CBO report: IRS audits will affect American taxpayers making below $400k
Geltrude & Company founder Dan Geltrude joined 'Cavuto Live' to discuss the massive expansion of the IRS after House Democrats passed the Inflation Reduction Act.
According to tax experts, new Internal Revenue Services (IRS) rules could cause a sizable increase in audits and taxes on Americans, especially those using transaction services like Venmo and PayPal for fantasy sports.
CPA and Tax expert attorney Bruce Willey told Fox News Digital that the new changes are so overbroad that they constitue one of the largest "cash grabs" by the government 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 by third-party settlement organizations (TPSOs) from $20,000 annually in cases of 200 or more transactions to $600 annually regardless of the number of transactions.
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1040 income tax form and w-2 wage statement with a federal Treasury refund check. Closeup with selective focusing. (iStock)
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 to recipients of cash if their transactions exceed $600 annually. 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. The IRS will not know what the individual paid for those tickets and the person receiving the Form 1099 may need to provide further details.
The taxpayer may or may not have taxable income because of that reporting but could receive a Form 1099 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. But, you better be keeping receipts of your losses. Those will be a deduction against any winnings 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 of winnings and would not be reduced by the wager. A 1099 also would be issued by the third party settlement organization to the person who collected the wagers and later doled out the winnings. Both the NCAA tournament or fantasy football organizer and the winners each may receive a 1099 for the gross amount received. Winners may deduct their wagers when computing the amount of tax due.
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The Paypal Holdings Inc. Venmo application is displayed in the App Store on an Apple Inc. iPhone in an arranged photograph taken in Washington, D.C., U.S., on Monday, July 23, 2018. (Photographer: Andrew Harrer/Bloomberg )
"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, including on some who have no increased taxable income.
"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.
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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 U.S. tax code unless it exceeds $17,000. However, the student will still receive a 1099 and may be asked to provide proof of the gift to avoid paying taxes on the amounts recieved.
"The horror is that a parent who pays rent to a college student every month, guess what, their child may get a 1099," Paravano 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 money and raising funds from parents to purchase a coach a gift.
If a transaction provider like Venmo or PayPal is being used and total amount received by any one person is $600 or more during a calendar 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 for items that are not taxable income.
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, increasing information reporting doesn't seem bad. It certainly is in everyone's interest to make sure taxes are being paid on all forms of taxable income. But if we've got 4 billion information returns now, and we think that might double, there's going to be a lot of uneccesary noise in the data provided to the IRS and 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 new information 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.
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US President Joe Biden speaks about the American Rescue Plan from the Roosevelt Room of the White House in Washington, DC, on February 27, 2021. (Photo by ANDREW CABALLERO-REYNOLDS | Daniel Acker/Bloomberg via Getty Images)
Some 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 budget deficits.
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.
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The IRS in December said that it is delaying the new tax reporting requirement by one year and that the new rules will be applied to tax filings occurring in early 2024.
The IRS said the change was intended to hone in on Americans evading taxes by not reporting their full gross income. However, critics have labeled it as an overbroad government overreach likely to hurt middle-class Americans and small businesses. There is likely still time for Congress to make changes.