Tax man eyes the eBay crowd
IRS considers changes that could mean new rules for those that sell goods online.
NEW YORK (CNNMoney.com) -- Facing a $345 billion tax gap, the Internal Revenue Service has set its sights on a new target - the rapidly expanding world of online business.
In an effort to crack down on under-reporting by individuals and businesses that sell goods online, an IRS official said the tax agency is discussing creating new tax reporting requirements. The review of tax policy was first reported on Tuesday by the tax-law trade publication Tax Notes.
While no details were given, the new reporting requirements could mean big changes for stand-alone Web retailers as well as individuals selling family heirlooms through popular online auction sites such as eBay Inc.
E-commerce continues to grow rapidly. Retailers generated $87 billion dollars in online sales in 2005, according to the Commerce Department's Census Bureau, up 22 percent from 2004.
The changes, which have been bandied about by the IRS for some time, are part of a larger IRS initiative to narrow the tax gap, or the difference between what taxpayers should have paid and what they actually pay.
Under current tax law, an individual who sells an item online and collects more money than its purchased value is expected to report that money as income on their tax return. If an item's original purchase value cannot be determined it is typically valued at $0 under current tax law.
Often times, those individuals that sell items online - such as a rare baseball card worth five times what it was purchased for - may not realize that they are obligated to report those earnings, says Tom Ochsenschlager, vice president of taxation at the American Institute of CPAs.
"They don't understand where they have crossed the line between a business and a hobby run out of their garage," says Ochsenschlager.
The IRS' attempts to promote better reporting of online profits has been stymied by the fact that most online transactions leave behind very little evidence for the tax man to track, especially if shoppers don't use a credit card or opt for an online payment system such as PayPal, which is also owned by eBay.
"A lot of things go unreported because there's no paper trail," explains Cindy Hockenberry, a tax information analyst at the National Association of Tax Professionals.
One remedy the IRS is considering is third-party reporting, or having an outside source, such as an online auction site, report information to the IRS.
Representatives from eBay stressed that maintaining their clients' privacy was of the utmost importance, but that they would turn it over to if the government request were accompanied by a subpoena.
At the same time, third-party reporting could prove to be a giant headache.
"It will be an administrative nightmare to figure out who has to report and what has to be reported and trying to track these millions of people that buy and sell on the Internet," says Hockenberry.