OT: IRS Paypal Tax Situation

[mybuddyinc]

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

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

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

[Cozumeleno]

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.

[glchen]

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!

[khkco4bls]

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

[Head928]

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.

[MikeGarcia]

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.

..

[BobC]

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

[glchen]

Originally Posted by khkco4bls

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

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.

[Exhibitman]

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

[PhillipAbbott79]

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

[egbeachley]

Originally Posted by PhillipAbbott79

. It is highly unlikely that they can prove exactly what you sold, and prove exactly what you bought them for, if you paid cash.

Phil

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.

[Manny Trillo]

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

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