If a tax law perplexes the public, it also makes life difficult for the IRS

Drama over the IRS is now mostly confined to Congress. The agency has returned more or less to normal, dealing with the day-to-day complexities of taxes. The T...

Drama over the IRS is now mostly confined to Congress. The agency has returned more or less to normal, dealing with the day-to-day complexities of taxes. The Taxpayer Advocate Service has also been dealing with vexing, if not existential issues. To review a few of those issues, Federal Drive with Tom Temin spoke with the National Taxpayer Advocate herself: Erin Collins.

Interview Transcript:

Tom Temin And one of those vexing day to day, plain old fashioned tax administration issues concerns this 1099 K form. This is a form that was. Is it new? Is it revised? And I guess a lot of people don’t understand what they’re supposed to do with it. And the Taxpayer advocate service is jumping in here.

Erin Collins So the challenge is Congress changed the law about a year ago. And I think a lot of small companies and individuals were not really impacted because the law required that third party companies such as the Venmo, the CashApp, a PayPal, that they would file these forms, but the amount was for $20,000 or more, or you had more than 600 transactions. So most of the individuals that use the venmo’s of the world did not meet that requirement, but the law was changed to drop that down to one transaction of $600 or more. So needless to say, I suspect millions of taxpayers are now going to fall into that bucket. So that’s a real challenge. Last year, the IRS postponed the reporting date. Right now, it is scheduled to start in 2024. So if you are an individual and you’re using again, we’ll use Venmo for purposes of discussion. Venmo, for example, you and I have lunch once a month and I want to use my credit card so I can get my points. And so you reimburse me through Venmo. And by year end, we have more than $600 of charges. I will then get a 1099 K for Venmo for what is not a taxable event. So that’s a real challenge for folks as we need to make sure that the consumers, the taxpayers are correctly reporting those transactions to Venmo so that Venmo does not then issue a 1099 K for personal use. So that’s a real challenge for taxpayers right now, is during the year being proactive to make sure that they are reporting personnel on those types of accounts. So Venmo and others have come out and said maybe you should consider having two separate accounts, one for personal and one for business so that you do not cause that particular issue. And then the IRS has indicated that if you do get a 1099 K when it was for personal, not for goods or services, that you should reach back out to the issuer to ask them to reissue it. I don’t want to be negative, but I think it’s next year. Come January, February, March, millions of people reach out to Venmo and say, Please re-issue my 1099 K. It’s not going to be a quick process. So the IRS has guidance out there as to what you should do if you get the 1099 K, how you can report it and in essence back it off the return so you don’t have a mismatch with your 1099 K. So there’s going to be a lot of confusion and I suspect a lot of errors that are going to be made on this particular issue.

Tom Temin If a individual is paying, say, a personal services provider, say, I don’t know, gym trainer, an individual that accepts Venmo, your payment to that person would not be what triggers the 1099 K or would it that person receiving it to that person that’s income. So they would have to report it anyway.

Erin Collins Yeah. So in your example, only the one receiving the payment, so the person providing the gym services and that should be taxable. So that would be appropriate use of the 1099 K it would report hypothetically you pay them $50 for that service that should be taxable by that individual. So that is a proper transaction versus if you and I, as I gave the example earlier, have lunch, that should not be taxable to me because you are just reimbursing me for your portion of the lunch. That’s where the challenge is going to come in. And so I think a lot of individuals who are paying, for example, we’re seeing people help their children and they’re sending them money at college. Here’s money to pay your rent or here’s money to pay your food. This month, that child potentially is going to get a 1099 K if it’s not done correctly. So that’s a real challenge. I don’t think we want millions of people having these 1099 K’s for nontaxable events.

Tom Temin Right? So you have to make sure that you classify and do the Venmo or whatever it is transaction correctly so that you don’t invoke one for these kinds of things.

Erin Collins So some of the applications indicate you can put for purchase, which again then the recipient would potentially get a 1099 K versus personal. I think the safest way is to have a personal account, but everything is personal. And you set it up with the Venmo company that this is for personal use versus a business account. So that is one way to do it. I know a lot of practitioners have given advice that if you do receive a 1099 K next year and it’s for personal, that depending on if it’s personal versus hobby versus investment, there are different ways you can report it on the return. So our hypothetical example of we like to have nice lunches, so you pay me $1,000 for the year. I would then report the thousand dollars, but back it off and indicate on my tax return that was for personal and it was not for goods and services. And then I would zero it out. And that way my tax return would match the IRS records of the 1099 K.

Tom Temin We’re speaking with national taxpayer advocate Erin Collins. This sounds like one of those cases where Congress does something and the IRS not only gets the work, but also gets a lot of the ire because of it.

Erin Collins Yeah, I think there’s going to be a lot of questions when those 1099Ks are issued that individuals, the consumer, the taxpayer is going to be asking, what do I do with this? And not understanding the consequences of either ignoring it if they think it’s just personal and therefore not taxable, or if they report it. Do they understand how they can back it off their return so they’re not paying on tax for something that’s personal?

Tom Temin So this could cascade to the call centers, to the inbound mail and email queries and therefore cause another possible logjam like they had during the bad years of the pandemic.

Erin Collins Yeah, that is a concern that we need to get the message out as soon as possible so that people that are filing those returns do it appropriately so they don’t have to deal with the consequences. And the IRS isn’t overwhelmed by the increased calls or, as you said, the paper coming in the door.

Tom Temin And that whole discussion of workloads and inbound mail comes to the topic of staffing at the IRS. Now, the Treasury inspector general for Tax Administration has issued a report saying that the IRS needs to do a better job of using special incentives to get bodies in for those critical jobs. And you’ve had a lot to say about that, too, over at TAS.

Erin Collins Yeah, I think the first year I arrived here in 2020 as part of our annual report to Congress, we made it our number one most serious problem for taxpayers, because if the IRS cannot not hire and retain good employees. That impacts taxpayer service. So like TIGTA, we very much support the IRS using the special payment incentive to get the right folks into the door. Hiring, in my opinion, provides both an opportunity and a challenge. Every IRS employee is important to the mission, but at the same time, some of the positions that we have and the skill sets that we have, are mission critical. And as the IRS, in essence, rebuilds and really focuses on its I.T. and other functions, we need to try and attract those folks from the outside that have a unique skill set that we need for mission critical work. So the special payment incentive is a great way to encourage some of those folks to want to come in and provide public service to kind of give them that extra incentive to come in the door.

Tom Temin And these are not gigantic payments. These are not $100,000 types of bonuses. It’s in the grand scheme of things, not big money. Fair to say.

Erin Collins Yeah, it’s it’s an extra incentive. Usually it’s somewhere in anywhere from five, ten or 15% of the potential salary for a particular year. So again, it’s not the large dollars. I think most people that come in to an organization like the IRS or a federal agency, it really is because they are inclined to look towards public service. I’d like to think that our IRS has employees. They’re here to make a difference in the lives of taxpayers, and they’re here to improve tax, administration and service. A lot of our folks are not here similar to the outside for the larger dollars. They’re here to make a difference. But having that additional or compensation is important to get the right people in the door. So I’m a big proponent of trying to equalize both in public with the private sector and whatever we can do to help get the right people in the door and also retain our folks.

Tom Temin And I said at the outset, that was my thought that the IRS has more or less reached equilibrium compared to the stormy last couple of years. I should ask you if that’s your assessment and what you are going to be looking at as another tax season approaches, We’re still a few months away. We’ve got a budget cycle to complete between now and then, and that affects everybody.

Erin Collins I said in my June report to Congress that the filing season this year was night and day for the filing season in the previous year. I’m not sure I’m as rosy as you are as we’ve reached the equilibrium from pre-COVID years. We have made substantial progress in the filing season, but the IRS still has a long way to go in order to get to what I would call the quality service the taxpayers are entitled to.

Tom Temin And since you and I last spoke, we have a new commissioner for the IRS, Danny Werfel has been in there. Are you in touch with him regularly? Because I think he understands these issues from what I know of him and that these are high priorities there, too.

Erin Collins Yeah. So as a national taxpayer advocate, I have the honor of being a direct report to the commissioner. So I have the opportunity to chat with him on a regular basis, involved in many meetings with the Commissioner and others. I do think that he’s come in in a very interesting time. And also it’s a great opportunity because Congress has given the IRS additional funding. I think there’s a challenge of we want to make sure that we don’t lose any more funding because we need to be transformational. We need to have the IRS be a different organization than it was last year or the previous years. And that unfortunately takes funds as well as having good employees. So I think he very much understands the challenges that he’s facing and the challenges that the agency is facing. But he’s been a pleasure to work with. And as I said, we have a big task ahead, and I think we have our eyes open wide. But we do realize things are getting better, but we have a long way to go.

Tom Temin And just an unrelated question on something I just learned recently is that there are somewhere around 150 people in federal agencies called the Ombudsman, or now they call them ombuds so I guess neutral word and that the National Taxpayer Advocate, the Taxpayer Advocate Service has been part of that community because in a sense you are a ombud for millions and millions of taxpayers and what’s going on in that particular community? And is this something that’s growing stable or what do ombuds talk about?

Erin Collins Yeah, you make it sound like it’s a joke at a bar or what are they talking about? So basically the agency was created back in, I believe it was 1996, and TAS has been lucky enough to be involved since inception. And it really is a way that these federal agencies, the Ombudsman, get together to talk about basically best practices.


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