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

[bobbyw8469]

Originally Posted by Moonshot Moose

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.

[Gorditadogg]

Originally Posted by Exhibitman

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.

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

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[bobbyw8469]

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

[Exhibitman]

Originally Posted by Gorditadogg

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

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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.

[raulus]

Originally Posted by Exhibitman

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.

[gunboat82]

Originally Posted by Exhibitman

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.

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.

[JustinD]

Originally Posted by gunboat82

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."

[4815162342]

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


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[bobbyw8469]

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

[raulus]

Originally Posted by bobbyw8469

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.

[todeen]

Originally Posted by bobbyw8469

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

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

[bobbyw8469]

Originally Posted by todeen

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.

[bnorth]

Originally Posted by bobbyw8469

35k

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.

[bobbyw8469]

Originally Posted by bnorth

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.

[raulus]

Originally Posted by bobbyw8469

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.

[Gorditadogg]

Originally Posted by raulus

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.

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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[Fred]

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.

[SyrNy1960]

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?

[GeoPoto]

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.

[toledo_mudhen]

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

[raulus]

Originally Posted by Fred

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.

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.

[Exhibitman]

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.

[ValKehl]

Originally Posted by GeoPoto

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 paid for an item you just sold for $1,000, your estimates, assuming they are plausible, will tend to be accepted. The IRS can hardly "prove", or even suggest, you paid $0.

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).

[4815162342]

Originally Posted by ValKehl

… 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. …

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


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[raulus]

Originally Posted by ValKehl

yes, the taxes I have paid (22% federal and 5.75% Virginia) on these collectibles gains are painful.

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.

[gabrinus]

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

[GeoPoto]

Good point Val. Thinking in Polish. Oh well.

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[ValKehl]

Originally Posted by raulus

Unless you’re a dealer, the federal tax rate on collectibles gains is 28%.

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.

[raulus]

Originally Posted by ValKehl

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.

[Fred]

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.

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.

[ValKehl]

Fred, yes, I am a CPA, but my certificate has not been active/current since I retired in 2007. I probably am a rare CPA in that I have never done income tax returns for anyone (or any company) other than myself and my family members. FYI, the two major chunks of my career (16+ years each) were spent with the USA subsidiary of a British company where I was mostly involved in contract administration and with the finance department a large county government (which doesn't pay income taxes). However, I do know enough about income taxes "to be dangerous."

With respect to the cards I've sold that I got out of wax packs as a kid, while my cost of these cards was zero, I did have some costs to offset against what the cards sold for, such as TPG grading fees and eBay selling fees. The profit on collectibles sales (total sales $$ minus total costs $$) becomes part of one's federal taxable income, and this amount could be enough to put one in a higher incremental federal tax bracket. Here's a link to the federal tax brackets for 2023: https://www.irs.gov/filing/federal-i...other%20filers

You asked, "how does state tax work on that?" I believe state income taxation varies considerably. Having lived in VA my entire life, I am not familiar with other states. In VA, one pays the same income tax rate on the profit on collectibles sales as one does on other types of income.

Fred, I hope I have adequately responded to your questions, except for those you raised related to selling cards as a dealer, which I don't feel I have enough expertise to answer.

[Moonshot Moose]

Originally Posted by bobbyw8469

But I'm a hobbyist.

One thing to keep in mind: Under the Tax Cuts and Jobs Act, for tax years 2018 through 2025, hobby expenses are not deductible at all.

Beginning in 2018 and lasting through 2025, miscellaneous itemized deductions are no longer deductible and therefore no hobby expense is able to reduce hobby income. If the IRS classifies your business as a hobby, you'll have to prove that you had a valid profit motive if you want to claim those deductions.

[Moonshot Moose]

Originally Posted by Moonshot Moose

One thing to keep in mind: Under the Tax Cuts and Jobs Act, for tax years 2018 through 2025, hobby expenses are not deductible at all.

Beginning in 2018 and lasting through 2025, miscellaneous itemized deductions are no longer deductible and therefore no hobby expense is able to reduce hobby income. If the IRS classifies your business as a hobby, you'll have to prove that you had a valid profit motive if you want to claim those deductions.

If your selling activities are classified as a hobby, it's crucial to understand these rules to correctly file your taxes and avoid issues with the IRS. If your hobby starts to make more money or if you're making concerted efforts to be profitable, it may be time to consider if your hobby could qualify as a business for tax purposes. Consulting with a tax professional can provide clarity and help you make the best decisions based on your specific circumstances.

[4815162342]

Originally Posted by Moonshot Moose

One thing to keep in mind: Under the Tax Cuts and Jobs Act, for tax years 2018 through 2025, hobby expenses are not deductible at all.

Beginning in 2018 and lasting through 2025, miscellaneous itemized deductions are no longer deductible and therefore no hobby expense is able to reduce hobby income. If the IRS classifies your business as a hobby, you'll have to prove that you had a valid profit motive if you want to claim those deductions.

I haven’t sold a card in several years. “No hobby expense” sounds like you can’t deduct the cost basis for a card any more. Surely that’s not correct?


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[raulus]

Originally Posted by 4815162342

I haven’t sold a card in several years. “No hobby expense” sounds like you can’t deduct the cost basis for a card any more. Surely that’s not correct?


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Even if you're a hobbyist, your basis in the cards is properly included in the calculation of your gain. That's not technically a deduction.

But if you have a loss on the sale of a card, then you can't take that loss. So for example, you have 10 cards that you sell for a gain, you have to pick up those gains. If you have another 10 cards that you sell for a loss, those losses cannot be used to offset your gains.

And when it comes to other hobby expenses, like traveling to shows, your PSA membership, Net54 dues, home office deduction, tax preparation fees, etc., none of those are deductible.

[4815162342]

Originally Posted by raulus

Even if you're a hobbyist, your basis in the cards is properly included in the calculation of your gain. That's not technically a deduction.

But if you have a loss on the sale of a card, then you can't take that loss. So for example, you have 10 cards that you sell for a gain, you have to pick up those gains. If you have another 10 cards that you sell for a loss, those losses cannot be used to offset your gains.

And when it comes to other hobby expenses, like traveling to shows, your PSA membership, Net54 dues, home office deduction, tax preparation fees, etc., none of those are deductible.

Thanks for the clarification.

I hate to lose the Net54 deduction; the dues are pretty steep!


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[bnorth]

Originally Posted by raulus

Even if you're a hobbyist, your basis in the cards is properly included in the calculation of your gain. That's not technically a deduction.

But if you have a loss on the sale of a card, then you can't take that loss. So for example, you have 10 cards that you sell for a gain, you have to pick up those gains. If you have another 10 cards that you sell for a loss, those losses cannot be used to offset your gains.

And when it comes to other hobby expenses, like traveling to shows, your PSA membership, Net54 dues, home office deduction, tax preparation fees, etc., none of those are deductible.

This is exactly why I always recommend getting a CPA. Too many people read stuff on the internet and believe it because it fits what they want to be real like taking deductions you really can't. Home Office deduction LOL good luck on that one if you ever get audited.

[bobbyw8469]

Originally Posted by Moonshot Moose

One thing to keep in mind: Under the Tax Cuts and Jobs Act, for tax years 2018 through 2025, hobby expenses are not deductible at all.

Beginning in 2018 and lasting through 2025, miscellaneous itemized deductions are no longer deductible and therefore no hobby expense is able to reduce hobby income. If the IRS classifies your business as a hobby, you'll have to prove that you had a valid profit motive if you want to claim those deductions.

I thought that was innate??? No one EVER buys a card hoping that they LOSE money on it???

[Leon]

I have been writing off my Net54 dues for around 20+ yrs now. So far it hasn't been a big tax savings.
The one time I have ever been audited, I had a loss of a few k on a few cards. I counted the losses and showed the cost and sale price. They passed the audit with no issue.
Now, I did have an errant 1099 that I missed and owed taxes on. But my card losses were fine.... (except they were losses )

ps...I have had the same CPA for about 25 yrs...worth his weight in gold.

Originally Posted by raulus

Even if you're a hobbyist, your basis in the cards is properly included in the calculation of your gain. That's not technically a deduction.

But if you have a loss on the sale of a card, then you can't take that loss. So for example, you have 10 cards that you sell for a gain, you have to pick up those gains. If you have another 10 cards that you sell for a loss, those losses cannot be used to offset your gains.

And when it comes to other hobby expenses, like traveling to shows, your PSA membership, Net54 dues, home office deduction, tax preparation fees, etc., none of those are deductible.

[Jersey City Giants]

I had a big deal many years ago that forced (yes forced and not because I needed money) more to sell through an auction house. Nabbed a ton of money but my issue was that most of the items were purchased many years before and had no receipts. Hence, my accountant had me do a "fair value assessment" on each lot (there were like 80 of them). This basically was me finding three recent sales of the same or similar item. Worked out bout some of the game worn items were tricky. Did my best as I wanted to pay my taxes. However, you can game it a bit (your PSA 4 that you sold was slightly off center but you can find a record of three nicer 4s that sold). In the mind of the government a 4 is a 4.

[doug.goodman]

Topps sent me a 1099 back in 1992 because I had "won" so many packs of the gold winner cards. They valued them at I think $3 per pack and I had gotten so many of them that I was able to put a complete set together.

For those of you who have never put a set together from packs, you probably need 5 or 6 times the number of cards in a set to make a set from packs. Maybe more.

19 year old union grocery clerk Doug got screwed in that deal, hahahaha.

And I still have the set,
Doug

[Snapolit1]

Missing a 1099 is a huge reason many people get audited.

Originally Posted by Leon

I have been writing off my Net54 dues for around 20+ yrs now. So far it hasn't been a big tax savings.
The one time I have ever been audited, I had a loss of a few k on a few cards. I counted the losses and showed the cost and sale price. They passed the audit with no issue.
Now, I did have an errant 1099 that I missed and owed taxes on. But my card losses were fine.... (except they were losses )

ps...I have had the same CPA for about 25 yrs...worth his weight in gold.

[jchcollins]

Originally Posted by Snapolit1

Missing a 1099 is a huge reason many people get audited.

I don't think they drag it out that far anymore. If you get a 1099 that you ignore, and the IRS computers match that up - they'll just send you a bill.