The IRS Crackdown: Third Party Cash Apps and Taxes
[ After this blog post was published the IRS updated the threshold from $600 to $10,000. I highly recommend businesses still continue to switch to a payment platform designed for business. Use of apps like Venmo, CashApp and Zelle for business use is still NOT allowed under those app guidelines.]
First, let’s clear up a few major misconceptions:
It's been all over the news, people are upset about it. With Venmo sending nearly 1 billion dollars to family and friends every month , it’s no wonder people are worried about their money being taxed. The IRS has put out a new proposal that would mandate banks to do due diligence on transactions of $600 or more. If they suspect you're not paying your taxes then they would have to take action. This is concerning for many because there is no way of telling how long this kind of monitoring will last or what specific criteria banks will use in order to flag suspicious payments. In today's blog post we're going to cover some important questions that you might have about these new regulations as well as offer some tips on how you can avoid getting into trouble with the IRS.
Are personal payments going to be taxed?
No! Have at least a little faith in your government, okay? Your personal payments would be monitored as part of the overall algorithm, but not taxed. I cannot tell you how many misleading headlines I have read indicating that. The IRS is seeking companies that are not paying their taxes. If you pay your roommate to split the rent or split a house for a weekend away with friends, relax; the IRS has not and will not tax anything regarded as personal. The diligence will rely heavily on AI and algorithms to discover significant trends that suggest commercial usage.
What if I am a business using one of these apps to send or receive payments and I always reports the income and expenses properly on my tax return?
That's fantastic that you're keeping track of your income and expenditures correctly on your taxes (I'm being serious! Running a business is difficult, be proud of yourself!). You are in good standing with the IRS, but you aren't supposed to utilize Venmo for business. When you enrolled in the program, you agreed to only use it for personal reasons. Because you are violating their rules, if discovered, you could be removed and locked out, creating a major headache! Business Venmo is a viable payment option since it takes fees into account and is geared toward business.
Many of the other payment platforms have fees! What if I can’t afford to pay the fees? What platforms do you recommend?
You can make it work, I swear! Increase your prices to cover it, or meet your clients in the middle and increase to cover 50% of the fees. Merchant fees are an inevitable expense of doing business and you will forget they are there once they become a norm. You're a legit business; act like one.
PayPal and Square are other good paid options.
Are there any options without fees?
Yes! Most banks allow a certain number of ACH payments each month, and some even provide unlimited options. Both RelayFi and Brex, my two favorite business bank providers, provide unlimited ACH payments. It's a fantastic alternative if you can make direct ACH payments work for your company.
Why is the IRS taking this action? What will the government gain from this proposed shift?
A few reasons. To begin, it's obvious that a lot of people and businesses in this country aren't paying their fair share of taxes. We used to refer to it as "tax planning" while I was working in public accounting... Anyways, this plan is supposed to prevent businesses from utilizing these personal apps to avoid tax. However; many are critical of this analysis since these apps in question have monthly limits of about 5-7K per month. Multiply that by 12 months and then again by the highest US personal tax bracket of 37%; at worst we are talking about 30K per year in avoided taxes. I know that is not nothing, but we are not taking down billionaires and tax shelters left and right with this proposal either.
From a logistical perspective, this is part of an 80B dollar funding increase for the IRS over 10 years, proposed by the Biden administration. The hope is that this funding increase would generate 700B in net revenue for the IRS over this period, which would in turn help to fund the social-spending bill. And I don’t know, maybe the funding could help the IRS answer the phone now and then? Maybe?
There are certainly a lot of privacy issues to sort through if this change comes to fruition, and I am anything but a privacy lawyer, so both you and I will have to wait to see exactly how this plays out. But as a CPA I can tell you that individuals making personal payments are in the clear, businesses should change to a platform designed for business payments even if that means incurring fees, and maybe just maybe, this funding will help you get your tax return sooner. But not making any promises on the last one!
Have more questions? Reach out!