Help!! Audited on my 2021 Taxes over baseball cards!!
 

I got audited yesterday over my 2021 taxes for the Ebay sales. Any advice on what to do?

Find your cost basis and subtract it. Then declare the rest as income and pay your taxes.
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I paid taxes on it back in 2021. I got lucky and still had my receipts from the various auction houses. But Ebay doesn't send invoices for the fees they take out. Trust me Leon....I'm not getting rich. I just love buying and selling cards.

Bobby I think you can go to ebay payments and search from 01/01/2001 to 01/01/2022 and it lists each sale. deduction for fees and shipping, then net for each sale. It would be a long project for as much as you sell but it's at least a way to itemize the fees. Fees you can deduct is less taxes for you now. Good Luck!

eBay monthly report
 

I think if you look at eBay's monthly reports it shows eBay's Fees and shipping fees + other adjustments-- -

I don't mean to hijack the thread but where do I look to find ebay's monthly reports from 2021? I'm not experienced on ebay and can use the help!

Thanks! Didn't know that was there, it's a great tool!

Did you do your own taxes or did a CPA do your taxes?

I do my own. Turbo Tax. The CPA was too expensive.

This is making me laugh

Just hire the CPA to avoid these headaches

Did you get a 1099 from eBay for that tax year that they want to reconcile your adjustments or did you not qualify for a 1099 and this is all from scratch? You probably do need a cpa now, as no one here could know enough of your specifics to give you absolute correct information. But good luck and keep us posted.

I got a 1099 from Ebay that year.

Yeah, I have to agree. Coming to Net 54 for advice on an IRS audit isn't the first step I'd take.

^^This X100^^ If you are going to play you need to pay a CPA. Seriously it is worth it every time because of things like this. From personal experience being audited sucks but if you use a CPA it is easy. They take care of everything for you. At least that was my experience and I was audited by everyone that can audit a business. There are way more people that can audit you than you think. It is not just the IRS.

Welcome to the wild and wacky world of IRS examinations.

I am a CPA, and I've been through this a few times with some of my clients. My experience is that as long as you're not hiding stuff, you'll be okay. From what you've suggested above, it sounds like you haven't been hiding stuff. On the other hand, if you have been hiding stuff, then the whole process is going to get painful and ultimately very expensive.

As others have mentioned, your gain on sale for any given item is calculated as the sales price, less your selling costs (including eBay fees), less your cost to buy the asset (also known as your basis). Hopefully you filed the correct forms on your tax return to report your sales. And hopefully when you add up all of the sales reported on your tax return, it sums to the amount that eBay reflected on the forms 1099 that they filed with our friends at the IRS. If not, then the agent will probably start poking at those differences, trying to figure out why there's a difference, and whether that means that you have additional gains that need to be reported.

Part of the fun here will also revolve around whether you are a dealer, a collector, or an investor. Depending on which group you land in, your ability to deduct losses may be limited. And your tax rate will also be impacted.

I agree with the general sentiments here that if you're not a savvy tax professional, then now is the time to hire one. My guess is that without help, this audit will chew up an incredible amount of your time and introduce a lot of stress. In case you were thinking it, you probably don't want to hire me, as I'm far too expensive for this type of work, and generally don't do a lot of work with individuals.

Good luck, and hopefully it's a walk in the park. With any luck, at the National you'll be able to regale us with tales of how you beat the G-men at their own game.

Did your 1099 match up with what you reported in turbo tax? If not, that's usually a flag. I recommend what the others said and partner with a CPA - a good one is worth the cost based on my experiences.

Where is Bob C. when you need him? He is the man for this job, and can probably answer any question you may have, Bobby.

CPA is well worth the money.

I have been wondering the same. I enjoyed reading all of Bob C.’s very well-written and detailed post, no matter what the subject was.

my friend went thru this he did like 20 k in sales,,after it was said and done it was not good ,,a nightmare.not worth it.had to make huge payment plans.

What about Legal advice? :p

Where are you, Bob ? We need you, you old geezer. We have someone needing your advice :D

I was audited for baseball card sales many years ago -- about 100K worth, maybe around 2007. It was torture getting together the records as it was a lot of cards. My CPA dealt with those IRS savages and I ended up getting out of it pretty much completely. While I did all the legwork for my accountant, he handled the agent well. Money well-spent.

Dang Jeffrey. That sounds like a nightmare.

Just looked, I paid $196 for a CPA at H&R Block to review my taxes.

My situation is not all that uncommon but I wanted the extra set of eyes.

It helps me sleep better.

1. W2 employee
2. 1099-K from PayPal
3. 1099-K from eBay
4. Brokerage account sales, dividends, interest, etc.

They found a few extra hundred bucks to deduct once I sent it to them for their review.

It was beautiful!

Pay the CPA!

It was a nightmare doing the work of finding every purchase and sale. But the agent was utterly ignorant of baseball cards and how they are bought and sold. That ignorance helped me plenty.

Thank you! I used to pay the CPA. I forget what made me stop going to him. I felt like he didn't understand the nuances behind it. You can deduct a portion of your house, your electric bill, etc.

I am fearful of this as well. I didn't cheat the IRS....I deducted what I paid for cards to offset the sells. But I'll admit....my record keeping skills suck. Hopefully this won't make me wish I never messed around in the hobby.

Hopefully you didn’t try to report a “loss” and tried to take a ton of deductions to offset your regular income. I am not a CPA but that is always a bad idea.

I do use a CPA but they have been very upfront with me about what I am supposed to be doing and what is and isn’t allowed.

I did lose money on some cards. I took no deductions that weren't allowed. Bubble Mailers, PO Box, VCP subscription, Ebay fees, Paypal fees, etc.

In my experience, most of the work is actually in being able to track down and produce all the records you need, regardless of whether you hire a CPA or not. I was audited several years back for poker winnings, and I handled everything myself. I would do the same again if I am ever audited for selling sports cards. But I also keep meticulous records and I don't try to write off shady shit.

I don't write off shady shit, but my record keeping skills suck big time. About the only things I'm good at is saving old invoices. And even that is hit or miss.

The statement that you can get audited by entities other than the IRS is so true. I got audited by the CA EDD for my small business (3 family employee operation). The process took 18 months, at least 150 hours of my time, $5000 for my accountant and an additional assessment of $14.28, inclusive of interest and penalties. If they would have offered to settle for $5000 at the outset (even though I owed zero), I would have taken it.

You should be OK then. You just need to download all your eBay activity and get your bank records for any accounts you use and all your receipts. You can request data from ebay. It takes a few days for them to create a downloadable report for you. But it will have everything you need, buying and selling, with all the fees itemized.

I used to do my taxes with pencil and paper, Turbo Tax was
 

too expensive. Then a couple of years ago. I got a 1099-K from eBay reflecting 50K in sales. I immediately went to a CPA firm. There are many ways to deal with this, but we decided to go with Schedule C. As Calvindog points out, there is a ton of legwork, but there are also so many legitimate "expenses" including cost of inventory. And it gets easier and more routine every year.

I did schedule C as well....and that is what they didn't like....maybe they can't fathom selling 10 or so cards on Ebay and immediately being over their threshold.

Fun!

Schedule C is appropriate if you are a dealer. It could be that they intend to poke at that a bit, just to make you prove that your approach to buying and selling meets the usual indicia of acting as a dealer.

Question, Nicolo: What if you're not a dealer, but just a collector who has sold one card in his collection through someone else? If Schedule C is not appropriate, then what schedule is?

Thank you, my friend. I need the help. (read as HELP!!!!!!!!!!!!!!!!!!!!!!!!!!!) ---Brian Powell

Did you realize significant capital gains from the sale of baseball cards in 2021? If so that might have been the red flag that prompted the audit.

Not really. I had enough sales to trigger a 1099, but offsetting auction purchases and PSA fees....

It wasn't a full blown audit, but I also had the IRS question my schedule C for my baseball card revenue a few years back, and I basically just downloaded my ebay sales and sent it to them, and that was enough to satisfy the IRS in that case.

I don't know about your case, Bobby, but I think in general from what I've read here, is that if year after year, you are always reporting losses on your schedule C for your business, that's going to be a red flag for the IRS and get you audited. I'm not a CPA, so I probably have no clue what I'm talking about, but the IRS probably figures that if your business is always losing money, you would just close up shop and not continue anymore unless you are using it as an illegal tax shelter. Again, this is probably not you, and it just may have been an unlucky draw in this case.

This is known as the "hobby loss" rule. I believe if you lose money on a Sch C for 3 of the past 5 years the IRS can declare it a hobby and preclude you from taking such losses.

Yep. IRC Section 183(d) provides a safe harbor. If your business has net income for 3 of the last 5 years, then it meets the safe harbor to be a business and not a hobby.

If you're an investor or a collector, then the fun starts on Form 8949, and flows to Schedule D.

If you read the instructions to form 8949, there are some instructions that specifically speak to the sale of collectibles, and how the action gets reported.

What kind of sales did you do in 2021

Dollar amount

Ugh

The pitfalls of collecting and/or investing

35k

Not a surprise. Lower dollar and middle class tax returns are more likely to be audited than wealthy tax returns because small fry are easier to go after. You don't pick a fight with an 800# gorilla when you can beat up a spider monkey instead.

Your situation is unique and fact-driven, so there is no advice you can get here that will be worthwhile except to hire either an accountant or an attorney with audit defense experience. Sorry, but that's the reality of it. That said, I do have a few casual thoughts on the issues that part-time dealers face in general:

If there is a hobby vs. business challenge, did you follow the requirements of your state for doing business? For nearly all states, that would include applying for a resale permit and collecting and remitting sales taxes. If you did that, the odds of being labeled a hobby fall drastically.

One other thing to remember when dealing with tax authorities is that testimony is evidence. Just because you do not have a piece of paper does not mean you have no evidence of what you paid for a card. You will be surprised at how well you can recall card deals. I know I was recently when I bumped into a dealer who'd sold me some cards a decade earlier. I remembered exactly which cards I got from him. I can't remember to put away my shoes but the details of buying a 1967 Ken Holtzman signed card a decade earlier, yup.

Finally, preparation is key. Get your records in order and gather your thoughts in advance of meeting with the auditor and be ready to respond. Do not think you can outwit or anticipate the issue raised. You can't. You just have to play it where it lays.

Also, is it a full audit, or are they doing a line-item audit? Usually done through the mail.

It's a line audit. All related to selling cards on Ebay. Nothing related to my real job.

Adam, the IRS goes where the money is. The big guys have the highest odds of getting audited.

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Thank you Adam. No, no reseller id. I paid whatever the invoices asked for.

Logical but not true. Per the Motley Fool, in 2022, there were 12.7 audits per 1,000 returns filed by the lowest-income wage earners (making it a 1.27% chance of audit) compared with 3.8 per 1,000 returns filed by all other individual taxpayers. They don't go where the money is, they go where the low-hanging fruit is, and people who cannot fight are the easy ones.

Not sure where the fool gets their data, although I suspect they could be right.

In other news, GAO published a report on IRS audits for 2019, which you can find here:

https://www.gao.gov/products/gao-22-104960

If you're too lazy to click the link, then you can read the table below.

I do wonder if part of the issue is people who make a lot more, but report a lot less. So they fall into the bottom group, yet they get audited a lot more because they're obviously hiding income.

This is a bit misleading without context, because the higher audit rate for low-income earners is heavily skewed by people who claim the refundable Earned Income Tax Credit. And even with a credit so ripe for abuse with manipulated earnings, the IRS made it a point in 2023 to reduce the number of audits that target that group.

Looking at this chart and the report, it becomes more obvious how many lower income earners are targeted because of pure numbers.

The government loves to create graphs and statistics that slant the perception toward the narrative they wish you to believe. Honestly, one of my largest pet peeves.

This chart is simply stating the number of requested audits from those income brackets with no comparable of actual filed taxes in each bracket. As only the top 1% of the populous earns over 650k in a single tax year, those last 3 bars contain a fraction of filers. Those audit rates can be from a pool of hundreds in the top bracket vs 10's of millions in others. The amount of filers that claim incomes in excess of 5m positive yearly has to be a atom in the mass structure of Americans (1% of the population is 650k+ earners, so it would be a tiny fraction of that 1%). Previous studies has placed the percentage of Americans with a total net worth of 5m+ at around 9%. The number making that annually as a claimed positive is truly infinitesimal.

They could audit 100% of all over 650k top earners and it would still be dwarfed by astronomical numbers of low earners being handcuffed with tax burdens of audits they can't afford to fight. The IRS absolutely knows where they get the majority of audit collections from and it isn't from the top earners.

They fully admit so in the GAO report- "IRS officials said audit rates declined due to staffing decreases and because it takes more staff time and expertise to handle complex higher-income audits."

It also makes sense to not beat your gift horse mercilessly. The top 1 percent earned 22.2 percent of total AGI and paid 42.3 percent of all federal income taxes. In all, the top 1 percent of taxpayers accounted for more income taxes paid than the bottom 90 percent combined. If you push that group of earners into overseas tax shelters by hitting them harder what would be the plan to make up those losses?

This is also a particularly true but uncomfortable statement - "Audits of the lowest-income taxpayers, particularly those claiming the EITC, resulted in higher amounts of recommended additional tax per audit hour compared to all income groups except for the highest-income taxpayers. IRS officials explained that EITC audits are primarily pre-refund audits and are conducted through correspondence, requiring less time. Also, lower-income audits tend to have a higher rate of change to taxes owed."

I believe the highest audited county in the country is in the Mississippi Delta.


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Have any of your guys ever been audited for selling stuff on Ebay yet?

I have not. But I've also never gotten a 1099 from eBay.

I did have a bonus side quest with the IRS a couple of years ago, when their scanner failed to register a negative sign on my tax return, and they sent me a notice saying that I owed them $73k. But nothing related to cardboard.

Do you purchase the TurboTax with audit protection? If so, contact a tax expert on Turbotax and ask them for help.

I did use Turbo Tax but I purchased the base one. I don't believe it had audit protection.

:eek: Hire a CPA, get a tax license, and became a real tax paying business. I wish you the best. Report back on how it turns out for you.

But I'm a hobbyist.

I wouldn't use the word "hobby" when discussing your cardboard activities with the IRS, unless you want them to classify your activities as a hobby, which means you get the worst of all worlds when it comes to how you're taxed.

I have an ebay store. I would guess that I would have gotten a 1099 anyway because of the sales threshold, but I don't know for sure how they do things.

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What if you don't have the purchase receipts or records for the cards you sold?

How can the IRS prove or disprove what is reported? Or will the IRS fall back on "it's up to the seller to maintain detailed records"?

What if the person or persons you bought cards from are no longer amongst the living and cannot be called upon to testify or provide a deposition to the claims a person makes about purchase price of a card or cards?

What are common triggers for an audit related to collectibles sales?

Sounds messy.

Before taxes being a part of Ebay, not many collectors thought about taxes. We bought and sold at shows, online, and traded. Receipts weren't a thought. So if you bought something 15 years ago at a show, sold it in an auction today, and you took a loss. How would you prove that without a receipt?

The best alternative to a lack of receipts is a "diary" kept contemporaneously. Since you don't have that, you make a plausible guestimate of what you paid (including any related expenses). As long as you don't guess $1,000 paid for an item you just sold for $1, your estimates, assuming they are plausible, will tend to be accepted. The IRS can hardly "prove", or even suggest, you paid $0.

I have a 2012 Version of Quicken that I have been using forever.

Keeps track of my bank account and bills for me.

Every card I have purchased over the last 12 years has been a line item entry in Quciken detailing : Seller - Description - Cost

Certainly everything in the guidance from the IRS requires good records. Gold standard is 3rd party documentation. Next step down is contemporaneous self produced documentation. Lowest level is your current recollection.

And when it comes to business audits, they definitely take a hard line around documentation for deductions. At the same time, I’ve never had the IRS attempt to challenge the gain calculation for an asset acquired decades earlier, so I’ve never seen that element play out.

A lot will probably come down to how tough the agent wants to play. And also how large the amounts are. If it’s a $10 purchase from 30 years ago, you might just be okay. If it’s 6 figures, they might not be so willing to let it slide just on your word.

I had a large typo-related letter audit once. It got sorted out. Eventually. Only took about ten hours of my time and a few months.

Dealing with the tax authorities is unsettling in part because their methodology is the opposite of what we are used to in American jurisprudence, where the burden of proof is on the accusing party, innocent until proven guilty, etc. In tax stuff, it flips: they accuse and the burden is on you to debunk the accusation.

George, I think the IRS would be super happy if you were to "guess $1 paid for an item you just sold for $1,000" because this would maximize their tax revenue.

I have sold many zero cost baseball cards in the last few years, as I have been selling off the cards I got out of 5-cent wax packs in the 1950's when I was a kid. And yes, the taxes I have paid (22% federal and 5.75% Virginia) on these collectibles gains are painful. But, then I realize how fortunate I am that Mom didn't toss my cards out after I left home (she called before tossing them out several years later and asked if I still wanted them).

That is very cool, Val. I don’t even have my original pack-pulled cards from the 80s!


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Unless you’re a dealer, the federal tax rate on collectibles gains is 28%. Plus a bonus 3.8% net investment income tax for taxpayers whose adjusted gross income exceeds certain thresholds. Plus state and local rates where applicable.

For dealers, they pay tax at their ordinary income tax rate, which for fed can be as high as 37%.

For those of us who meet the NIIT thresholds, and live in states and cities with high rates, we often end up paying 40%-45% or more on our gains.

Gerontocracy
 

Guys remember when you pay taxes you are perpetuating the Gerontocracy!!...Don't do it!!...Jerry

Good point Val. Thinking in Polish. Oh well.

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Not so, Nicolo. The basic federal tax rate on collectible gains is the LOWER of 28% or your incremental tax rate on ordinary income. My incremental tax rate is 22% - yours may be higher.

Fair enough. I hadn’t considered that possibility.

Val,

Just curious, are you a CPA or tax preparer? It's not that I doubt anything you're saying, but there were comments about looking for tax advice on a internet chat board (ok, in our minds, we're more than a casual chat board) that make sense. :p

Worst case is that anything you sell has a $0 cost basis for you which means the entire sale would be considered "taxable" (for the most part). An assumption is that you would take the sale price and subtract the total cost basis of the item and that would be the taxable portion of the sale.

If the above is the case, are you indicating that the tax rate is either 28% (maximum) or if lower, what the sellers actual incremental tax rate is after all considerations (deductions, etc.)? Bottom line, it sounds like you have to add the sales/profit to your declared income, then that could possibly move you to a higher tax bracket (depending upon the amount of sales/profit being delared).

How does state tax work on that? Any considerations there?

Regarding a resale license/document. What if I have a resale tax license/document and I buy something from an auction house but may not put it up for sale because I'm part hobbyist (wink, wink). Is that allowed? Or is it one of those things where there's like an honor system and everyone should pay the tax on items that may not be for "immediate" resale.

Technically, someone could say that they purchased the item (no taxes due to resale license) with an intention of selling it, much later in the future.