The payment settlement reporting requirements of new IRC § 6050W, which go into effect next year, apply broadly to transactions conducted by debit or credit card, as well as third-party network transactions. While CPAs’ clients can easily understand how accepting payment cards at point of sale might affect them, those with income from online transactions settled either by payment card or through PayPal or other such third-party networks may have questions about the reporting requirement— or about reporting income generally from online transactions.
The reporting requirement was introduced by the Housing Assistance Tax Act of 2008 (PL 110-289). Banks or other “merchant acquiring entities” will report aggregate amounts of payment card transactions to payees and the IRS, and third-party networks likewise will report aggregate payments.
The Internet has certainly become a major venue for retail commerce. In 2009, eBay.com alone handled more than $57 billion in gross merchandise value. Those transactions generated more than $31 billion in net total payments through PayPal, which is a subsidiary of eBay Inc. (annual report, eBay Inc., Feb. 17, 2010).
Section 6050W(e) provides a relatively high de minimis threshold for transactions settled by third-party networks: Reporting is required when the total gross reportable amount to a payee exceeds $20,000 and the aggregate number of transactions exceeds 200 (both conditions must be met). This provision would seem likely to exempt casual sellers and even some smaller businesses from reporting, but businesses should be aware that many entities that are not banks and may not consider themselves to be payment settlement entities fall under the expansive definition of “third-party network.” Final regulations (TD 9496) issued in August did not adopt a recommendation made by several comment submitters in response to Notice 2009-19 that payment card transactions also be subject to a de minimis exception.
AN ONLINE GARAGE SALE?
Beyond any reporting requirements, CPAs’ individual tax clients who sell personal items on eBay might not be sure whether their income from such sales is taxable. CPAs can point them to the Tax Court case of Andrea Orellana (TC Summary 2010-51). Orellana—an IRS revenue officer—said she hadn’t known she was supposed to report income from what she regarded as an ongoing “online garage sale” through eBay. But the Tax Court sustained an IRS determination that because of these activities she underreported her income by $30,663 for 2004 and $11,179 for 2005. The court sustained deficiencies totaling $12,428 and accuracy-related penalties of $2,486. The court noted she was in a better position than many taxpayers to know that her online sales produced potentially taxable income. The court added (in the context of assessing accuracy-related penalties) it “might not expect for a taxpayer to keep records for a few small items sold on eBay,” but noted the number of Orellana’s transactions: more than 7,000 between 2000 and 2005.
Nonetheless, online sales could put taxpayers at risk for underpaid taxes and penalties—perhaps more so starting next year if their transactions are reportable—if, like Orellana, they mistakenly believe they’re not required to report income (amount realized, less basis and selling expenses) just because they don’t consider themselves to be in business.
RECONCILING RECORDS WITH FORM 1099-K
Others who do consider themselves in a trade or business and understand their income reporting obligations from online sales could find it difficult to reconcile their records with amounts reported on the new Form 1099-K the IRS has drafted for this purpose. They would be well advised by their CPA to begin instituting procedures to do so. Despite a concern by many that reporting would not reflect net amounts after “charge-backs” or other adjustments, the final regulations adhered to reporting of gross amounts only. The regulations specified that a reportable amount is determined as of the date of the transaction and “is not intended to be an exact match of the net, taxable, or even the gross income of a payee.” Nonetheless, tax practitioners should at least note the reported amount and attempt to reconcile any differences from what is reported on Schedule C.
CPAs should advise their business clients of these new information reporting requirements, along with expanded transaction reporting under section 6041 starting in 2012 (see “The Coming 1099 Revolution: Are You and Your Clients Ready?” JofA, Aug. 2010, page 40).
By Tom Prieto, CPA, MBT, (firstname.lastname@example.org) an adjunct professor at American Jewish University in Los Angeles.
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