In an effort to narrow the tax gap, IRS has been going after eBay and other auction sites for years. The IRS estimates that unpaid taxes from individuals, as opposed to big corporations, account for more than 70% of the tax gap.
And within that group, the self-employed are considered the biggest offenders comprising roughly one-third of the tax gap, many of whom use eBay and online auctions. The IRS suspects that many eBay and online auction sellers have not been declaring their incomes properly. eBay also has been dodging government requests to report their sellers income, and IRS sure wants their money (Read Frivolous Arguments to Avoid When Filing a Return or Tax Refund )
But that is now about to change.
This year as part of the housing rescue package signed by President Bush, IRS will require PayPal and other processors of online payments to report annual gross receipts to the IRS for all but the smallest online merchants beginning 2011 (the wonders of bill lobbying — how does this relate to housing rescue???). The new law requires credit card companies and third party payment processing such as Paypal to report to the IRS payments made to small businesses and other self-employed workers. That would allow the IRS to compare the self-employed workers’ tax returns with the payments and determine whether they’re underreporting their income.
The Housing and Economic Recovery Act of 2008 expressly says that:
SEC. 6050W. RETURNS RELATING TO PAYMENTS MADE IN SETTLEMENT OF PAYMENT CARD AND THIRD PARTY NETWORK TRANSACTIONS.
(a) In General- Each payment settlement entity shall make a return for each calendar year setting forth–
(1) the name, address, and TIN of each participating payee to whom one or more payments in settlement of reportable payment transactions are made, and
(2) the gross amount of the reportable payment transactions with respect to each such participating payee.
With eBay almost requiring the use of Paypal to their sellers, there’s no escaping the claws of the IRS. Sellers now have no choice but to report their eBay income (or at least those processed through Paypal) in their tax returns next year.
For those who have not been declaring their online auction income, you use Schedule C Profit and Loss. The good part is that by reporting your income, you can also deduct your expenses resulting from your business activity, such as home office use, packaging and shipping supplies, eBay and Paypal fees, among others.