OT: IRS Paypal Tax Situation

[BobC]

Originally Posted by Exhibitman

Bob's take on what the IRS does is exactly correct; they compare paperwork from different sources and flag discrepancies. The letter is just an inquiry, not a final decision. You may need to amend your return to cover it. If your tax preparer had the 1099 and messed up they should amend for free and cover the penalties and interest, if any. If you didn't give the 1099 to the preparer, the cost and interest and any penalties are on you: garbage in, garbage out.

I think the IRS is doing more of this sort of paperwork inquiry/assessment than ever before for individual taxpayers. I got one from the IRS for a recent tax year because the IRS didn't have a W2 and W3 for me but had my 1040 showing the income. I got a letter proposing a drastic increase in my taxes because the IRS assumed that my entire salary was untaxed when I'd actually been fully withheld and paid in. I got it straightened out eventually and the IRS rescinded the entire proposed assessment. Scared the heck out of my wife but having handled disputes with the IRS for clients, I understood the nature of the inquiry and how to straighten it out.

In other words, don't panic.

You may want to look at this page on the IRS web site, which explains the rules on capital gains taxation of collectibles:

https://www.irs.gov/taxtopics/tc409.html

Adam,

It's not that the IRS is doing more of this. They have always gone back and confirmed and checked everyone's tax return against all the W-2s and 1099s they receive on every taxpayer. This includes things like broker statements showing your proceeds from the sales of stock and even those statements from people having HSA accounts that take out distributions to make medical payments. If you miss those and don't pick them up on your return, it may take a year or two even but, the IRS will eventually match up those information forms they got with what is on your tax return. If they can't see that the appropriate amount is being picked up on your tax return where they expect it to be, their system will generate one of the "love letters" everyone just waits to get from the IRS. Now if what is missing or off doesn't change the tax liability due, they won't send the letter. Also, if they don't see where the reported amount is missing, they also will not send a letter. For example, the OP said he sold items using Paypal I believe. IRS got that information from Paypal and looked to see those sales receipts being reported on his tax return. Now let's say the OP had revenue from both Paypal and other sources, like cash paid to him at shows. Maybe when he filed his return he picked up and actually reported the cash payments he received but, forgot to add in the Paypal receipts. As long as the cash payments he reported on his return equal or exceed the amount Paypal reported, the IRS will leave him alone. They just assume the sales revenue he reported goes back against the Paypal info and don't realize he's under reported his income. The IRS is not that sophisticated and tries to automate everything so it is mostly done by machines and not humans. How do you think we end up hearing about how many billions of dollars each year they pay out in fake refunds?

BobC