WASHINGTON — This year, Dennis Turbeville, a woodworker in Washington, used the mobile payment service Venmo to sell his wares, collect payments on a rental property and split personal expenses with family and friends.
He carefully tracks income for his business, Austen Morris Custom Furniture, with QuickBooks software and works with an accountant to make sure everything he owes to the federal government is paid correctly.
But Mr. Turbeville is concerned that a recent tax change intended to crack down on tax evasion by small businesses and those operating in the “gig” economy will mean more paperwork and headaches from the Internal Revenue Service. He is hopeful that if there are any unintended discrepancies, his business will be too small to attract an audit.
A tweak to the tax code enacted last year was intended to ensure that those who use services such as Venmo, CashApp, Etsy, StubHub and Airbnb to collect money are reporting all their income to the I.R.S. The change was part of the Biden administration’s efforts to narrow the $7 trillion “tax gap” between revenue that is owed and revenue that is collected.
But for millions of Americans, the new requirement means additional tax forms, potentially higher tax bills and a lot of confusion. That is stirring anxiety among some of the middle-class taxpayers and independent business owners President Biden promised would spared from greater tax scrutiny.
“It is very confusing, and I can see how it would be very stressful for someone who didn’t have an accountant,” Mr. Turbeville said. “I feel very much in the dark about it.”
The new tax policy was tucked into the stimulus package known as the American Rescue Plan, which Democrats passed in 2021. It has gone largely unnoticed because it applies to income earned this year and affects taxes that most Americans will pay in 2023. It is projected to raise about $8 billion in additional tax revenue over a decade.
But as the impact of the rule and the prospect of surprise tax bills become clear, it is drawing pushback from business groups, lawmakers and others, prompting a scramble within the Biden administration to come up with a solution to avoid another chaotic tax season next year.
Senators Joe Manchin III, Democrat of West Virginia, and Bill Hagerty, Republican of Tennessee, are expected to try to scale back the tax measure by attaching amendments to the $1.7 trillion spending package that Congress is expected to pass this week. Business groups have been urging the Treasury Department to act on its own to delay the new requirements to avoid an administrative crisis at the I.R.S., which has been faulted by an internal watchdog for woeful customer service.
Before the rule change, services like Venmo supplied users with a snapshot of their income called a 1099-K form only if they received more than $20,000 and had more than 200 transactions. The forms were supposed to be submitted with tax returns to the I.R.S. and were intended to help determine how much a taxpayer owes.
Those thresholds were lowered to $600 for a single transaction this year, significantly broadening the number of people who receive such payments and who are likely to be required to pay more taxes.
Many taxpayers who run small businesses, or occasionally sell goods on the side, often mix their business and personal transactions. They could face messy fights with the I.R.S. if their tax forms erroneously show them making more income than they actually earned. In some cases, people who sell used items could face high tax bills for those sales if they cannot find old receipts that show how the value of those items depreciated from the time that they were purchased.
Kidizen, a website for buying and reselling children’s clothing and toys, is seeing some of its sellers drop off out of concern that they will face inflated — and incorrect — tax bills that they do not have the means to contest.
“We fear that this burden is causing so much confusion that it is going to deter casual sellers and parents from selling,” said Mary Fallon, co-founder of Kidizen. She explained that many people who sold used goods on the website would need to find old receipts to demonstrate to the I.R.S. that they did not profit from the sales.
“They’re selling kids clothes that were purchased years ago,” she said. “They don’t have these receipts anymore.”
Most policymakers agree that taxpayers should pay what they owe according to the law. However, backlash over the tax changes has given Republicans another avenue to criticize the Biden administration’s plans to empower the I.R.S. through an $80 billion overhaul.
Senator Rick Scott, Republican of Florida, proposed a legislative change last week to block the I.R.S. expansion and reverse the provision that requires broader reporting of financial transactions on payment apps.
“The Biden administration is also changing I.R.S. standards to begin tracking every financial transaction Americans make in excess of $600, including on CashApp, Venmo and PayPal,” Mr. Scott said. “It’s an outrageous violation of Americans’ privacy. It’s stuff we see in Communist China.”
Democrats have also been on the defensive over the law, and some, including Senator Maggie Hassan of New Hampshire, have called for amending it. Her legislation, the Cut Red Tape for Online Sales Act, would change the law so that online sellers did not receive tax forms showing their sales until those transactions topped $5,000. She has warned that “needless confusion caused by unnecessary tax forms risks burdening Granite Staters with undue taxes.”
Lobbyists representing online sales and payments platforms have engaged in a last-minute pressure campaign to persuade lawmakers to include such changes in a year-end spending package that lawmakers expect to pass this week. But it is not clear if there is sufficient political support to undo the measure.
Arshi Siddiqui, a partner at the law firm Akin Gump who is representing a coalition of businesses trying to change the new tax requirements, said she expected that as many as 50 million taxpayers would get new tax statements for the first time as a result of the measure in the American Rescue Plan.
“If Congress doesn’t act, we’ll see a tsunami of 1099s going out to people who will be confused,” Ms. Siddiqui said, adding that she thinks the Treasury Department could potentially change or delay the measure on its own.
Julia Krieger, a department spokeswoman, said that “Treasury and the I.R.S. are laser-focused on quickly identifying a solution to address any challenges taxpayers may face this filing season.”
Senator Ron Wyden of Oregon, the Democratic chairman of the Senate Finance Committee, told Treasury Secretary Janet L. Yellen this week that the I.R.S. must improve its communication with taxpayers over the new requirements and more clearly explain what kinds of transactions would be taxable.
“There has been significant confusion about this provision, and the I.R.S. needs to provide greater clarity to taxpayers as soon as possible,” Mr. Wyden said in a statement in which he recounted the conversation with Ms. Yellen.
The I.R.S. issued a warning this month to taxpayers who will be facing the new requirements for the first time. It urged them to make sure that they have all of their financial documents in order before they file their tax returns next year.
“A little extra caution could save people additional time and effort related to filing an amended tax return,” the I.R.S. said on its website.
The uncertainty surrounding the tax reporting change could strain the I.R.S. while it has been working to clear a backlog of millions of old tax returns and is in the midst of a leadership transition ahead of the confirmation of a new commissioner.
The scale of the change to the rules has also provided fresh fodder for critics of the I.R.S. and the Biden administration to argue that Mr. Biden is breaking his pledge not to raise taxes or increase audit rates on Americans who earn less than $400,000 per year.
“It’s all low-income people here,” said Grover Norquist, the president of Americans for Tax Reform, said. “Billionaires don’t have side gigs where they make money renting their room out.”
Allison Soares, a California tax lawyer, predicted that discrepancies on tax forms would be widespread because of the new policy and that the burden of proof would be on businesses to clear them up.
“I would anticipate more audits,” Ms. Soares said.
Big corporations have also been bracing for the worst.
Venmo, which is owned by PayPal, has been trying to prepare its users for tax changes that could affect them. It has been reiterating to customers that payments not specifically designated as being for goods and services will not be included on the 1099-K that the company provides to users and will not list individual transactions.
“Whether it’s splitting the bill for dinner, chipping in for a gift or just sending money to a loved one, PayPal and Venmo payments between two consumer accounts default as a Friends and Family transaction — ensuring they are not taxable or reportable to the I.R.S.,” said Tom Hunter, a PayPal spokesman.
But not all users are aware of the differences between Venmo’s business and personal accounts. There are concerns that some transactions could be lumped together.
Mr. Turbeville, the furniture maker, switched away from using Venmo’s business service this year because of the additional fees that the company charges, but tracks the business transactions that he uses on the “friends” setting manually. He is also expecting to get an additional tax form from Etsy associated with his sales on its website, which will make the tax season even messier for him this year.
Emily Cochrane contributed reporting.
