LEGAL
Financial Surveillance Advocates are Persistent, Constant By Keith Thornburg, Vice President and General Counsel
Recent stories in the news showed that many small businesses and gig workers were surprised to learn that their “third-party settlement organizations” (i.e. Venmo, PayPal, CASH App, etc.), to the IRS if they exceed $600.Tis information is annually reported to the IRS on Form 1099-K by these payment services. Payment card providers are subject to the same regime and have always had a $600 threshold.
One user was quoted by Fox News as saying, “Honestly, I’m using Venmo because there’s no taxes” and if it “starts to have taxes, I’m not using it anymore.” (
foxnews.com/us/venmo-users- unhappy-aſter-learning-about-this-new-legal-requirement;
foxbusiness.com/money/venmo-paypal-cash-app-report-payments- irs)
Last year’s proposal by President Biden’s administration, including Treasury Secretary Janet Yellen, was for banks to report on a similar basis for all customer bank accounts. Tis proposal significantly raised public awareness of federal financial surveillance programs.
Bankers are fully aware of federal financial surveillance programs under the Bank Secrecy Act and AML requirements for filing suspicious activity and currency transaction reports. Te federal government’s surveillance of business receipts through payment card and payment settlement organizations is not as well known.
Te payment card and third-party settlement reporting originated in the Housing and Economic Recovery Act of 2008 (H.R. 3221 110th Cong., Pub. L. 110-289, eff. July 30, 2008). Tis provision was buried in the bill at Section 3091 (codified later as 26 USC 6050W). Although payment card reporting has always been subject to the aggregate $600 threshold, third-party settlement organizations were favored with a threshold of $20,000 and more than 200 transactions. Under this threshold, many small businesses and gig workers were not reported to the IRS on Form 1099-K.
Te 2008 bill primarily addressed subprime mortgage lending and our nation’s economic recovery from the meltdown that was triggered in part by the mortgage lending crises. Te bill passed overwhelmingly with Democrats and attracted Republican votes (former Missouri Sen. Kit Bond voted “No”), and President George W. Bush signed the legislation into law.
Regarding 1099-K reporting, the IRS notes on its website that “Tis reporting is required by law. Tird party information reporting has been shown to increase voluntary tax compliance and improve collections and assessments within IRS.” (emphasis added) Te IRS will use the data from the Form 1099-K to develop taxpayer education and outreach products and services, as well as new examination and collection approaches. (
irs.gov/payments/general-faqs-on-new-payment- card-reporting-requirements)
Te change placing third-party settlement organizations on the same reporting threshold as the payment card industry was enacted at Section 9674 in the American Rescue Plan Act of 2021 (H.R. 1319 117th Cong., Pub. L. No. 117-2, March 11, 2021). Tis bill was primarily a $1.9 trillion economic stimulus and covid relief measure. Te legislation was passed via the reconciliation process to avoid a Senate filibuster. No Republican senators supported the bill, which was initially passed with a tie-breaking vote by Vice President Harris. Te following House vote was 219-209. In final passage, the bill received no Republican votes.
Key Takeaways • For the banking industry and payment card networks, there is now parity of regulatory burden with third-party settlement organizations. It is possible going forward that small businesses and gig workers will more readily accept payment cards because there is no longer a privacy advantage to the third-party settlement organizations.
• For all businesses, there is a need to carefully consider the cost and benefits of these substantial federal surveillance programs and have a candid discussion with elected officials.
THE MISSOURI BANKER 9
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