By Roy Ice
There has been a lot of hype and social media buzz about the IRS monitoring your bank records and PayPal accounts for transactions over $600.
So, what is the IRS looking for? For starters, the proposal is only for inflows and outflows of cash greater than $600 in total. That means that no one is looking into the transactional detail from your personal account (your secrets are safe for now). But why $600? Why the need at all?
The end-all-be-all of taxation is that all income received is reportable and, unless specifically excluded by the Internal Revenue Code, potentially taxable. That is obvious for things like your W2 job or business, but it also includes other gains. Find $100 on the street? Reportable. Help a friend move for $200? Reportable. The little things go unnoticed because they are too small to worry about, but they are, by definition, income to you.
It is not a popular topic to cover, but it is clear that the amount of unreported income in the U.S. is staggering by even the most conservative estimates. There is no real legal or moral justification to underreport income simply because a side gig is not a “real job” or to slight an “overreaching” government. Even the bible says, “ … render therefore unto Caesar the things which are Caesar’s.” Underreported income costs the U.S. government the better part of a trillion dollars every year!
What is not clear is what this new proposal would look like in practice if fully implemented for bank activity. A recent Senate hearing addressed this and was on the record saying that two boxes could be added to interest forms already filed by banks. These boxes would show total inflows and total outflows of cash. This could mean that significant total inflows could face some scrutiny if no related income is reported for the accounts in question. Bear in mind there are legitimate reasons for cash to increase without income, such as taking on debt, as an example.
So, to me, there is nothing new going on here. The proposed law changes do not create tax. Instead, it is a mechanism to enforce compliance with existing tax laws. Personally speaking, if I am paying my fair share of tax and someone is running their business on a “cash only” basis and avoiding reporting their income, then I can’t say that I have a lot of sympathy for that person’s position against transparency in this case.
There is already precedent for this type of reporting. Effective Jan. 1, 2022, payment processors like Venmo will report total payments of $600 to the IRS on Form 1099-K. Previously, the threshold for 1099-K was $20,000 or 200 transactions. Individual bank transactions of $10,000 or more have been reported in detail to the IRS for years. Payments to individuals over $600 are already required to be reported on 1099-NEC forms, and interest and dividends as little as $10 are disclosed by your financial institution.
Regardless, taxation is complex and issued forms may not tell the whole story. The IRS has a very full plate already, so we will have to see if these reporting requirements have any real teeth. In the meantime, you should talk to your advisor to make sure you report income fairly and the related taxes accurately. We should all pay our fair share — but not a penny more!