Bruce Willey, a tax expert, warns that a surge in IRS taxes and audits targeting the fantasy sports industry is imminent, describing it as a “cash grab” that will hit Americans “like a truck.”
Tax experts warn that the implementation of new IRS regulations may result in a significant hike in taxes and audits for Americans, particularly those who use transaction services such as Venmo and PayPal for fantasy sports.
Aside from the fantasy sports industry, Willey and Paravano also noted that the IRS changes would have broader impacts on Americans in various ways.
For instance, sending money to a college student can be treated as a gift under current U.S. tax laws unless it exceeds $17,000. However, the student will still receive a 1099 form and may be required to provide proof that the money was a gift in order to avoid paying taxes on the amounts received.
The revised code will also apply to transactions made through Facebook Marketplace, lending money to a friend, reimbursing a roommate for rent, paying a colleague for a dinner, settling a bar tab, a mother sending gas money to her child, and raising funds from parents to buy a gift for a coach.
Wiley said, “most Americans are about to get run over, and they have no idea. If they’re not prepared for it, things could get pretty ugly for people.”
The American Rescue Plan Act of 2021 revised a code section that reduced the reporting minimum for Third-Party Settlement Organizations (TPSOs) from $20,000 annually for 200 or more transactions to $600 per year regardless of the number of transactions. T
his change, backed by Democrats and signed into law by President Biden in March 2021, requires TPSOs like Venmo, PayPal, Etsy, AirBnB, among others, to send 1099-k forms to both the IRS and the recipients of cash if their transactions surpass $600 per year.
This means that if you use sports betting apps like FanDuel or DraftKings that utilize these payment systems, you will be subject to taxes, although sports betting is already taxed under current tax codes.
“It’s this huge fishing net that’s just going to sweep up a vast amount of people in America,” Willey claimed.
The revised code is expected to impose additional tax-related responsibilities on individuals participating in sports fantasy leagues and those who sell professional sports tickets.
Jeff Paravano, Nationwide Tax Chair at BakerHostetler, highlights a scenario where an individual may sell preseason game tickets at a loss but still receive a 1099 form for the gross proceeds. In this case, the IRS will not have knowledge of the cost of the tickets, and the recipient of the form may need to provide further information.
It’s possible that the taxpayer may or may not have taxable income from the sale, but they could still receive a Form 1099 for selling even a single ticket, depending on the sale amount.
Paravano, a former Senior Adviser to the Assistant Treasury Secretary for Tax Policy, warned the following:
“Somebody that engages in a lot of fantasy sports; You can only deduct the losses to the extent of your winnings. But, you better be keeping receipts of your losses. Those will be a deduction against any winnings you received. ”
According to Paravano, the changes will likely affect fantasy sports leagues where money wagers are made among coworkers, friends, and family members. He explains that the 1099 form will be issued for the full amount of winnings and will not take into account the wager.
Additionally, the Third-Party Settlement Organization will also issue a 1099 form to the person responsible for collecting the wagers and distributing the winnings. Both the organizer of a tournament such as the NCAA or a fantasy football league, as well as the winners, may receive a 1099 form for the gross amount received. However, winners can deduct their wagers when calculating the tax owed.