services, the IRS has put the practice under a microscope. Last spring, the agency's Treasury Inspector General for Tax Administration (TIGTA) released a report indicating that the tax collector should beef up efforts to identify unreported income that travels via PayPal, Zelle, Venmo and other payment apps.

The Inspector General's work evaluated the "effectiveness of the Internal Revenue Service's efforts to identify unreported income transferred via peer-to-peer payment systems" and highlighted several ways to boost tax collections.

Of course, it's challenging to offer strong arguments against the government's desire to tax legitimate income, but this news could come as a significant shock for many freelance or part-time folks.

How P2P Works

When you're out to dinner with friends, the bill your ravenous group of five runs up equals $420. One person pays the tally, and the other diners each transfer $84 to the payer. Maybe your roommate pays the rent, and you Venmo her your share. The same apps send money seamlessly for small business buys, too. Crafters, freelancers and other online sellers have embraced these rapid transfer tools wholeheartedly.

Small businesses also use P2P, and websites like and rely heavily on one or more of these transfer apps.

Since PayPal first dipped its toe into the money transfer arena in 1999, the field has exploded. Venmo has even become a verb in the English language, as in "Venmo me $23 and we're square." Electronic transfers have become a way of life for a significant slice of the U.S. population, and they're here to stay.  

Reporting Income

Estimates indicate one trillion dollars circulate through these apps annually. PayPal is the largest operator in the field. Then comes Zelle, which handled over $300 billion in transfers last year. However, even the trillion-dollar figure could be a low guess when you add in CashApp, Venmo (owned by PayPal), Facebook Messenger, Payoneer, Square Up, etc.

PayPal's current practice on reporting only kicks out a 1099-k tax form report if the account holder's account receives 200 transactions and $20,000 in payments during a single calendar year. Venmo's policy clearly states that it does not send tax forms for personal accounts and discourages business accounts.

If a part-time entrepreneur earns $20,000 via a P2P app, they should receive a 1099-k at tax time. This practice complies with Section 6050W of the Tax Code, but TIGTA's report suggested drastically lowering the bar to $1,000 per year.

Instead, the recently signed American Rescue Plan Act of 2021 (ARPA) cut it even further. For the 2022 calendar year, the ceiling lowers to $600—which is also the threshold to receive a 1099 MISC for other types of work done on a freelance basis. Those changes will take effect during the 2022 filing season and bring in billions in new tax funds to pay for some of ARPA's price tag.

What Changes Will Look Like

This lost revenue totals billions of dollars and concerns the federal government greatly. "If the IRS is unable to identify non-compliance effectively, taxpayers may begin using P2P payment applications to conduct business, skirt third-party reporting, and avoid paying taxes on income," TIGTA authors wrote.

The IRS needs to redefine which cash handlers are Third Party Settlement Organizations or TPSOs. Only TPSOs need to comply with 1099-k reporting. If the business doesn't believe it fits under that umbrella, 1099-k forms aren't sent.

Of course, even without those forms in hand, taxpayers are expected to report all income. HOWEVER, the IRS believes that around 45% of them don't because they realize the IRS doesn't receive a form.

Data Risks

So, why is your data at risk? Those 1099-k forms in the mail contain tax ID numbers or Social Security digits, and your mailbox is a prime location for data theft.

In addition, P2P apps carry the risk of a data breach just like all other payment methods. If you store a credit card at one of these money share sites, what are your protections? Are those protections any different if you use a debit card?

You should know the details. Two different federal laws—the Fair Credit Billing Act and the Electronic Funds Transfer Act—protect credit, debit or other electronic transactions. If the data's used for fraud, you eventually get your funds back, but credit cards restore funds more rapidly.

Don't assume that no 1099-k means no taxes owed, either. That could result in a costly mistake.

Shield Yourself

When you pay for goods or services, please monitor the platform used to pay those bills. There's usually a credit card, debit card or bank transfer like Zelle to access your funds at its foundation. It's vital to understand how you're protected for purchase disputes like damaged or missing goods.

IDShield monitors member data 24/7 to know rapidly when any details are breached. That tracking includes SSNs, Tax IDs, credit and debit card figures and more. Check out IDS' free 30-day credit monitoring trial and see all we can offer to guard your valuable personal data.


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