PayPal 1099 - bad news for MA and VT residents

[BobC]

Originally Posted by Jeffrompa

The wife and I have 5 eBay stores and have to pay tax on every sale . Just a reminder the penalty for underpaying the IRS is $ 25000 . I don’t think it’s worth the risk .

Just out of curiosity, where did you hear/get that $25K figure from? I know the IRS can charge you penalties and interest for underpaid taxes but, $25K?!?!?!? Been a CPA and doing taxes for about 40 years, and this would be a new one to me. Normally if you underpay your federal taxes there can be an underpayment of estimated taxes through the original due date of the return, which is basically an interest rate charged by the IRS that changes quarterly. It is based on the short term federal rate, plus 3% I believe. Once the return due date has passed, you could potentially get hit with an underpayment of tax penalty of up to 20% of the tax found to be due, plus they can also charge you interest on any amounts due until they are finally paid in full. Any amount of penalty due for not properly paying your correct income tax on time would be based on the amount of underpaid tax, not a flat $25,000 figure. So I'm curious to hear who told you that!

[calvindog]

Originally Posted by BobC

Just out of curiosity, where did you hear/get that $25K figure from? I know the IRS can charge you penalties and interest for underpaid taxes but, $25K?!?!?!? Been a CPA and doing taxes for about 40 years, and this would be a new one to me. Normally if you underpay your federal taxes there can be an underpayment of estimated taxes through the original due date of the return, which is basically an interest rate charged by the IRS that changes quarterly. It is based on the short term federal rate, plus 3% I believe. Once the return due date has passed, you could potentially get hit with an underpayment of tax penalty of up to 20% of the tax found to be due, plus they can also charge you interest on any amounts due until they are finally paid in full. Any amount of penalty due for not properly paying your correct income tax on time would be based on the amount of underpaid tax, not a flat $25,000 figure. So I'm curious to hear who told you that!

Agreed

[Jeffrompa]

Take it as word . I would of hate to say who had to pay it .

[calvindog]

Originally Posted by Jeffrompa

Take it as word . I would of hate to say who had to pay it .

Penalties and interest are determined based on a number of factors; there's not a flat 25K penalty for underpayment of taxes.

[Jeffrompa]

Originally Posted by calvindog

Penalties and interest are determined based on a number of factors; there's not a flat 25K penalty for underpayment of taxes.

If you do not pay the correct amount on your 10-99 , also they don’t audit you if someone thinks they can get away with it . They just tell you what you owe and collect it .

[BobC]

Originally Posted by Jeffrompa

If you do not pay the correct amount on your 10-99 , also they don’t audit you if someone thinks they can get away with it . They just tell you what you owe and collect it .

The entire IRS system is automated. I can guarantee you that every single 1099-MISC, 1099-INT, 1099-DIV, 1099-R, W-2 and any other miscellaneous 1099 form or statements they get, like SSA forms for social security, your HSA account, the 1095s for health insurance, and so on, are all eventually input into their system and tied back to every single taxpayer's return. Now it could take a year or two before they get around to doing it but, rest assured, they will. They have a max of three years from when a return was filed or originally due to go back and audit or question it. If their system kicks out any discrepancy in the numbers, or difference in the calculated tax, the computer immediately assumes it is correct and spits out a letter that gets mailed to the taxpayer saying they have discovered an error and/or discrepancy in figuring the tax they owed, here is the amount they have come up with, plus any applicable interest and penalty charges, and ask you to either pay it in full within a short period of time, or get back to them to let them know why you don't think you owe what they are asking for, and to provide proof of same. So in other words, you are guilty till proven innocent when it comes to the IRS.

Now as to Jeffrompa's statements, you might want to check your English as what you typed doesn't make a lot of sense. But, to maybe try to answer what you were getting at, if you get a 1099 from someone reporting a certain amount of sales, as long as the IRS can find at least that amount reported somewhere on your return, you probably won't get a letter/notice from them. For example, say a card dealer sells both on Ebay and at shows throughout the year. Say they get a 1099 from Paypal after the year ends for $100,000 of Ebay sales. And lets say they sell an additional $50,000 during the year at shows, for none of which anyone sends them a 1099. If on their personal tax return for that year they file and report the card business as a sole proprietorship on Schedule C, as long as the Gross Sales line item on that Schedule C shows at least the $100,000 that was reported to the IRS on the 1099 they received from Paypal, the IRS system will not show a discrepancy or deficiency in the income reported, and probably no letter or notice will be generated and sent to the taxpayer. End up reporting say only $90,000 of gross sales on that same return, which is less than the amount of the 1099 they got, and I can pretty much guarantee you they'll be getting an IRS letter or notice at some point about the discrepancy.

[Exhibitman]

Correct. Every so often I get a discrepancy notice from the IRS, typically when a big case settled during the tax year and the settlement proceeds go through my client trust account. Regardless of whether I actually keep any of the proceeds, the insurer will 1099 me for the full amount. Usually clears up with a letter. One of the dumber aspects of this 1099 stuff is that lawyers get them for everything (box 14 on the form) but it is not necessary to send them to other businesses if the business is incorporated. So I don't 1099 AT&T, for example.

If you are going to claim to be a card selling business, be business-like. I have a resale permit and eBay store, I remit sales and use tax, maintain correct records of costs, file a Schedule C, etc.

[BobC]

Originally Posted by calvindog

Penalties and interest are determined based on a number of factors; there's not a flat 25K penalty for underpayment of taxes.

There are a variety of penalties that can be incurred. There's an underpayment penalty for not paying in enough estimated tax through the original due date of your return. That is basically an interest penalty using an interest rate that changes quarterly and is based on the applicable federal short term interest rate in effect, plus 3%.

Then once you've reached the due date for your return, you can have separate penalties for either filing your return late, or paying the taxes late, or both. Those penalties build up over time and depend on how long you wait to either file or pay the taxes you owe. In both cases the penalty for late filing can go as high as 25% of the tax due with the return, and for late payment it can go up to an an additional 25% of the tax due. These additional penalties together are limited to no more than 5% per month of the ultimate tax due, up to the maximum amounts I mentioned. Oh, and they also tack on the interest charge to what is owed on top of everything else as well.

And in what I think is the case with what a lot of you in this thread are asking about, if you file your return and misclassify yourself as a business and are therefore disallowed any net losses you tried to deduct, or if the IRS gets information from someone that shows you to be in the business of selling cards and you don't properly report the income, or collectible gain, you could end up getting hit with an additional accuracy or negligence penalty for disregarding the rules of up to another 20% owed on the amount ultimately determined to be due. And that can also still be subject to the late payment penalty, and if you didn't file the return when originally due, including extensions, they could tack on the late filing penalty as well. And of course they keep charging interest on top of everything else till they collect it all.

Still, there is no flat $25,000 penalty but, depending on what you did or didn't do, the penalties can start to add up real quick if you owe the IRS any significant amount to start with. Why do you think there are all those radio and TV commercials for the companies that claim to be able to help you get out from under the IRS?