Paypal reporting income to IRS

http://www.irs.gov/newsroom/article/0,,id=174478,00.html

"Income resulting from auctions akin to an occasional garage or yard sale is generally not required to be reported. However, there may be exceptions. If an online garage sale turns into a business with recurring sales and purchasing of items for resale, it may be considered an online auction business." [sic]

 

I guess you need to read the rest of my post, don't you?

Why do I know anything about this topic? Because my family breeds dogs for a small profit or loss every year and has done so for decades. Despite this issue sounding different on the surface, this whole paypal IRS thing is going to play out in the EXACT same manner to the newly classified "hobby ebayers" with 100% reportable income that is NOT deductable. Dog breeders have known about the "IRS hobby" issue for years, but its now something new and unheard of for garage sellers, ebayers and craigslisters.

The IRS WILL LIKLEY BE LOOKING TO AUDIT MANY PEOPLE BY MAIL, especially if having a paypal 1099 is considered an audit flag (do you know what those are?). If you don't know how this process works and how it can correlate to your NEW PAYPAL 1099, then I feel you need to stay quiet on this issue. Yes, I am speaking in hypotheticals, but I am not going to sit around posting links to cases proving such. For those that read my whole post and understood my point, thank you. GaijinPunch obviously did not understand my comparison. This is real and my idea is certainly within the bounds of reality. GaijinPunch is refering to semantics, which won't do squat if some poor slob on the board agrees with his dismissal of my comments and gets audited and classified as a "hobby" and not a "business". If you take anything away from my post its this: we should be saving recipts like crazy and using an accountant with IRS experience, now and forever.

http://www.irs.gov/businesses/small/article/0,,id=219552,00.html

Actually there are a large number of cases that have already been settled by tax judges on this subject. In most of these cases the tax payer lost. If you think the new paypal 1099s are not going to be looked at like a 1099 you get from working at a job that does not withhold, you are a fool. The IRS knows that most folks will NOT BE PREPARED to properly defend themselves and will NOT be set up as businesses. The IRS sees catching people off guard as a way to generate revenue, paypals database is a big cash cow for them and many folks are going to be wrongly mistreated along the way.

Let me tip you in, some accountants are telling thier clients to be prepared for an audit on past tax returns, IF they have paypal 1099 arrive. Why is this? Because the IRS wants to get back taxes owed on old ebay sales and a "suspiciously high dollar" Paypal 1099 is "just cause" for them to do a back taxes audit.

I will give you this much, if someone is already reporting "ebay-like" income as a business, with small profits and has legitimate deductions over serveral years, all of your comments are 100% accurate. I don't think many people posting here will fit that criteria. So, it is VERY safe to assume they would be audit bait if they got a surprise paypal 1099 with $20,000+ reported and have NEVER filed a similar side income on past returns.

I am specifically talking about an individual who sells stuff at a loss, has never done taxes as a business, has no regular CPA and is likley totally ignorant of how an IRS audit is conducted. GaijinPunch, you are dimissing parts of my comments "out of context" and will likely cost someone some money if they were to agree with you.

I say to those following this thread, believe GaijinPunch at your own perril!

The government doesn't want people to declare ebay as a businesses for tax purposes, they want to catch people off guard and have them enter the audit process as ignorant participants. On top of this they would likely try to get it classified as a hobby, so no deductions can be taken.

Income from a "hobby" is 100% reportable, but the expenses are NOT deductible.

The IRS wants you to pay taxes on 100% of the paypal income your hobby brings in as reported on the 1099.

Here is a case where the judge was sleeping:

http://www.laobserved.com/biz/2010/12/was_tax_judge_sleepi.php

I would love to see this topic come back in 2012 to see how many "ebay business decutions" were disallowed by the tax arbitrator or judge.

This is a crystal ball moment for me, just wait and see. Feel free to read this same topic as posted on an Amazon forum:

http://www.amazonsellercommunity.com/forums/thread.jspa?threadID=192975&start=0&tstart=0

 

I got myself set up with a DBA "doing business as" assumed name type thing over a decade ago and have been dealing with 1099's for the past 7-8 years and have been audited by mail once.

My advice stays the same, claim a loss every year. Clothes, food, tools, cell phone, travel expenses, miles on my vehicles, home office improvement costs, electricity, water sewer, internet.. etc. etc..

They want a piece of my pie? better factor in what it cost to get to the store to buy ingredients, cost of the pie tin, cost of oven, cost to run the oven... how's that pie taste now Uncle Sam???

 

thelastuser, you are an example of what I said and have HISTORY filing a schedule C and claiming deductions:

Let me repaeat:

Income from a "hobby" is 100% reportable, but the expenses are NOT deductible.

The IRS wants you to pay taxes on 100% of the paypal income your hobby brings in as reported on the 1099.

There will be MANY people who will be getting their first 1099, ever, from paypal in 2012, it will also be thier first time trying to file under a DBA or setting up a corporation, they will also likley claim thier first "loss" and business deductions. On top of this the IRS has a new ALL COMPUTER BASED SYSTEM for audits that NEVER EXISTED BEFORE. Are you saying with all the above taken into account, people who are "newbies" to all this should't be worried about getting an audit by mail? This is all being spurred by the IRS Market Segment Specialization Program (MSSP). Ebay is on thier list, look it up.

Here is an article, there are many more unpublished audit flags:

http://20somethingfinance.com/irs-tax-audit-red-flags/

Here is an article on the historical increase in audits:

http://thetaxchannel.org/2010/11/10/irs-tax-audits-increase-2011/

 

I think they're still pretty behind on audits, mine was for taxes filed approx 3-4 years prior to me getting mail from the fed gov about it.

If we weren't getting 10k+ back for having kids I'd probably just stop filing all together or check "exempt" and prepare for a battle XD


With shit like this why bother? For fuck sakes http://www.nytimes.com/interactive/2009/02/04/business/20090205-bailout-totals-graphic.html

Here in the US we give our last pennies to Banks just so they can loan it back to us with interest????

Banks also get to loan out money they don't have.. something like $9 for every actual $1 they have... and charge interest on it. This is why gold and silver were killed by HJR 192.. cause you can't create real physical money out of thin air like you can with some 1's and 0's in a computer.

Our constitutional money was also made illegal.... ya sounds totally legit to me.

The Federal Reserve makes and prints our money (out of thin air) and loans it to us at interest.... which we obviously can never pay back cause there will never be more frn's printed than we owe.

Truth is there is a finite amount of "money" but interest imposed can be unlimited thus making any debt literally impossible to repay... so why even try.

 

Last year for my taxes I filed and got a refund of $89. The IRS disagreed and gave me a refund of $250.

Personally I'm not too worried, but that doesn't mean I won't try to cover my ass.

 

Guess the IRS is trying to improve their image lol

 

Not unless you reword it. If you're selling at a loss and paying taxes on your loss, you need to spend a little money and hire an accountant.

 

You are not reading or simply have comprehension problems, I addressed that in my first post and recapped again. My overall point is pretty clear and I will recap it AGAIN just for you GaijinPunch, the IRS WILL LIKELY BE LOOKING TO AUDIT MANY PEOPLE BY MAIL, especially if having a paypal 1099 is considered an audit flag. Its not going to be as straight forward as you are claiming for people who have never filed a schedule C. The IRS is SPECIFICALLY going to target them; not necessarily established small businesses that have reported past profits and losses over a few years on their returns. Put yourself in the IRS's shoes, its easy pickings. Income from a "hobby" is 100% reportable, but the expenses are NOT deductible. The IRS wants people to pay taxes on 100% of the paypal income thier "hobby" brings in as reported on the 1099. If its not obvious to you, then PLEASE keep your tax advice and ideas to yourself.

Lets not comment on each other anymore. I can see we are in different camps. I am merely giving a warning and used some examples to get my point across. I am right and you are clearly not aware of what the IRS is planning or capable of.

 

I was using TurboTax to do my taxes and if I understood the IRS correctly I qualified for a tax credit due to my status as a student that TurboTax didn't catch or I failed to tick a box somewhere.

Either way I was pleased and not about to question them about tax law. They are supposed to be the ultimate authorities on it.

 

Turbo tax, H&R Block and Jackson Hewit all give extremely conservative tax estimates. They purposely leave out deductions and credits which people are eligible for.

Here is a longish article that gives an overview of the low-end tax preparation industry, which includes turbo tax:

http://motherjones.com/politics/2011/04/gary-rivlin-tax-prep-refund-anticipation-loan

 

theres a rather simple solution to this drug mules have been doing it for years

get a pre pay credit card from walmart it can be reloaded from anywhere for only 3 or 4 bucks for any amount


ide suggest only accept payments in cash but sending hundreds in cash via mail is rather dangerous if the package is lost

 

That's selling at a loss after expenses (not selling at a loss)... which if it's your hobby, should be very, very small. At least with games. If your expenses are higher, there's a simple solution: incorporate yourself as a small business. It is a one time fee.

I read ages ago when I decided to sell games as a side-biz how I needed to do it on a hobby basis. What I read then was you can deduct your expenses on your hobby-based income (say, football tickets if you blog about football games and generate revenue on a football website). However, you can only expense if it keeps in you the black. You can't expense $10k worth of tickets, generate $5k worth of revenue, and count that as a $5k loss on your personal income (effectively lowering your main taxable income).

2nd google hit on the subject

I'm self-employed. I know quite a bit about this as I have to file every year despite the fact I'm not a resident. I respect your warning but I think you're taking a bit too harsh of a big brother approach based on your gut feeling.

 

GaijinPunch, we are agreeing for the most part. I also have filed a miscellaneous expenses tax form and in the past have had corporations. So I understand exactly why you feel this is no big deal. The problem with your perspective is that it ignores that fact that the IRS has NO interest in auditing people like you and me. They would lose many cases by doing so. I guarantee that WE are not on thier hit list. They need to build cases that have a good chance of winning and generating untapped tax revenue. In my opinion the IRS will focus on people that do turbo tax, H&R block, Jackwon Hewitt or do thier own e-file; whom also have recived thier FIRST paypal 1099 and have NEVER filed a miscellaneous expenses form on PAST tax returns. The reason why? Because it will be a valid and legal reason to check these folks older returns for suspected unreported ebay earnings.

In an old interview with the Examiner, David Montague, of The Fraud Practice says that the provision could deliver tax revenue in the amount of $9.529 billion over 10 years. He basis this idea on the possibility that more than three-quarters of a million people rely on eBay.com as their primary or secondary source of income.

http://www.examiner.com/dvd-in-new-...nd-other-online-sellers-profits-starting-2011

The IRS has set thier sites on an easy target and you and I are not that target, but I'll bet many folks on this board DO fit the criteria I described above. GaijinPunch, you are right only as long as someone has a PAST history of filing a schedule C with the IRS and appears to have a consistant and competent tax preparer. If not, these folks should be VERY aware of the possibility that they may fit a PROFILE the IRS is looking for, whom will then be the pople that pay the estimated $9.529 billion of tax revenue over 10 years.

I would say you've been lucky with the help of filing taxes properly up to this point. Like I said I have family that breed dogs and thier situation was IDENTICAL to yours, but there is so much tax case history with dog breeding they NEVER stood a chance. I know you said you have done a paper audit before, pending on the year, it would say a lot about the system the IRS was using at the time. I'd bet if it happened to you again, they'd go back and look into the past.

Here are some posts from the Amazon forums on this very topic, they illustrate my point indirectly:

Yes I always reported all income, most of it 1099 income, to IRS, including amazon sales. If you save receipts, including for inventory, improvements to book storage, mailing and packaging,, your income really isn't that great. When I had a large inventory, one-half of my basement was used for book storage so I could deduct 1/6 of my house expenses, including a climate control system for my basement, from incomes taxes. And I have an office in the house which boosts my business use of my home to one-quarter-All legit.

Yet because most of my income is 1099 income, I still send quarterly checks to IRS and FICA because if you get caught, you'll be paying for long time. I got caught back in '77 when I was growing and selling lots o' weed and not reporting any income but spending like a drunken sailor on diving trips, cars, pick-ups etc. The DEA found out and, after their case against me fell apart, they turned me over to the IRS. Unlike fear of Hell or belief in God to prevent a trip to Hell,, fear of the IRS ad fear of an IRS audit is a solid reason to be good. And there is the argument of being a good citizen, paying your part, etc. comes after facing the consequences of not reporting. (It was only one year I didn't report income, but I could in no way justify my spending with the actual legit income I had earned and reported for five years. And even back then, before tracking of everything by computer, the IRS looked at what I had done, how I took the 8 trips to Turks and Caicos and Jamaica as shown on my passport, what I was driving, what vehicles I'd registered, where I got m diving equipment, how I paid for that new tractor and pick-up, who I paid cash for all my doctor's visits, how
I paid your local property taxes, everything. They even want t know where I got the money to pay my lawyer, which was four times the amount of income I had reported during the past five years. Talk about being at a loss for words.)

And if you get audited once, my lawyer told me you chances of getting audited a second time go way up. I'm now a legal beagle because I want to be a good citizen. I've got nothing to hide. I'm married to a judge's daughter and doing anything illegal is out of the question. But I still remember the audit, the money I spend years repaying, plus the interest, the interest on the interest, the penatly for thinking about not paying the interest, the interest for thinking about not paying the penalties, the interest for thinking about not paying the interest on the penalties- the list is long, covering two pages of fine print.

Don't wait for Paypal to do it. Do it yourself. One thing the IRS doesn't like is strange changes in the amount of income you report If you sell lots o' books and haven't been reporting, you could be setting yourself up for an audit even though audits are rather infrequent. Maybe the IRS is looking to close the gap on the federal deficit by cracking down on Internet merchants. Maybe it's the IRS's usual bluff. But do you want to play a game of bluff with the IRS? I wouldn't recommend it.

posted by hungryfreaks Dec 25, 2010

The answer is yes all payment processors will be reporting. I suspect 2012 or so is when we see 3rd party sellers start dropping like flies from Amazon and Ebay as they get their Audit notices from the IRS because so many people jump into selling without reading. Imagine how many don't pay attention to anything, they will be hit with the audit and no way to pay it off, and they'll stop selling of course.

posted by falken1976 Dec 25, 2010

 

When this happens classifieds like Swapmeet, Craigslist and gumtree will take over. Nobody to police cash in hand payments.

 

A couple of things
1: Doesn't Ebay say they will have to give only 2011 PP revenue (and onward)?
2: Don't most sellers withdraw most of those funds to a bank at some point?

It still plays off to me as something people should have been doing from day one. I've been reporting my PP revenue to Japanese & US tax authorities from the get go, for the simple reason I do any reporting (even if it could be somewhat hidden). They're taxes: they come back and bite you in the ass, by definition!

 

i hate paypal and ebay both screwed me out of a lot of money from rediculous penalties had a collection agency calling my house for months it took e forever to get the mess straitened out

 

Sooooooooooo does PayPal Australia have to pay taxes too?

 

Well, good thing for you the punctuation & grammar police don't issue fines.