New Housing Bill Targets Underground Economy

Congress has passed a housing-market-themed bill that includes a number of tax-related provisions. One in particular will be of interest to some people who have been earning income through credit card transactions without reporting that income to the IRS. In short, that part of the “underground economy” is about to get dug up:

The bill would… require institutions that make payments to merchants in settlement of payment card transactions to file an information return with the Internal Revenue Service. According to the Treasury Department, “Payment cards (both credit cards and debit cards) are an increasingly common form of payment to merchants for property and services rendered. Some merchants fail to report accurately their gross income, including income derived from payment card transactions. Generally, compliance increases significantly for amounts that a third party reports to the IRS.” The bill would also require information returns for payments in settlement of certain third party network transactions that operate in a manner similar to payment card transactions. This proposal was previously approved by the House of Representatives as part of H.R. 6275 by a vote of 233 to 189 (with 10 House Republicans joining 223 House Democrats in support). This proposal is estimated to raise $9.802 billion over 10 years.

From the looks of this, the IRS isn’t going to be asking for a report on every credit card transaction, but just for the annual total that any particular card-issuer or online payment system pays to each person who receives money. In the same way that banks send the IRS a 1099 each year for everybody who earns interest on their bank accounts, and every company with a payroll files W-2 forms each year for anybody who’s earned a paycheck, now credit card companies and companies like PayPal will have to send in some sort of form saying how much money they’ve passed along and to whom.

By “third party network transactions that operate in a manner similar to payment card transactions” I think they mean stuff like PayPal, but it’s a little unclear to me. Here’s some stuff from the official technical explanation of the bill:

[A]n organization generally is required to report if it provides a network enabling buyers to transfer funds to sellers who have established accounts with the organization and have a contractual obligation to accept payment through the network. However, an organization operating a network which merely processes electronic payments (such as wire transfers, electronic checks, and direct deposit payments) between buyers and sellers, but does not have contractual agreements with sellers to use such network, is not required to report under the provision. Similarly, an agreement to transfer funds between two demand deposit accounts will not, by itself, constitute a third party network transaction.

…In addition, a third party settlement organization is not required to report unless the aggregate value of third party network transactions for the year exceeds $20,000 and the aggregate number of such transactions exceeds 200.

This description is a little hard for me to wrap my mind around, so I’m not sure if it applies strictly to on-line credit-card-like payments of the PayPal variety, or if it applies to any of the myriad ways of earning a buck or two on-line through referral fees, paid links, etc.

In any case, not only will this have the effect of bringing some underground economy transactions to light, but it will provide the IRS with additional targets for liens.

Bush is expected to sign the bill. The new reporting provisions are scheduled to take effect starting in .

At FSK’s Guide to Reality, FSK discusses the Wesley Snipes and Ed & Elaine Brown cases, and how the government uses high-profile prosecutions like these as a way of discouraging tax resistance.

And at Gay Tax Protest, John Bisceglia talks about my Thoreauesque tax resistance strategy and compares his own project with that of the war tax resisters.