Next time you're drifting off to sleep at an Airbnb, think about this: The owner of the house you're crashing at may owe thousands in taxes and probably doesn't even know it.

Over the past few years, American participation in on-demand platforms has exploded. Currently, there are 2.5 million Americans earning a secondary income through the so-called "sharing economy" business models, such as Airbnb, Uber, and Lyft.  By 2020, it is estimated that 40 percent of people will have some kind of contingent income. But a new report finds that many of the entrepreneurs who earn money by working with these online services are falling into a gigantic tax loophole.

How is it possible? Turns out many of these Americans don't receive the 1099 forms both they and their tax professionals need in order to prepare their taxes properly, meaning millions of Americans are unwittingly non-compliant with the IRS.

I recently spoke to Caroline Bruckner, the executive in residence for the Department of Accounting and Taxation at the Kogod School of Business at American University. She was formerly Senior Counsel to the U.S. Senate Committee for Energy and Natural Resources, where she advised the Committee and its Chair, Sen. Mary Landrieu (D-LA), on tax, finance, budget, and labor issues. She also previously served as chief counsel to the U.S. Senate Committee for Small Business and Entrepreneurship during Sen. Landrieu's chairmanship (2009-2014). She told me Congress never anticipated this kind of internet economy and, as a result, they've found themselves playing catch-up with business innovation.

"When the initial tax rules for the sharing economy were written in 2008, the business model wasn't really up and running in a big way. You saw pieces of it with eBay and Etsy, but for the most part, the IRS wasn't concerned about 2.5 million Americans earning a secondary income with online platform work. They were more concerned with eBay sellers or bloggers selling space on their site," she explained. "But now this loophole is very real, and people inside the sharing economy are falling into it."

The reason why this happens is that, under current tax law, if platform users pay by credit card, or if the platform is paying their service providers and sellers by processing credit card payments, they're not required to provide 1099k forms unless the service provider earns more than $20,000 and has more than 200 credit card transactions.

The average on-demand service provider falls way short of providing that many rides or renting out their extra room that many times. But the majority of these people do make enough ($600 or more) to receive a 1099 miscellaneous form, and they are simply not receiving those.

"Basically, when the IRS decided that any payment made by credit card should be exclusively reported in the 1099k form, they went back and changed the instructions for the 1099 miscellaneous form, which created a reporting loophole under the $20,000 reporting threshold for credit card payments. So even though most providers are meeting the 1099 miscellaneous threshold, which is $600, they're getting paid by credit card and falling under the $20,000 threshold and not getting any 1099 form."

Sounds complex, right? Imagine if you're just a small Etsy dealer selling handmade home decor for a few hundred dollars a year, all the while being completely oblivious that you owe taxes on that money.

"According to IRS research, in circumstances where there is no information reporting or withholding, there is a 63 percent net misreporting rate," Bruckner said. "And what we know anecdotally from talking to tax preparers and our own survey work is that most people aren't receiving 1099s from platform companies and aren't even aware that they have to pay tax on their platform earnings. It's not like anyone is deliberately violating the rules, but they're still non-compliant."

So who should shoulder the responsibility? Should the IRS make people more aware of their requirements? Should platforms be more diligent about providing forms? Or should it be up to the users to be proactive about paying taxes on their income, despite the fact that no one is directly asking them for it?

"In order for the 1099 regime to work, both the IRS and taxpayers have to receive the proper forms. Here, neither are getting them, unless you work for Uber, which issues 1099s to all their drivers," she concluded. "Ultimately, I think it's a shared responsibility."

A shared responsibility for the sharing economy. Seems like a perfect match. The question is whether anyone will step up and make it happen.

Published on: Jul 20, 2016
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