PayPal 1099 - bad news for MA and VT residents

[scooter729]

I kept checking all year during 2017 to maintain my PayPal transactions to well under the $20K and 200 transaction thresholds. So I was quite surprised today when a 1099 showed up from PayPal for my sales of well under $20K.

I just got off the phone with PayPal - apparently Massachusetts and Vermont passed regulations late in 2017 that required PayPal to send out 1099's to residents of their states, for transactions totaling over $600. WTF?? Apparently this can be done with no notifications??

Did anybody else get blindsided by this turn of events? Hopefully for the rest of you - this isn't the start of this becoming the norm for all states.....

[rats60]

What is the issue? Do you not report all of your sportscard sales?

[scooter729]

Originally Posted by rats60

What is the issue? Do you not report all of your sportscard sales?

I also sell a bunch of other household stuff - tools, kids stuff, etc. - never really kept any records on any of that stuff. Could've found other methods of selling had I known.

I'm mad that the rules changed during the course of the year with no advance notice - you'd be cool with that if you were impacted?

[rats60]

EBay has sent those to me in the past. I don't care. All the sales go to PayPal then to my bank account and are reported as income on the tax return.

[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 .

[Exhibitman]

Every year regular as clockwork someone whines about 1099s from paypal.

You're supposed to pay your taxes; do that and you won't have to get all bunged up about paypal 1099s. I track my sales and pay my taxes and I could not care less whether paypal sends my state a 1099.

[slidekellyslide]

I fly past $20,000 in PayPal before February every year. I don’t have to worry about my state passing any regulations.

[savedfrommyspokes]

For many years, my expenses far surpassed my income while buying-selling cards for my collection. If your expenses offset your income, which it will for many collectors, it is simply a matter of documenting the said expenses and including them on your return to offset your gains.

[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 .

[Snapolit1]

Originally Posted by savedfrommyspokes

For many years, my expenses far surpassed my income while buying-selling cards for my collection. If your expenses offset your income, which it will for many collectors, it is simply a matter of documenting the said expenses and including them on your return to offset your gains.

Do not believe that's true unless you can substantiate that you are running a business and not a hobby. Occasional sales probably a hobby. Can't offset hobby expenses.

That's always been my understanding.

[Peter_Spaeth]

Originally Posted by Snapolit1

Do not believe that's true unless you can substantiate that you are running a business and not a hobby. Occasional sales probably a hobby. Can't offset hobby expenses.

That's always been my understanding.

So if I buy a card for 1000 and sell it for 800 I owe taxes?

[Snapolit1]

Originally Posted by Peter_Spaeth

So if I buy a card for 1000 and sell it for 800 I owe taxes?

No. What I was trying to say is that a sports collector cannot sell $3000 worth of cards in a year with a $2500 basis and say I didn't really earn income of $500 because I separately had $500 of expenses. Expenses don't figure into the equation unless it's a business you are running.
That's my understanding of how it works, but I am not a tax professional.

[bobbyw8469]

Originally Posted by Snapolit1

No. What I was trying to say is that a sports collector cannot sell $3000 worth of cards in a year with a $2500 basis and say I didn't really earn income of $500 because I separately had $500 of expenses. Expenses don't figure into the equation unless it's a business you are running. PWCC is running a business. I make occasional sales but can't seriously argue its a business.

That's my understanding of how it works, but I am not a tax professional.

I sell about $30,000 worth of cards on Ebay that I pay $33,000 for. Am I running a business? Or is it a hobby? Hell, you can sell just 2 Hank Aaron rookies and exceed their monetary threshold.

[Snapolit1]

Originally Posted by bobbyw8469

I sell about $30,000 worth of cards on Ebay that I pay $33,000 for. Am I running a business? Or is it a hobby? Hell, you can sell just 2 Hank Aaron rookies and exceed their monetary threshold.

https://www.irs.gov/newsroom/busines...for-deductions

[calvindog]

Originally Posted by Snapolit1

No. What I was trying to say is that a sports collector cannot sell $3000 worth of cards in a year with a $2500 basis and say I didn't really earn income of $500 because I separately had $500 of expenses. Expenses don't figure into the equation unless it's a business you are running.
That's my understanding of how it works, but I am not a tax professional.

I believe this is correct.

[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.

[BobC]

Originally Posted by bobbyw8469

I sell about $30,000 worth of cards on Ebay that I pay $33,000 for. Am I running a business? Or is it a hobby? Hell, you can sell just 2 Hank Aaron rookies and exceed their monetary threshold.

To receive the 1099-K form at year-end that reports your proceeds to the IRS, in addition to having to have at least $20,000 of sales, you also need to have at least 200 transactions. So just two sales would not necessarily trigger the party responsible for preparing the 1099 forms to generate for you under those circumstances. The two states mentioned by the OP have put forth there own requirements for reporting such income to them. That doesn't mean those sales are also being reported to the IRS but, I would guess that as long as whoever is preparing the 1099 forms to send to those states is doing that, they'll probably just go ahead and send them to the IRS as well. Just because the IRS rules don't require someone to send them a 1099 with your sales on it doesn't mean they can't go ahead and do it anyway.

Here's a link to another article that nicely spells out what the IRS is looking for in determining if you are a hobby or a business, in more straightforward language. You have to look at the various considerations the IRS uses and review each situation separately for the specific facts and circumstances.

https://www.kahnlitwin.com/blogs/tax...bby-a-business

The big rule of thumb that is most often followed is the "3 out of 5 years of income" rule, which is what is most commonly referenced when someone talks about the "Hobby Loss Rule". But, even if you have fewer than 3 years of income in the prior 5 years, you can still argue that the intent was to be a business and be profitable if you can show a good reason why the losses occurred. Just not as easy an argument to win with the IRS.

[bobbyw8469]

Originally Posted by BobC

To receive the 1099-K form at year-end that reports your proceeds to the IRS, in addition to having to have at least $20,000 of sales, you also need to have at least 200 transactions. So just two sales would not necessarily trigger the party responsible for preparing the 1099 forms to generate for you under those circumstances. The two states mentioned by the OP have put forth there own requirements for reporting such income to them. That doesn't mean those sales are also being reported to the IRS but, I would guess that as long as whoever is preparing the 1099 forms to send to those states is doing that, they'll probably just go ahead and send them to the IRS as well. Just because the IRS rules don't require someone to send them a 1099 with your sales on it doesn't mean they can't go ahead and do it anyway.

Here's a link to another article that nicely spells out what the IRS is looking for in determining if you are a hobby or a business, in more straightforward language. You have to look at the various considerations the IRS uses and review each situation separately for the specific facts and circumstances.

https://www.kahnlitwin.com/blogs/tax...bby-a-business

The big rule of thumb that is most often followed is the "3 out of 5 years of income" rule, which is what is most commonly referenced when someone talks about the "Hobby Loss Rule". But, even if you have fewer than 3 years of income in the prior 5 years, you can still argue that the intent was to be a business and be profitable if you can show a good reason why the losses occurred. Just not as easy an argument to win with the IRS.

Then the IRS has no clue as to how competitive the baseball card market actually is.

[BobC]

Originally Posted by Peter_Spaeth

So if I buy a card for 1000 and sell it for 800 I owe taxes?

No! If you are actually considered to be in the business of selling cards, you would report a $200 loss for the year if this is all the activity you had, and you'd be able to deduct that loss against your other taxable income. If you are considered to be in a hobby, you can still deduct the cost of the card against what you sold it for but, if you end up with a loss, you don't get to deduct it against your other income. You basically just show it as though you broke even.

And flip the scenario around and say you bought the card for $800 and then sold it for $1,000. If you are considered to be in the card selling business, the $200 net profit you generated would be included as part of your taxable income, subject to ordinary income tax rates, at a maximum rate of 39.6% for 2017. Also, if considered as a business, this would also likely be considered self-employment income and you'd probably be liable for self-employment taxes (social security and Medicare taxes) on that same net income, on a combined employer and employee rate of as much as 15.3%. And that is in addition to what you would owe as income tax on that same $200 net profit.

If you were considered to only being in a hobby instead, you would still have to include the $200 of net profit on your tax return but, now it would be considered a capital gain from the sales of a collectible, subject to a maximum income tax rate of only 28%, and there would be no self-employment tax owed.

These are very simple examples assuming the individual is operating more or less as a simple, sole proprietor, and not operating as a corporation or other business entity. I'm quoting maximum and potential tax rates also. To determine how much someone would really end up owing, you'd have to go through all the items in their returns and add in everything to see where they really come out in the end.

On a possible positive note, the new tax reform act may hold a benefit for those considered to be operating as a business. The new Section 199A calls for a deduction of up to 20% of the net income from pass-through entity businesses that meet certain requirements. To my knowledge, it appears that someone selling cards would be able to qualify for this. Again, you'd have to look at each person's specific tax facts and circumstances to determine the actual impact this may have on their returns starting in 2018.

[BobC]

Originally Posted by bobbyw8469

Then the IRS has no clue as to how competitive the baseball card market actually is.

Virtually every business market is competitive. The IRS doesn't need to have a clue, nor care one iota. All they know is that if you have net income, regardless of what/where it is from, you should be reporting and paying them tax on it.

[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 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?

[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 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.

Lawyers have special issues when it comes to payments going into their IOLTA accounts on behalf of clients. Had just helped a client in filing their 1099s for last year and had to explain how you often have to prepare two 1099s for payments to settle claims, one reporting 100% of the a settlement amount to the recipient, and a second showing the actual portion going to the attorney involved for their share. Or you may have to do Nominee statements to break up a 1099 that goes to one person but, needs to get broken up amongst several people. The trick is to make sure you report everything as it goes to the IRS so they don't come back at you for later on.

[BobC]

Originally Posted by 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.

Lawyers have special issues when it comes to payments going into their IOLTA accounts on behalf of clients. Had just helped a client in filing their 1099s for last year and had to explain how you often have to prepare two 1099s for payments to settle claims, one reporting 100% of the a settlement amount to the recipient, and a second showing the actual portion going to the attorney involved for their share. Or you may have to do Nominee statements to break up a 1099 that goes to one person but, needs to get broken up amongst several people. The trick is to make sure you report everything as it goes to the IRS so they don't come back at you for later on.