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

[brian1961]

Originally Posted by raulus

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

[Yoda]

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.

[bobbyw8469]

Originally Posted by Yoda

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....

[glchen]

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.

[stlcardsfan]

Originally Posted by glchen

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.

[raulus]

Originally Posted by stlcardsfan

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.

[raulus]

Originally Posted by brian1961

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

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.

[notfast]

What kind of sales did you do in 2021

Dollar amount

[mrreality68]

Ugh

The pitfalls of collecting and/or investing

[bobbyw8469]

Originally Posted by notfast

What kind of sales did you do in 2021

Dollar amount

35k

[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.

[Moonshot Moose]

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

[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.

[bobbyw8469]

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

[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.

[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

[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.

[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.

Sent from my SM-S906U using Tapatalk

[Exhibitman]

Originally Posted by Gorditadogg

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

Sent from my SM-S906U using Tapatalk

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.

[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.

[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.