TaxProf Blog

Editor: Paul L. Caron, Dean
Pepperdine University School of Law

Monday, May 22, 2017

WSJ:  The Blind Spot In The Sharing Economy — Tax Collection?

Airbnb uberWall Street Journal Tax Report: The Blind Spot in a Sharing Economy: Tax Collection, by Laura Saunders:

A loophole is helping gig-economy workers, online sellers and home-sharing hosts cheat on their taxes.

Under a law enacted in 2008 and later clarified by the Internal Revenue Service, many online-platform businesses that connect buyers and sellers and take credit-card payments, such as Airbnb, TaskRabbit, Etsy and ride-sharing firms, fall into a special category.

These businesses have to report a provider’s income to the IRS only if that person earns more than $20,000 and has more than 200 transactions. In that case, the company sends both the provider and IRS a Form 1099-K listing gross income.

By contrast, freelance workers who don’t use such platforms often face a much stiffer reporting threshold of $600 for Form 1099-MISC. For example, if a hardware store pays a plumber $750 directly for work done, the store is supposed to send both the IRS and the plumber a 1099-MISC listing that amount.

The double-pronged threshold of Form 1099-K is so high that many gig workers fall below it—and are often tempted to omit the earnings from their tax returns. ...

The broader issue here is how important it is for the IRS to receive notification of payments for goods or services, such as through 1099 forms. According to an IRS study, taxpayers skipped reporting only 7% of income ($15 billion) if the agency received notification about payments. On the other hand, taxpayers skipped reporting 63% of income ($136 billion) if it was subject to little or no IRS notification.

Gig-economy firms vary in how they handle this issue.

The ride-sharing giant Uber submits 1099-K forms for all drivers who earn income, although it isn’t required. Drivers also get 1099-MISC forms if they earn payments for referrals. Rival Lyft changed its policy this year so that drivers earning $600 or more now get 1099-Ks. ...

While some gig workers mean to cheat Uncle Sam, experts say others are bewildered by tax requirements that can be almost as complex for the owner of a microbusiness as for a much larger firm. Many know nothing about Schedule C (for a small business), payroll taxes and quarterly estimated payments. Often they’re unaware of valuable write-offs as well.

“The government isn’t getting the money it’s owed, and workers aren’t taking the deductions and offsets they’re allowed,” says Caroline Bruckner, managing director of the Kogod Tax Center at American University, who studies microbusiness issues. In a survey she conducted of self-employed business owners working in the gig economy, 69% reported receiving no tax information from the platform they used.

Previous TaxProf Blog coverage:

http://taxprof.typepad.com/taxprof_blog/2017/05/the-blind-spot-in-the-sharing-economy-tax-collection.html

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Comments

I'm positive IRS bigwigs are waking up in a cold sweat over this. It is their worst nightmare. When I was a young revenuer in the late '70s, the IRS once had us drop everything and chase after independent contractors because congress was looking into employees v contractors (yes, this is the issue that never goes away). I ended up knocking on doors of people living under the ship channel bridge in Houston (yes people live there) trying to see if they had filed tax returns for their 1099 work. As a white guy in a suit, I couldn't get anybody to talk to me. I left when the kids started throwing firecrackers at me. True story.


Posted by: Dale Spradling | May 23, 2017 5:51:34 AM