IRS delayed its reporting rules targeting gig economy income, but a permanent fix is needed
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IRS delayed its reporting rules targeting gig economy income, but a permanent fix is needed

Taxpayers get one small, temporary reprieve from the government's ongoing crackdown on the sharing economy.

That not-so-joyous season is upon us. Tax season, that is.

Americans only have about a month left to file their taxes. Fortunately for many taxpayers, the Internal Revenue Service is delaying the implementation of new reporting requirements related to income received through payment and gig work platforms, including Uber, Lyft, Venmo, CashApp, and PayPal. The new requirements, set to go into effect next year, stem from tax code changes made by the Biden administration’s American Rescue Plan.

The IRS’s decision to delay the enforcement of new reporting requirements for gig work and payment platforms is a reprieve from the federal government’s ongoing crackdown on the sharing economy. However, this delay is only a Band-Aid solution that merely postpones the issue until the next tax season. Congressional action is necessary for a permanent solution that avoids unnecessary headaches for more casual participants in sharing economy.

To be clear, delayed reporting change isn’t a new tax. Individuals receiving payment for goods and services via third-party payment platforms are already required to report those payments as taxable income, and the new requirements don’t apply to non-business transactions between friends and family. The IRS is changing its reporting requirements on the part of the platforms, which will require platforms to report users’ business transactions directly to the IRS if they exceed $600 in a year.

The IRS can compare that information with an individual’s tax filing to catch unreported income. Previously, the reporting threshold was $20,000 and 200 individual business transactions. The new policy reflects a 97% reduction in the monetary threshold and does not set any threshold related to the number of transactions.

It might be difficult for many people to forget to report $20,000 in income, but it is much more likely and reasonable for someone to understandably overlook smaller Venmo transactions over the course of a year or a couple of hundred dollars from Uber. The unnecessarily low reporting threshold of $600 opens the door for these minor mistakes on the part of taxpayers to result in an audit. Regardless of whether this income is legally taxable, such a low threshold appears particularly punitive.

Gig work payment platforms have significantly lowered the transaction costs associated with earning side income and, as a result, are of great benefit to individual workers and overall economic growth. A 2021 Pew Research Center report found that 16% of U.S. adults have earned money through an online gig platform. Lower-income individuals and minority groups are among the most likely to have participated in gig work. According to the Pew report, 58% of gig workers said the money they earned over gig platforms was “essential or important for meeting their basic needs.”

But the technology-enabled gig economy is also associated with lower enforcement costs for the IRS relative to traditional types of informal or cash-based employment arrangements. The IRS’ new reporting requirements will make it much easier for agents to catch even small amounts of unreported income earned through gig work.

While these changes aren’t necessarily new taxes, they signal a shift in enforcement efforts that appears at odds with the Biden administration’s stated goals. The subsequent Inflation Reduction Act allocated $80 billion to the IRS, with most of the increased funding going toward business system modernization and enforcement efforts. The White House assured Americans that the additional resources would “go toward enforcement against those with the highest incomes, rather than Americans with actual income less than $400,000.” Yet, the IRS’ lower reporting thresholds for gig work income will likely result in increased enforcement actions against lower- and middle-income taxpayers who earn small amounts of money through side gigs.

It is fair to say that investing in enforcement could generate additional revenue. The Congressional Budget Office estimated that a similar $80 billion package could raise $207 billion in revenue through increased enforcement activities. However, these estimates do not consider how taxpayers may alter their behavior in response to the threat of enforcement actions.

As noted in a 2021 report from the U.S. Department of the Treasury, “rules and regulations governing tax procedures can advantage well-resourced and corporate taxpayers who have access to tax experts in ways lower-income taxpayers do not.” For example, wealthier individuals can afford to hire expensive lawyers and tax preparers to lower their tax burden within the confines of the law.

Meanwhile, lower-income Americans are more prone to making mistakes on their taxes and might be considered “low hanging-fruit” for the IRS to target in audits. While the IRS’ efforts to crack down on gig work income may increase tax revenue, most of that additional revenue will not come from the wealthy. Moreover, enforcement efforts that result from the new reporting requirements will likely harm lower-income gig workers the most.

Cracking down on gig work and boosting enforcement efforts are not good strategies for going after high-income tax avoiders. At the very least, Congress should consider increasing the reporting threshold. A much better approach would be to simplify the tax code, which might eliminate the loopholes that some lawmakers feel allow wealthier people to legally, but unfairly to low-income workers, reduce their tax burden. Rather than stifle the burgeoning gig economy, lawmakers should focus on identifying tax reforms that would provide workers with greater flexibility to establish their preferred work arrangements.