2. misc-audio
  3. 126811-2278

Potential Tax Liability

I have a friend who inherited many electronic items including those of the audiophile variety. Through ads on this site and others, he sold about $60k worth of equipment within this year.   He is not a dealer and does not have a business, either physically or on paper.  Most of the payment transactions were made through PayPal. He is now worried about potential tax liability. Sometimes he created invoices. Sometimes the money was sent through PayPal's "Friends and Family" option. The money was transferred from PayPal to his bank account periodically. It suddenly occurred to him about possibly having a tax liability.    Made me curious too.   Would these proceeds need to be declared as income to the IRS?
kodak805
jea48
2,944 posts
 
The 1099-K is meant to ensure that those that do business online report their income.

https://plantingmoneyseeds.com/3-things-your-home-business-should-know-about-the-paypal-1099-k/

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If I remember correctly EBay/PayPal, (EBay at the time owned PayPal), was forced by the IRS to send out a 1099-K to sellers that sold items that totaled over $20,000 or 200 transactions in a calendar year period. More importantly A 1099-K had to be sent to the IRS. Problem was the number of people that did not have an actual business on file with the state and or local governing body. They didn’t have a state sales tax permit or a federal ID number for the business. Why would the state let alone the IRS worry about some guy running a small business out of his home? The government wasn’t getting their piece of the pie. With the 1099-K not only do they get their due income tax and state/local sales tax money they know who might be running a business under the radar of the IRS, state, and local government. It’s all about getting their piece of the pie.

As for the OP’s friend I would be willing to bet he will get a 1099-K from PayPal. PayPal knows nothing about where the guy got the merchandise he listed on EBay that sold for over $60,000 so far this year. He will then have to pay the person who prepares his taxes to straighten out the mess with the IRS. One thing for sure I wouldn’t just throw the 1099-K in the garbage can when it comes.

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almarg
8,673 posts
 
Jim (Jea48), thanks for providing the links.  From the wording of your posts, though, I'm not sure if you've noticed that the requirement for issuance of a 1099-K is $20,000 **and** (not "or") 200 separate payments in a calendar year.

Best regards,
-- Al
 
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warmglowingtubesart
29 posts
 
cleeds-- If it makes the taxpayer feel better, then he should go ahead and consult someone. But, in my view, there is nothing that should be done in this situation unless and until the taxpayer receives a letter of inquiry or Notice of Audit.
 Less than 1% of all tax returns are actually audited, and the  I.R.S. must complete an audit (and send you a "statutory notice of deficiency") before they can legally make an assessment against you (in excess of the amount you showed as tax due on your return). Until there is an assessment,no collection efforts (such as levying on a bank account or garnishing your wages, for example) can be undertaken.
  If a taxpayer or representative  were to contact the I.R.S. about a filed return first, say to explain a Form 1099, their chances of being audited would only go up, thereby asking for "trouble".
   Also, once a statutory notice of deficiency is issued, the taxpayer has 90 days to file a petition in the Tax Court. Throughout the time the case is pending in court, no collection activities can be taken. Also, the taxpayer will be contacted via letter by a local Appeals Office early in the process, in an attempt to resolve the matter without going to trial.
    I would say to sit tight for now, and in the unlikely event of an audit, hire a tax attorney or C.P.A. at that time. I would also point out that the I.R.S. never contacts taxpayers by telephone, unless they are returning a call from the taxpayer. It just doesn't work that way. Thus, if someone calls you purporting to be from the I.R S., you can be sure that the caller is a fraud, probably trying to get personal information about you.

---Steve
jea48
2,944 posts
 

Al (almarg),

Thanks, I did read it wrong.

"AND"...... Capital letters too, and I still missed it.


PayPal is required to report gross payments received for sellers who receive over $20,000 in gross payment volume AND over 200 separate payments in a calendar year.

Jim

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almarg
8,673 posts
 
... In my view, there is nothing that should be done in this situation unless and until the taxpayer receives a letter of inquiry or Notice of Audit....   If a taxpayer or representative  were to contact the I.R.S. about a filed return first, say to explain a Form 1099, their chances of being audited would only go up, thereby asking for "trouble".
Steve (Warmglowingtubesart), thanks very much for your informative posts.  But note in the OP the indication that the items were sold "within this year."  So presumably what is being looked for is guidance about how the sale proceeds should be treated when the 2016 return is prepared a few months from now.  (And perhaps also if a final quarterly estimated tax payment for 2016 will be submitted).

Regards,
-- Al
 
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