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IRS cracks down on eBay, Amazon Marketplace and other online sellers' profits starting in 2011

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NY DVD Examiner

As we come nearer to the April 15th deadline to file your 2009 taxes, here is some news that may affect you in 2011. If you sell DVDs and other things online through eBay.com, PayPal, Amazon Marketplace, Google Checkout or other similar online selling venues, the IRS is introducing a new income reporting form called Form 1099-K, Merchant Card and Third-Party Payments. Starting in 2011, any bank or payment center that processes debit cards, credit cards, gift cards and electronic payments will be required to report the amount of money sellers received.

For most people who are sporadic sellers, this new form will not be applicable. Only sellers who make $20,000 and over or sell more than 200 transactions per year will receive a Form 1099-K. This information will be added to the person's other reported income from W-2 forms and independent contractors' Form 1099-MISC on their tax return. The reason for the creation of this new Form 1099-K is to help close the gap on unreported online earnings. Now the IRS can match the information reported compared to the individual's tax return information. This does not mean that only people who receive a Form 1099-K are liable for reporting their online earnings. It is the law to report ALL online earnings regardless. Online transactions are still traceable and impossible to evade the IRS if they have reason to investigate. David Montague, founder and President of The Fraud Practice says, "The proposed provision could deliver tax revenue in the amount of $9.529 billion over 10 years." For instance, just eBay.com alone attracts over 97 million U.S. users and over $25.2 billion of merchandise has been sold. Even if only one tenth of that does not get reported to the IRS as income, it is still $2.5 billion dollars! More than three-quarters of a million people rely on eBay.com as their primary or secondary source of income.

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Form 1099-K does not take into the account of the original cost of the merchandise, listing fees, maintenance costs, chargebacks, shipping costs and other fees that subtract from the profit. There are even times where the seller is losing money or selling at cost. These details need to be documented with receipts or other type of legit proof in order to be declared as loss on the tax return. The total reported will be the loss deducted from  the reported Form 1099-K amount. This reinforces the need for sellers to have accurate and up-to-date bookkeeping, no matter how trivial the sale is.

To track the transactions, the seller is required to supply the social security number or EIN (Employer ID Number) to the payment centers. If you feel uncomfortable with releasing your social security number, you can apply for an EIN. It can be done easily online, by toll-free phone (800) 829-4933, by fax or by mail. If you apply online or by phone, you will receive your new EIN immediately. If you fail to provide this information by 2012, you will be subjected to "backup withholding" where the payment centers will deduct monies and withhold income tax from reportable payments.

A possible loophole that sellers may use to get around this would be to sell using multiple accounts, such as each family member creates their own account instead of having one family account. Another loophole is for sellers to ask for alternative payments (cash, money orders) for their merchandise. This may cause a resurgence in the use of money orders again after it had lost to Paypal, which was more convenient with quicker turnaround and less non-payment issues. However, this will not be the case with eBay.com, as money orders and checks are no longer allowed as a payment method option. Sellers may also seek alternative ways to unload merchandise, such as by garage sales or local flea markets. As stated earlier, any intentional attempts to use these methods to avoid tax reporting to the IRS is illegal. If the IRS suspects suspicious activity, the seller may be susceptible to an audit.

Upon hearing this news, some New York sellers are surprised they were supposed to report all their eBay.com earnings. Many already have negative feelings towards the ever increasing eBay.com and Paypal fees; this will add to the nickel-and-diming routine and leave a harsher bittertaste. Keeping track of sales and merchandise costs are part of standard bookkeeping for dedicated online business sellers. For sellers who are clearing out their house and sell items that have been gathering dust for years, it will be a challenge for them to have any proper paperwork to prove they are not making a profit. One particular New York seller who wished to remain anonymous said, "The system is flawed and people will continue to find loopholes."

For DVD sellers, this will hit the hardest on anyone who sells high value collectibles such as SteelBooks and other out of print or hard-to-find DVDs. DVD collectors who have relied heavily on selling extra copies to fund their own collections may now have to rethink their funding source. Collectors may trade more than sell. For scalpers, those who sell many of these collectibles for the sole purpose of profit, this may no longer be as profitable and they may find other means for income. Perhaps there is a silver lining here for collectors who have always been irate about scalpers wiping out limited stock and forcing collectors to pay premium prices online.

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, NY DVD Examiner

Annie Chu is President of the renowned media specialty site, SteelBookHunterz.com, the first dedicated to SteelBook™ collectors worldwide. She is a frequent contributor to numerous Blu-ray and DVD-related sites. An avid collector, her personal collection contains well more than 1,000 Blu-ray,...

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