OT: IRS Paypal Tax Situation
 

I know this has been discussed before, but couldn't find it in search.....

Just got a lovely :rolleyes: letter from the IRS saying I owe 9K+ in unpaid taxes from 2014 :mad:

As stated in document, it is from my paypal "income" of 22K+.

Of course that's "Gross" --- hardly close to net income. Heck, I just break even most of the time .......

I'll go to a tax guy to be this all documented and sent in properly. But just to get a jump on things, want to get what might I need. I can only think (not that I'm thinking right right now) of two items:

1 - Invoices from auction houses for 2014 (of which I have a big one from REA).
2 - Bank statements showing ebay fees for the year.

Any other thoughts, suggestions, experiences would greatly be appreciated.

Not fun, Scott :(

Sorry to hear about this, Scott - hope it gets squared away quickly/easily.

When I do my taxes every year, I know that on top of purchases/eBay fees, a big expense I usually have is mailing costs from items I sell. I don't know if you keep all of your post office receipts, but if you bought postage online, you should be able to track those expenditures.

Some of this may depend on whether you fill out a Schedule C for selling your baseball cards as a "business" or whether it would be classified as a short term capital gain for collectibles.

Other things you would need would be paypal fees, and most importantly Cost of Goods Sold (COGS). That is, you need verified receipts, invoices, etc, stating how much you purchased the items that you sold. (if you purchased on ebay, you may be able to use ebay purchase history.) Good luck!

Here's my question if I bought everything in my collection at antique shows Brimfield other locations you normally just pay cash a lot of times and don't have receipts but what happens when you sell your whole collection at auction do you pay taxes on the difference of what you paid to what you sold it for

I got a bill for 14K from 2014's return this year.

Basically I had to amend my 14 return with a detailed schedule C showing purchases as well. Ended up not owing anything.

They're fishing....
 

They are assuming you had a 22K profit , ;they are relying only on what Paypal has documented that you are on record as receiving.
..you and your guy have to address the 22K "profit" ; hire someone who really really knows the codes........it may turn out that as it often does , you actually and truly have a loss . Don't expect a refund though. Isn't this a fun hobby ? Please keep us posted ; we're all in this particular boat together. Godspeed.Vaya Con Dios.

..

I've been doing taxes for almost 40 years and have a client that sells on Ebay, so I know what you got yourself into. You neglected to report the results of your online selling activity through Paypal, which obviously sent information about your activity into the IRS for 2014. You should have received a copy of this 1099 form sent from Paypal also. The IRS threshold for having Paypal report to them on an individual is that they have at least $20,000.00 of receipts, and at least 200 transactions, for a calendar year. The person who suggested you may have to determine if your are dealer or just selling collectibles/investments can forget that, at that volume you are most likely going to be considered a dealer by the IRS, trust me. As such, if your business isn't incorporated or set up as some type of Limited Liability Company, you're supposed to file a Schedule C as part of your federal tax return and report your sales activity for the year. In other words, you treat it as a sole proprietorship. Obviously to report this you'd start with your gross receipts or sales, and then list your allowable deductions, to finally determine your net taxable income for the year.

As some others mentioned, there are various expenses you can claim and use to reduce your taxable income, such as Paypal or Ebay fees, postage costs and shipping materials, etc. You're probably ignoring the biggest expenditure of all though, which is most likely your Cost of Goods Sold (COGS). Yes, you're supposed to keep track of the costs you incurred to acquire everything you sold. and then only deduct the actual cost of each item sold against the sale price you received for it. You can't just say that you bought $30,000 in cards during the year and only sold cards for $25,000, and claim you had no income and instead, a $5,000 loss. It doesn't work that way. Any item you buy and hold, as a dealer, basically becomes an asset of the business knows as inventory. You hold the value for each business inventory item purchased as an asset until you sell it. It is only then that you report the sales price as income and offset it by the cost you originally incurred to acquire the item sold.

The IRS doesn't know anything about what you do, other than the fact they got a 1099 form from Paypal showing you had gross receipts of a certain amount. Since you didn't report this income on the tax return nor show any expenses against it, the IRS can only assume you had no deductible expenses and went ahead and recalculated your return based on what they know. The letter they sent, and the amount shown as due on it, were sent for one main reason.......to get your attention, which they obviously did. You need to go back and try to figure out all your expenses from that year related to your card selling, including your COGS, and come up with your net taxable income.

And to add insult to injury, assuming that you are actually handing the sales and work yourself, you are actively involved in the business and not only is the net income going to be subject to ordinary income tax rates but, it is also probably going to be subject to self-employment tax (social security and Medicare) of upwards of 15.3% on top of of the income taxes.

The best thing for you to do is go back and star putting together all the data you can to try and figure out what expenses you may have. The IRS already knows your gross income based on the report they got from Paypal. Determining what your COGS sold is could be tricky if you don't keep decent records. And then in determining your other costs you want to try to include as much legitimate expense as possible. Don't forget things like mileage to drive to the post office, internet access costs and fees, possibly a home office deduction if you have an exclusive area of your home you us for the business, and so on. if you are not very experienced with the IRS or the rules, you probably should look for some expert advice. Once you think you have all that, you should write back to the IRS and explain that you have expenses to be deducted against the income reported to you from Paypal. You want to list everything out as best you can and include any supporting documents in your response. Once you've come up with what you believe is your true net income, ask the IRS to review your account and if need be, recalculate what you owe them. At that point you wait to hear their response back.

You should be able to bring the IRS calculated tax due way down but, don't be surprised if you do end up with a balance still due. And of course then they can also tack on interest and penalty charges for not originally reporting the income and paying the tax late. Good luck.

BobC

Interesting thread.

You'd have to discuss that with the IRS or your tax accountant. If you don't have any receipts (or something similar) to verify the purchase price of your items, technically, the IRS can say that you picked up those items for free, and the entire amount that you sold the item for is your profit and taxable.

Bob's take on what the IRS does is exactly correct; they compare paperwork from different sources and flag discrepancies. The letter is just an inquiry, not a final decision. You may need to amend your return to cover it. If your tax preparer had the 1099 and messed up they should amend for free and cover the penalties and interest, if any. If you didn't give the 1099 to the preparer, the cost and interest and any penalties are on you: garbage in, garbage out.

I think the IRS is doing more of this sort of paperwork inquiry/assessment than ever before for individual taxpayers. I got one from the IRS for a recent tax year because the IRS didn't have a W2 and W3 for me but had my 1040 showing the income. I got a letter proposing a drastic increase in my taxes because the IRS assumed that my entire salary was untaxed when I'd actually been fully withheld and paid in. I got it straightened out eventually and the IRS rescinded the entire proposed assessment. Scared the heck out of my wife but having handled disputes with the IRS for clients, I understood the nature of the inquiry and how to straighten it out.

In other words, don't panic.

You may want to look at this page on the IRS web site, which explains the rules on capital gains taxation of collectibles:

https://www.irs.gov/taxtopics/tc409.html

I never understood why 1099's go through Paypal and not Ebay. Paypal is essentially a glorified checking account. A place for money to come in and go out of. Not a source of "income".

As it is, I just report my Paypal 1099, claim all my deductions and expenses and pay my taxes accordingly.

Paypal is treated like a bank, Dave. They collect and disburse funds, so they are deemed to be knowledgeable about where the money goes. eBay doesn't have that same role now that it spun off PayPal. When PayPal was a subsidiary of eBay, of course, it was in effect eBay that was issuing the 1099.

I'm an idiot pertaining these discussions. Is their any benefit taking a check versus Paypal friends?

One Benefit:
 

..a check or money order won't rat you out to the federales.....

..

Hi,

Don't pay taxes on things that are not profit. While you sold them for 22,000 I am sure you paid something for them if not most of that. If you broke even you are likely free and clear on what you owe. It is highly unlikely that they can prove exactly what you sold, and prove exactly what you bought them for, if you paid cash.

I had a similar problem where they said I didn't fill in the boxes properly and I told them I accounted for it in my adjusted gross income. That is all that it took to get it to go away.

A simple hand written mailed reply stating you did not profit from the 22,000 in sales should do it. You may even want to indicate that there is a possibility of loss and the government may in fact owe you more money, then thank them for bringing it to your attention.

Phil

i was under the impression large checks(10000 or more I believe) does trigger a sequence of events at the bank...which could involve the federales?

Legally no. Regardless of payment type you are technically supposed to report it. Plus a bank could realistically notify if you have cashed or deposited a series of checks that reach a threshold.

Trades on the other hand.....

Scott, I'm in the same boat recently. Fortunately I document everything via a spreadsheet on Google drive so I have a good reference point on expenses that offset the sale for every card I own or have owned including any profit/loss. That and I keep all the invoice emails from AHs.

Bob,
I just read your post and this got me wondering if you might be overlooking another fairly simple Course of Action. If the items that he sold via paypal in 2014 were actually purchased a certain time ago (is it more than a year?) for this problem lets just say that his stuff was purchased in 2011-2012, can't he simply fill out a Schedule D and not worry about CoGS and begginning inv/end inv etc...??

I am anxious for your answer as it seems to me this would be ok if he held those assets for a long time (sorry not exactly sure if it a year or more?) Please advise, thanks!

Peace, Mike

All of this complexity is another good reason why we need a national retail sales tax to replace the current mess.

Sent from my SAMSUNG-SM-G530AZ using Tapatalk

Mike, it is my understanding that a card dealer is required to report using Schedule C ( which is used to report the results of a business), whereas a card collector is required to report using Schedule D. How long ago the cards were acquired prior to their sale is irrelevant in either case. If I remember correctly (my "CRS" disease gets worse every year!), one major difference exists with respect to cards sold at a loss; such losses are offset against cards sold at a profit by a dealer, but not so by a collector.
Val

Adam,

It's not that the IRS is doing more of this. They have always gone back and confirmed and checked everyone's tax return against all the W-2s and 1099s they receive on every taxpayer. This includes things like broker statements showing your proceeds from the sales of stock and even those statements from people having HSA accounts that take out distributions to make medical payments. If you miss those and don't pick them up on your return, it may take a year or two even but, the IRS will eventually match up those information forms they got with what is on your tax return. If they can't see that the appropriate amount is being picked up on your tax return where they expect it to be, their system will generate one of the "love letters" everyone just waits to get from the IRS. Now if what is missing or off doesn't change the tax liability due, they won't send the letter. Also, if they don't see where the reported amount is missing, they also will not send a letter. For example, the OP said he sold items using Paypal I believe. IRS got that information from Paypal and looked to see those sales receipts being reported on his tax return. Now let's say the OP had revenue from both Paypal and other sources, like cash paid to him at shows. Maybe when he filed his return he picked up and actually reported the cash payments he received but, forgot to add in the Paypal receipts. As long as the cash payments he reported on his return equal or exceed the amount Paypal reported, the IRS will leave him alone. They just assume the sales revenue he reported goes back against the Paypal info and don't realize he's under reported his income. The IRS is not that sophisticated and tries to automate everything so it is mostly done by machines and not humans. How do you think we end up hearing about how many billions of dollars each year they pay out in fake refunds?

BobC

I understand your question but, I kind of addressed this already when I mentioned how many dollars and how many transactions you have to have before Paypal is required to report your receipts to the IRS. At a minimum of $20,000 a year and 200+ transactions, that sounds a little bit more than just a casual collector who can take advantage of treating his sales as investments subject to capital gains taxes and not just ordinary income tax rates. Even so, you have to remember that unlike long term capital gains on the sale of regular investments like stock or bonds, those have a maximum capital gain tax rate of 20% under current law, regardless of what the taxpayer's income is. Collectibles have a higher potential capital gains rate of of up to 28%, even if held more than 12 months.

BobC

You're right, the IRS can prove anything. But they don't need to, it's up to you to prove to them how much you paid for the cards. If you can't prove then they assume the entire amount is profit.

Let me add a little more to this regarding the holding period of the assets you also asked about. If the person is in the business of selling cards, there is no capital gain or collectible treatment you can get tax-wise. You're in business and the cards you bought are inventory, period. Doesn't matter if you hold them two months or two years, when you sell them, the profit you make on the sale over what you paid for them is considered ordinary income. Now you also get the benefit of being able to deduct other expenses for the operation of your business, like postage, advertising, etc. A collector who buys and sells occasionally just for investment purposes is not in business and doesn't get to write off expenses. What he/she pays for the card is their basis in it till they sell it, give it away or otherwise dispose of it. For example, if I'm a card dealer and you call and tell me you have a killer collection you want to look at for possible purchase, and I fly out to see you and look at it, my cost of travel to come and see you is a business expense I could write off for tax purposes. If I'm just a true collector and investor, that travel expense is not tax deductible. See the difference? There's pros and cons going both ways.

Also, if you are in business and then stop and get out of it, there's nothing that says you can't take your former inventory and convert it to collectibles that you own personally. You'd want to give it some serious time from when you last transacted business as a card dealer though till when you tried to sell something and claim it as a collectible subject to cap gain treatment. You'd also have to watch out for what kind of business entity you may have held the assets in. Putting items into a corporation can have different results when you take them out as opposed to running your business as a sole proprietorship or even an LLC treated as a partnership or disregarded entity. Now you're getting into areas that start to get a little too technical and you begin to overthink these things. trying to keep it general and simple.

BobC

BobC

I just want to Make sure, so you only get tax papers if you do over $20,000 and 200 transactions?

Correct, must meet BOTH criteria.

To clarify the discussion here (or maybe muddy it), there are lots of different "1099" forms. There's 1099-INT used to report interest income, 1099-DIV for dividends, etc. The 1099 of interest here is the 1099-K used to report credit card transactions. (Another in the 1099 series is the 1099-MISC. That's the form that's issued for contractor work, rental income, etc.)

PayPal will issue you a 1099-K, not a -MISC. Here's the threshold for issuing the document, quoting from the IRS instructions for the form:

Exception for de minimis payments. A TPSO [third-party settlement organization; that's PayPal] is required to report any information concerning third party network transactions of any participating payee only if for the calendar year:
The gross amount of total reportable payment transactions exceeds $20,000,
and
The total number of such transactions exceeds 200.

However, I've seen 1099-Ks issued to people who were under that threshold. Uber and AirBnB, for example, send the doc to anyone who has any payment run through them.

The amount on the 1099-K shows the gross amount of the transactions. It's up to you to keep track of any fees.

As has been stated earlier, it's your responsibility to report all your income, from whatever source. Even if the money comes to you as cash or check, it's still reportable income.

Bill

Well, I suppose if your intent is to not report the income.

Bill

Ducking taxes is not nearly as nefarious as shill bidding :)

Thanks Bob for all this great information. Good to know. And I didn't know it.

Thanks everyone, especially Bob, for very insightful and helpful info.

I'm going to contact an accountant and go from there. I'm sure I can prove expenses, and see where I stand.

I will update when I have more information, as I think this is important to many of us.

Not so much Not Fun, Scott

So if you do over 200 transactions and spend over $20k (buying cards not selling) you do not have anything to worry about, correct? ITs only if your selling cards?

Depends on your wife. ;)

Correct. The 1099 series is used to report money paid to you by others. When you're buying your only tax responsibility is to keep track of your costs, so that when you do eventually sell you'll be able to substantiate your basis.

Your cost is everything you paid to acquire the card--buyer's premium, shipping, etc. If you bought a card raw, I'd even include any grading fee as part of the cost. The cost basis does not include storage, insurance, etc.

Bill

I sold less than 20 items and gross revenue was less than $2,000. So, I obviously don't do this for a living. Would it be reasonable to compute taxes owed through the calculations below?

Total sales, minus eBay fees, minus PayPal fees, minus postage, multiplied by 28%

I'm looking at a similar circumstance, however I'm selling for my dad using my paypal/eBay. I'll get the 1099, but will I just report an equal amount paid out as consignment somehow? Do friend and family transactions count toward that limit?

No good deed goes unpunished...

Yes ..F&F transactions count as do refunds credited back to your account.....

This happened to me last year and I had to go back and resubmit returns showing COGS and expenses to offset the gains as Paypal only reports total incoming amount of account. The real shitty part is I use my Paypal account for a lot of other things including collecting entrance fees for fantasy baseball, softball dues and various others non hobby related things that have nothing to do with income earned. I had to open another paypal account under my wife's name/info to split up the transactions to fall below the 200/$20,000 threshold

Sort of. You forgot to subtract how much you originally paid for the cards. Plus it's only 28% if you are In the 28% tax bracket.

Does anyone know if auction houses report your "income" if you consign some cards and subsequently receive a large check?

That is not my understanding. Internal Revenue Code (IRC) Section 6050W states that all US payment processors, including PayPal, are required by the Internal Revenue Service (IRS) to provide information to the IRS about certain customers who receive payments for the sale of goods or services through PayPal.

Personal payments that are not payments for the sale of goods or services will not be counted when determining if the IRS thresholds have been reached and will not be included on your Form 1099-K if you exceed the thresholds. However, all payments received for the sale of goods or services will be used to calculate the gross payment volume to be reported. PayPal monitors accounts to ensure that personal payments are not being used for sales of goods and services.

This thread certainly got my attention. Sort of tying into the question above, back in the 80's and early 90's, I was big into collecting vinyl albums. Now, as I get older, I decided to part with them, as I'm trying to decrease my collections. If I understand the info posted here so far, if I sell them through an auction house, I will owe taxes on the winnings? And since it was so long ago, I have NO IDEA what I paid for them. Ugh.

Second question first: If you're using PP to send him the proceeds by F/F, then no it doesn't count--because the 1099-K only shows money you've received. See Leon's response above for the situation if you're receiving money via F/F.
Now to the main event. I've prepared returns for people in your situation--where their eBay/PP account is being used as essentially a consignment shop. In that case I showed all the income (from the 1099-K), all the expenses, and the balance as cost of goods sold--so exactly zero profit. It's up to your dad to report the income on his tax return.

If you're selling off his long-time collection, then the income gets reported on his Form 8949 (which flows to Schedule D) with his costs as the basis. The amount of his receipts is everything he got from you.

Here's an example:

You sell a card for $100 plus $3.75 in shipping = $103.75. eBay/PP fees and shipping come to $20. You give your dad the remaining $83.75. On your Schedule C you show income of $103.75, expenses of $20, and COGS of $83.75.

Your dad paid $15 for the card in 1962. On his 8949 he shows a selling price of $83.75 and a basis of $15.

Did one of you pay to have the card graded? If it's you, the grading fees appear as an expense. If it's your dad, they show up as an increase in his basis.

If this series of events were ever questioned (and that's possible, with a Schedule C showing exactly zero) then in your reply you'd explain that this was a consignment situation for your dad, and include a copy of his return showing where the gain was reported.

Bill

Unfortunately, they were purchased over 15 years ago. I don't have any receipts and cannot remember what I paid for them.

As to the 28%, I thought the sales of collectibles were reported separately and taxes on those sales were capped. Long story short - I was under the impression this was not treated as ordinary income. Again, I don't do this for a living and certainly don't operate a business. So, no Schedule C.

Is the 28% cap correct, or am I missing something?

Scott,

Sorry to hear all this.
It so complicates/makes more costly the hobby of card-collecting.

As I may someday be in the same position, this thread is very informative and interesting to me. I realize now that I'm going to have to go about my record-keeping/accounting more professionally.

Fortunately, I have a hard-copy of almost all my ebay purchases over the years. I did also have a File for my Net54 transactions; unfortunately, I mistakenly deleted it a couple of years ago, and all those transactions are in cyber-space somewhere.

However, it occurs to me that I probably still do have records of many Net54 transactions in my Sent Mail file, so that might be a resource for you, too, if you're missing records.

And let me point out one bright side to your predicament:
You've been looking for a new project.
Now you've got one.

Hopefully, after deducting your COGS, you won't get killed.

Best.

Doug

All of his has further appreciated my late father's love of doing shows in person with cash to cash transactions.

Within the past 2 weeks REA, Goldin and SCP have all told me they DO NOT report sales to the IRS

That's really helpful information. Thank you very much!

Didn't EBay win a large law suit to not turn over sales to the IRS. They just report their profits from facilitating the sale between the buyer and seller. I think AHs are in the same boat.

You may be right Leon.....It was a couple years ago...I likely am misremembering.............