So you have a little ebay business? Do you need to report the income?

On a recent family road trip to visit my brother-in-law in Louisville, KY, my 14 year old daughter was anxiously awaiting payment confirmation for her largest sale-to-date for her ebay business.  Correction, her ebay hobby....

She's been busy generating cash for vacation....  I was a bit amazed that she was able to sell her old camera for $60, plus shipping.  I was even more surprised the buyer paid her extra money to ship it express mail so he would have it in time for his vacation, in Florida of course!

Always the skeptic, I suggested she not mail the camera to the buyer until she had confirmation that his payment was received in her paypal account.  She assured me the buyer had only positive comments in his transaction history, so I figured he was probably legit, but still......About halfway to Louisville, she received confirmation payment was received, so her business transaction went well!

However, it was time for this father to have another uncomfortable conversation with his 14 year old daughter.....this time about taxes.  You see, in order to help narrow the "tax gap" caused by unreported income, the IRS is enforcing a new tax regulation meant to ensure all taxable income is reported.  The new Form 1099-K reports the recipient and amount of credit card sales processed by third party settlement organization, like Visa, Mastercard, American Express and yes, Paypal.  This is sure to trip up many home-based ebay and internet businesses that may not have reported taxable income in the past.

The good news for my daughter is that she will fall under two exeptions from tax reporting requirements.

#1 Since there is no way she will ever sell her "inventory" for more than she(I) paid for it, there will never be any profit from the business.  Unless of course there is ever a resurgence of polularity of beannie babbies, in which case I'll gladdly bring up her tax reporting requirements!  A business in which there will never be profit is considered a hobby in the eyes of the IRS.  Income may need to be reported in certain circumstances, but expenses can never exceed income in order to generate a tax loss.  Disclaimer....other reporting requirments may be required.

#2 The new 1099-K is not required if credit card volume is under $20,000 and 200 transactions during the calendar year.  If she sold all of the "inventory" during the year, she would still be under these thresholds. (wanna buy a beannie babby?)

The hight of Louisville today was a predawn tour of Churchill Downs by my brother-in-law Kevin.  He is an exercise jockey and trained last years Derby winner Supersaver ridden by Calvin Borel.  Saw Calvin breeze by on a new horse this morning. Could be another Derby winner!

Do not respond to IRS Email!

Recently I've received several emails from the IRS alleging Unreported/Underreported Income (Fraud Application).  As a general rule, the IRS does not email information to taxpayers.  Unsolicited emails from the IRS are scams.  Do not go to any link in the emial, reply to the email or even open any emails from the IRS, United States Department of the Treasury, or Internal Revenue Service, unless you have a current tax case, audit or examination in process and have been in personal contact with an agent or representative from the IRS.

Our experience has shown that very few auditors communicate via email during the course of an audit or examination.  However, their initial contact with taxpayers is never via email.

We find ourselves representing clients undergoing IRS or Department of Revenue audits with increasing frequency.  Audits levels are up tremeandously and are anticipated to increase more as the government searches for more cash-flow.  Most new clients that are undergoing audit find it not so successful representing themselves in an audit.  Auditors have an understandable increased workload and pressure to close a case in the most expeditious manner.  Unfortunate for the taxpayer, the most expeditious manner of closing the audit is usually the most beneficial for the IRS, and most clostly for the taxpayer.

If you are undergoing an audit, be aware of your rights as a taxpayer.  Our recommendation is that you assign a CPA power of attorney to communicate with the auditors directly.  This leaves you completely out of direct communication with the auditor.  Clients tend to appreciate the fact that they don't need to personally meet the IRS agent, which aleviates a great amount of stress and anxiety during an audit.