Ina Steiner EcommerceBytes Blog
News and insight focusing on ecommerce.
by Ina Steiner, Editor of EcommerceBytes.com
Mon Aug 19 2013 20:47:49

Small Merchants in the Crosshairs of the IRS

By: Ina Steiner

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The IRS is using data provided by PayPal, credit-card processors and other financial institutions to try and track down businesses who are under-reporting their income. The Wall Street Journal reported that the IRS has already sent 20,000 letters to small businesses and expects the program to expand.

Companies like PayPal must now report sellers' monthly sales transactions to the IRS on Form 1099-K. But payment processors report gross transaction volume. So merchants who get a lot of returns and chargebacks and who charge shipping, insurance and sales tax, for example, may appear to be under-reporting their income based on those gross sales figures.

Small business and tax guru Barbara Weltman, who contributes articles to EcommerceBytes, wrote about the issue on her blog, coming out against the practice. "This is another example of a government burden on small business owners that impedes their ability to run their businesses," she wrote.

The intent behind the new law may be good - should some sellers get away with underpaying taxes while other sellers pay their full due? But it's not clear how laborious a process it is for honest businesses who receive the letters to substantiate their numbers. We already spend an enormous amount of time filing taxes each April - do sellers really need to spend another boatload of time reconciling their records with those of payment processors?

See Tuesday's newsletter for more information about this issue, and let us know what you think!




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Perminate Link for Small Merchants in the Crosshairs of the IRS   Small Merchants in the Crosshairs of the IRS

This user has validated their user name. by: Philip Cohen
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Mon Aug 19 22:15:47 2013

There should be no need for any reconciliation if your business records are properly prepared and kosher: gross sales, less returns, less purchases, less other valid deductions = net income. If the gross sales you have declared do not closely approximate the sum of the electronic payments the IRS calculates that you have received then, deservedly, you are probably going to get one of those letters …

Perminate Link for Small Merchants in the Crosshairs of the IRS   Small Merchants in the Crosshairs of the IRS

by: comet This user has validated their user name.

Mon Aug 19 23:43:02 2013

....And just as easily report the correct income etc and get them off your back!

We have been dealing with an estate and have had several issues with the IRS where things did not come to light--a lesson for people who ever plan to die and leave things to their kids to figure out!!!!---and the IRS has actually been very forgiving and easy to deal with.  I am not talking millions here so not in the cross hairs of the "Big Guns" but even so--nothing more terrifying than getting one of those IRS envelopes!  

As a very small business --and getting ever smaller due to LACK OF SALES ON EBAY--I don;t worry about this.  But for those who do--get a good accounting program or even a brown envelope and KEEP your receipts for EVERYTHING---what you buy;  what you pay to ship-;  what you get back and the condition---and you should be fine.  

This is not rocket science.  

Perminate Link for Small Merchants in the Crosshairs of the IRS   Small Merchants in the Crosshairs of the IRS

by: pace306 This user has validated their user name.

Mon Aug 19 23:49:00 2013

The Paypal reporting shouls be easy ... no sales = no taxes to report.

Paypal is eBays Frankenstein. eBay/Paypal need to demonstrate that they are on the "up n up" they are the good guys (Amazon is the bad one). SO they snitch on sellers.

I cant hide anything and I dont - so none of this is going to happen to me - I have an accountant and everything is reported (theres no cash to not report).

The US govt needs money to spy on its citizens, pay for illegal aliens, flesh out Obamacare and other loosing laws - so they are comming to you. After all you are an easier target then making Google "unpark" the millions (or even Apple) offshore.

Interesting story - but its like when seeing the police - if you've done nothing wrong - you have nothing to fear!

Perminate Link for Small Merchants in the Crosshairs of the IRS   Small Merchants in the Crosshairs of the IRS

by: FREDDY This user has validated their user name.

Mon Aug 19 23:58:11 2013

You may be perfectly honest in your calculations. As a small home operated business can you afford a tax attorney and accountant to protect your rights? Unless they have changed their policy, they don't allow anything unless you can prove them wrong. I have been through this. If it wasn't for a tax attorney that I hired, I would probably have ended up in jail and lost everything. The only thing I owed was to the attorney and my doctor for anxiety and ulcer treatments.
The gov't is broke and they did not get the windfall like expected with this bill. So, they are going after everyone. You and I pay for the tax agents. Makes you feel all warm and fuzzy inside doesn't it.  

Perminate Link for Small Merchants in the Crosshairs of the IRS   Small Merchants in the Crosshairs of the IRS

by: FREDDY This user has validated their user name.

Tue Aug 20 00:03:33 2013

When will the threshold amount be dropped to zero - all income will be reported. The day is coming soon - no paper money - all transactions will be reported.
Nothing is sacred anymore including the conversations with your doctor.  

Perminate Link for Small Merchants in the Crosshairs of the IRS   Small Merchants in the Crosshairs of the IRS

by: val2525 This user has validated their user name.

Tue Aug 20 00:09:38 2013

This is nothing new, it happens with 1099-Misc income too.  You simply report the gross income from the 1009-K, or more if that's the case, and deduct the other items in the appropriate expense category.  

Perminate Link for Small Merchants in the Crosshairs of the IRS   Small Merchants in the Crosshairs of the IRS

by: teddychan This user has validated their user name.
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Tue Aug 20 00:37:06 2013

Sorry folks, but the increased scrutiny is because eBay (and Amazon) have been blatantly helping their sellers avoid collecting sales tax and paying income tax for a number of years, and Uncle Sam is done playing games. What do you need to sell on eBay? A credit card and an e-mail address, basically.

Many of my competitors are still not compliant with state and federal tax laws and there obviously is rampant tax evasion happening on eBay in almost all categories. Yeah, like the thousands of "part time" sellers who have real jobs but spend every weekend dumping stuff on eBay as a "hobby" and don't bother keeping track of their sales, much less reporting it? Blame them.

Perminate Link for Small Merchants in the Crosshairs of the IRS   Small Merchants in the Crosshairs of the IRS

by: BonzSeller This user has validated their user name.

Tue Aug 20 01:42:57 2013

I for one will not have to worry about this for a VEEEEEEEERY long time. The one market place I was selling on has done such stupid things and made so many bad decisions that most of it's sellers are not selling anything and haven't for months, including me. When EBay pulled that crap about forcing all it's sellers to take any and all returns for any reason and pay for the return postage, it assured that I'd not be listing there anytime soon. I think I MIGHT have made maybe 900 bucks this year so far. So until they lower that $ requirement, I'll  not be worrying about this at all  

Perminate Link for Small Merchants in the Crosshairs of the IRS   Small Merchants in the Crosshairs of the IRS

This user has validated their user name. by: Marie

Tue Aug 20 04:20:13 2013

@Phil

That is a very broad statement and simply not really accurate in my opinion.  With the way PP reports dollars on a 1099K, it can be different enough from real sales figures to bring attention to it by IRS.  

They aren't talking about reconciling your business records.  It's reconciling the PP numbers with your business records.  There is a big difference there.  And yes you should always do this.

***************

@ pace

Exactly how does PP "snitch" on sellers?  The 1099's are a federal requirement, not the doing of PP.  In fact PP and Ebay fought hard to try and stop the 1099's.

*****************

Reconciling the PP 1099K isn't as hard now as it was the first year out.  PP now has a report that is call the Reconciliation report you can print or download to your computer.  I have found it to be accurate.  You do need to play with the format to make it more easily read.  But it works fine.

@Val

It's not the same as a 1099misc.  In the 1099K [unlike the 1099misc] is all money received which on the surface sound like the 1099 misc, but it isn't.  Included in the 1099K is ALL moneys you refunded through the year.  It does not reduce the gross amount by refunds.  If you were to refund a company you got a 1099misc from, it would reduce the 1099misc.  The same is not true on the 1099K

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@teddy
Good grief can't anyone take ownership for their own actions. It's now Ebay & PP's fault that some member purposely evade taxes.  Really?

IRS didn't have to force me to pay my share of taxes.  From the day I started my business I paid whatever taxes were due.  I file the proper reports every year and I reported my income long before the 1099K came into existence.  I don't like paying taxes anymore than the next person.  But it is the law and it is the right thing to do.  To blame Ebay / PP for some members not reporting their income is ludicrous.
*****************

@bronzseller
Ebay does not force sellers to take returns on any and all items for any reason, nor do the force sellers to pay return shipping.  There is a program you can OPT into if you'd like that is called the Managed Return Program.  But you do NOT have to join. I think you are misinformed about something.  There was a recent glitch, but it was short lived and it is fixed.  So if that is what is stopping you, you can certainly revisit your position as you do not have to do that.

Perminate Link for Small Merchants in the Crosshairs of the IRS   Small Merchants in the Crosshairs of the IRS

by: sasikat9 This user has validated their user name.

Tue Aug 20 05:55:17 2013

Its about time those sellers who think that they are above having to pay taxes get caught.

Its been a long time coming. Hopefully the credit card processors will have to start reporting ALL payments from everyone. It will ensnare a whole lot more scammers.

Perminate Link for Small Merchants in the Crosshairs of the IRS   Small Merchants in the Crosshairs of the IRS

by: Ed This user has validated their user name.

Tue Aug 20 08:02:24 2013

This is simple Honest sellers pay their taxes and the other sellers may not understand what it takes to be in business. Accounting is part of being in business and if you fail you could be the next person to be contacted by IRS

Perminate Link for Small Merchants in the Crosshairs of the IRS   Small Merchants in the Crosshairs of the IRS

by: Moonwishes This user has validated their user name.
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Tue Aug 20 09:36:33 2013

Over my nearly 12 years selling on line, within different forums, I have always read about some 'seller' saying 'who me?' when it comes to paying taxes on what they earn. Some declare that they are only doing this as a hobby so they don't need to declare it -- wrong. Some say that they are only selling off their own stuff and when it is gone they are done so they don't have to keep records - wrong (you may not have to pay taxes, but it is best to be able to prove what sold and for how much compared to what you bought it for). And then there are the ones that when this thing about the 1099K came out they suddenly realized that they might have to pay some taxes (up to then I guess they assumed it was free money and no need to report it) I've read aobut many of them who insisted over the years that making money on line wasn't taxable. So in desperation they are asking on forums how to avoid taxes on the money they have earned, which can be hard to do if you didn't keep track of things. What it all comes down to, if you want to sell on line, figure that you will be bit by the selling bug, and start keeping good records from the first. It will pay in the long run. If the IRS has seen a consistent history of taxes paid on income earned selling  on line, I doubt if they will be looking at those folks as keenly as someone that out of the blue is now reporting $10K or more of on line income.

Keep good records - period. Honestly do your taxes each year.
If audited remember that when they send you a paper saying what they are going to audit, that is ALL they can look at (in other words, keep all other tax paperwork put away) unless they find deliberate attempts to lie and cheat. But if they say they need to see your on line sales bookwork, they can't also look at your investments or medical deductions unless they had previously in writing requested them. This has been a long time rule unless it has changed just recently.  

Perminate Link for Small Merchants in the Crosshairs of the IRS   Small Merchants in the Crosshairs of the IRS

This user has validated their user name. by: Rexford

Tue Aug 20 10:35:36 2013

Good, everyone should be paying their taxes.  I have no issue with this.

At the same time, it irritates me that extremely large companies can work the system to get out of paying what they should be paying in taxes.  I hope the IRS has the lens on those companies as well.

Perminate Link for Small Merchants in the Crosshairs of the IRS   Small Merchants in the Crosshairs of the IRS

by: tmooreseller This user has validated their user name.
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Tue Aug 20 12:42:49 2013

The IRS is just trying to justify its existence. The fact is that I have been reporting negative net income for years, thanks to the lack of significant sales anywhere. So I am not worried. I report every year, and I am not happy with the results of my own audit. The trick to staying out of their crosshairs is to keep your receipts, accurate records, and make a report every year, even if you had no business activity. Fail to report at all and you risk being the rabbit.

Perminate Link for Small Merchants in the Crosshairs of the IRS   Small Merchants in the Crosshairs of the IRS

This user has validated their user name. by: Larchlea1

Tue Aug 20 12:57:39 2013

Report your taxes honestly.  Then your only worry if the IRS comes calling is if you made a mistake.

I cheer every time I read these crackdowns. The cheats are costing the honest folks a lot of money.

Bottom line, if you're running a business, you need to understand the accounting. If you don't understand it, hire someone who does.  

And what a lot of small eBayers don't understand is that if you truly report it all honestly, you will likely have much less of a tax burden than you might imagine if you're letting fear and lack of information rule.

Perminate Link for Small Merchants in the Crosshairs of the IRS   Small Merchants in the Crosshairs of the IRS

by: pace306 This user has validated their user name.

Tue Aug 20 13:58:25 2013

Marie "eBay Lobbies State Legislators on PayPal Mobile Payments, Regulations"  ... do you know why?

Its to prove to the IRS that Paypal can be a trusted source for reporting 1099s to all authorities PLUS get states to overlook Paypals banking irregularities (money holds etc).

Yes 1099s are required - but Payapl only tells SOME truths - not all.

As for returns - no you dont have to take them - but then u loose automatically and most times dont get the item back plus you are on the bottom of the search.

"no you dont have to file a 1040 - you will just go to jail if you dont (or pay into obamacare if you dont want the insurance"

Perminate Link for Small Merchants in the Crosshairs of the IRS   Small Merchants in the Crosshairs of the IRS

This user has validated their user name. by: Ming the Merciless

Tue Aug 20 15:31:54 2013

The more attention the IRS pays to small businesses the more big businesses like ebay can get away with.

Connect the dots and follow the money about what sector controls the government.

Good article on Seeking Alpha by Jeff Jordan about the fact that investors are catching on to ebay's "underhanded" stock buy backs to enrich employees and why this is damaging investment value.

Perminate Link for Small Merchants in the Crosshairs of the IRS   Small Merchants in the Crosshairs of the IRS

This user has validated their user name. by: Philip Cohen
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Tue Aug 20 15:46:01 2013

Marie,

“They aren't talking about reconciling your business records.”

They are indeed talking about reconciling your business records. What other records would they be asking a “business” to reconcile? The simple fact is business records start with “gross sales” which means ALL sales, from which you then indicate all your valid deductions; if your declared “gross sales” don’t approximate or exceed what the IRS believes to be your electronic payments receipts you have an accounting problem (or worse), and that invites a query from the IRS …

Perminate Link for Small Merchants in the Crosshairs of the IRS   Small Merchants in the Crosshairs of the IRS

This user has validated their user name. by: Marie

Tue Aug 20 16:02:34 2013

@pace306

PP is not responsible for 1099K's coming into existent nor is Ebay.  It may be your experience that the 1099K that PP produces is not truthful, but that has not been my experience.  I think it could be done better and easier to reconcile to, but that does not mean that it isn't real accurate numbers, so I'm unsure of what your point is.

As for PP and banking regulations, that is a completely different subject.  And not one I said anything about here.

@Phil

Yes your business records need to be in accurate order, but what the article is saying is that IRS is contacting some people because what was reported on the 1099K is too different in their opinion from the income they reported.  There for the ARE asking them to reconcile the 1099K to their business records or I guess the other way around if you prefer.  But what the IRS wants to see is the reason your numbers are different from the 1099K.  To prove that out you need to reconcile.

It's not a big deal.  Like I said before, PP has a reconciliation report you can download.  It just isn't cosmetically pleasing or subtotaled by month.  So dropping it into Excel and edit it will make it easier to follow.

Perminate Link for Small Merchants in the Crosshairs of the IRS   Small Merchants in the Crosshairs of the IRS

This user has validated their user name. by: Philip Cohen
Web Site

Tue Aug 20 17:09:28 2013

Marie,

Assuming PreyPal’s “merchant account” summaries are accurate (?) you should not have to reconcile such activity—if your own record keeping is satisfactory.

The fact remains, if you are running a “business” then your “gross sales/receipts” should be approximately equal to (or greater than) your gross payments received by credit card merchant account means. They may be “greater than” if some receipts are received other than by credit card merchant account means, ie direct deposit, cash/cheque).

Of course, conversely, if your IRS-declared gross sales are noticeably “less than” your credit card merchant receipts, you are likely to have a problem with the IRS …

Regardless, if the retail banks can produce an accurate statement of a credit card merchant’s account activity, surely even the clunky pretend-bank “PreyPal” should too be able to do so—then, maybe not—LOL …

Clunkity, clunk, clunk, clunk …

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