Staff Reports
Due to the Zelle tax loophole, many small businesses are at risk. The company claims that it is not required to report information related to its transactions to the IRS. However, a tax lawyer warned that some of these businesses might be affected by this rule.
Adam Brewer, a tax controversy lawyer, explained that the Zelle loophole is a way for companies to avoid paying taxes and dealing with the various administrative hassles that come with doing so. He said that the typical taxpayer is not affected by this rule.
Unlike other payment processors, Zelle does not have funds. As a bank-to-bank service, it handles automated clearing house transactions.
On its website, Zelle states that it does not issue forms 1099 for payments made through its platform.
However, since the IRS has recently issued regulations requiring third-party payment processing platforms to send a form to the agency along with their users, this rule applies to them.
Although the IRS's new threshold for reporting requirements applies to certain types of transactions, such as those made through Zelle, this does still not mean that the platform's transactions are not subject to the agency's scrutiny.
In January 2022, the IRS will require payment processing platforms to report certain types of transactions to the agency, such as those involving $600 or more. This new threshold is different from the previous one, which required these services to report transactions that were over $20,000.
The regulations issued by the IRS state that the threshold applies only to payments made for services and goods. It does not include certain types of personal expenses such as the rent or the cost of a friend's dinner.
Despite the small size of the American Rescue Plan's threshold, the requirement for self-employed individuals and small businesses to report their income remains the same. According to Brewer, the IRS's enhanced enforcement has allowed it to collect more information about the activities of small businesses.
The agency's goal is to catch individuals who underreport their income to avoid paying taxes. According to a study conducted by the IRS, unreported business activities cost the government billions of dollars. It also found that many Americans fail to report their income if it is not included in the automatic reporting system.
The IRS has gained more knowledge about the activities of online businesses, which means it can now keep a closer watch on the transactions made through Zelle and other payment processing platforms. Taxpayers should report any business transactions on these platforms on a timely basis.
Critics of the regulations claimed that they could negatively affect small businesses. They also stated that the regulations were the worst example of government overreach.
In addition to the regulations, the IRS was also granted an $80 billion budget increase, which included the hiring of 87,000 new agents. This has raised concerns about how the new rules and the additional funding will affect the operations of small businesses.
Despite the criticisms, Brewer noted that the IRS's enforcement actions were still focused on helping individuals and businesses prepare for the upcoming tax season.
Despite the increased scrutiny that the regulations have brought, Brewer noted that they have no bearing on the expectations of small businesses to report all of their income to the IRS.
He also expressed his concerns about the potential problems that the agency could face when it comes to the processing of business transactions. For instance, if a taxpayer has to provide proof that the transactions were not linked to their business income, the IRS might not be able to properly interpret the information.
Despite the fact that Zelle is not subject to the regulations, experts such as Brewer still advised taxpayers to avoid using the platform to evade the scrutiny.
The preceding is a summary of an article that originally appeared on The Daily Cable.
