The IRS has been so slow to adapt to the rapidly emerging peer-to-peer economy that billions of dollars in taxable income a year are probably going unreported every year, according to a study being delivered to Congress this week.
More than 2.5 million Americans earned income via on-demand platforms like Airbnb, Etsy and Lyft in 2014, and the companies generated an estimated $15 billion in revenues. But the companies don’t withhold taxes on the income they pay to people who provide services or sell items via their platforms.
The companies are required to notify the IRS of that income — and send service providers a 1099-K form of their yearly earnings to file with their tax returns — only if they earn at least $20,000 and have 200 or more transactions in a year. The rule applies only to companies that get paid by credit card.
A study by researchers at American University has found that more than two-thirds of those who earned income from the platform economy never received a statement of their earnings. The study, which surveyed 40,000 members of the National Association of the Self Employed, found that many people who earn income on the platforms are confused about when, whether or how to report their earnings on their tax returns.
Because much of the income earned in the platform economy is never reported to the IRS by the companies, it’s likely adding to the $194 billion per year that the IRS estimates the Treasury loses each year due to misreported individual business income.
“These issues should be addressed — not only because millions of American taxpayers are needlessly burdened trying to comply with an antiquated, outdated tax system — but also because inaction has very real implications on Treasury and IRS’ ability to fairly and efficiently collect taxes,” according to the report, written by Caroline Bruckner, managing director of the Kogod Tax Policy Center at American University. Bruckner is scheduled to testify about the report Tuesday before the House Small Business Committee.
The study says that IRS officials were notified two years ago that the $20,000 per year threshold was likely to mean that much of the income earned on the platforms would go unreported. At the time, the study says, the IRS promised to provide new guidance to help clarify matters and ensure that income was reported. But no new guidance has been released, and the study warns that with the number of platform economy workers expect to grow to 7 million by 2020, the potential loss in tax revenue is likely to be substantial.
Bruce Friedland, an IRS spokesman, says the agency expects to issue guidance on the issue in the near future.
The study suggests that the IRS release clearer guidelines for companies below the $20,000 threshold for filing 1099-Ks to ease confusion and encourage a uniform response by the platform-based companies. Etsy, Airbnb and Lyft all inform service providers that they only report income if the $20,000 and 200 transaction threshold is reached, the study notes, but Uber sends every one of its drivers a 1099-K and reports their income to the IRS, regardless of income earned.
The study says the current system ill-serves the millions of people who earn income from the platforms, by exposing them to possible audit and penalties for misreporting their income.
“At best, these small business owners are shortchanged when filing their taxes,” according to the study, “at worst, they fail to file altogether.”