Online platforms such as PayPal, Venmo, Airbnb, Facebook Marketplace and eBay — among others — have altered how individuals earn money and, more significantly, how they get paid for these goods and services. However, a short paragraph in the American Rescue Plan Act of 2021 may create unintended consequences for the IRS and big headaches for those receiving payments through these “Third-Party Settlement Organizations.”
First, the Congressional Research Service points out that the rules for taxpayers reporting individual income are not new. “Reporting requirements do not change the tax obligations of taxpayers. Taxpayers are required to report all the income they receive, in any form they receive it, whether it is reported by a third party to the IRS or not, unless the income is statutorily or otherwise excepted from the computation of taxable income.”
Nevertheless, it should come as no surprise that much of the income derived on these platforms is never reported to the IRS. Why? First, millions of people use these platforms on a regular basis and do not consider their relatively few transactions to be a real business. Second, when specifically using PayPal and Venmo, users often tag payments to “friends and family” when sending money for “goods and services” to avoid fees and reporting requirements. The “friends and family” option is supposed to be selected when paying someone back a debt or gifting money – think splitting a restaurant bill or…