Study: Sharing economy income taxes cause confusion for many workers

Many peer-to-peer economy workers may misunderstand their tax liability and be at risk for filing inaccurate returns, which may bring serious penalties.

Work in the sharing economy provides a source of income for a growing number of people in Washington and other states. In 2014, over 2.5 million people throughout the U.S. earned income through peer-to-peer platforms, according to The Seattle Times. Unfortunately, a new study suggests that many of these workers may be at risk for misunderstanding their tax liability and eventually facing penalties for failing to file tax returns or incorrectly assessing their liability.

Unreported income

American University recently surveyed 40,000 self-employed workers about their understanding of their tax liability for income earned through sharing economy platforms. The researchers found that many of the workers didn't know how and when to report this income on their tax returns. Some workers were uncertain as to whether they even needed to do so.

Worsening this issue, two-thirds of the workers reported that they never received 1099-K forms detailing their annual earnings through each platform. The Internal Revenue Service only requires companies to send out these forms to workers who earn over $20,000 or complete over 200 transactions in a year. Without these earnings statements, workers may be at even greater risk for failing to properly report their income or assess their tax liability.

The IRS reportedly is drafting new guidelines regarding earning statements for workers who do not currently receive them. In the meantime, though, many of these individuals may be at risk for inadvertently making errors when filing their tax returns.

Steep consequences

Workers who fail to file income tax returns or correctly assess their tax liability may face various serious penalties. According to the IRS, these include:

  • Penalties for failing to file on time. Workers who don't file tax returns at all may face a penalty of 5 percent of their unpaid taxes for each month that the return is late. The total potential penalty is capped at 25 percent.
  • A substantial understatement penalty. Workers who overlook income and understate their tax liability by more than $5,000 or more than 10 percent of the true amount owed can face a penalty.
  • A negligence penalty. The IRS may assess a penalty of up to 20 percent of a worker's tax liability if the worker hasn't made a reasonable attempt to comply with IRS laws, track income or prepare the tax return correctly.
  • A fraud penalty. If the IRS determines that a person has engaged in deliberate tax fraud, it may assess a penalty of 75 percent of the person's tax liability.

Furthermore, workers who make these errors and receive a notice of deficiency later could face various penalties if they fail to pay their back taxes. These include wage garnishment, arrest and asset seizure.

Given these serious consequences, anyone who faces sanctions for failing to file a tax return on time or filing an inaccurate return may benefit from consulting with an attorney. An attorney may be able to help a person negotiate to minimize any outstanding liability and resolve the tax controversy expeditiously.