The new IRC Â§ 6050W payment settlement reporting requirements, which come into effect next year, broadly apply to debit or credit card transactions, as well as third-party network transactions. While customers of CPAs can easily understand how accepting point-of-sale payment cards can affect them, those whose online transaction income is paid either by payment card, or through PayPal or other third-party networks. may have questions about the reporting requirement – or about reporting income typically from online transactions.
The reporting obligation was introduced by the 2008 law on housing assistance tax (PL 110-289). Banks or other âmerchant acquiring entitiesâ will report cumulative amounts of payment card transactions to recipients and the IRS, and third-party networks will also report cumulative payments.
The Internet has certainly become a major place for retailing. In 2009, eBay.com alone processed over $ 57 billion in gross merchandise value. These transactions generated more than $ 31 billion in total net payments through PayPal, a subsidiary of eBay Inc. (annual report, eBay Inc., February 17, 2010).
Section 6050W (e) provides for a relatively high de minimis threshold for transactions settled through third party networks: reporting is required when the total gross amount to be reported to a payee exceeds $ 20,000 and the total number of transactions exceeds 200 ( both conditions must be met). This provision seems likely to exempt occasional sellers and even some small businesses from reporting, but businesses should be aware that there are many entities that are not banks and may not consider themselves to be payment settlement entities. the broad definition of “third party network.” “The final rule (TD 9496) published in August did not adopt a recommendation made by several commenters in response to Opinion 2009-19 that payment card transactions should also be subject to a de minimis exception. .
AN ONLINE GARAGE SALE?
Beyond any reporting requirements, individual tax clients of CPAs who sell personal items on eBay may not be aware whether their income from those sales is taxable. CPAs can direct them to the Andrea Orellana Tax Court case (TC Summary 2010-51). Orellana, an IRS revenue officer, said she was unaware she was supposed to report income from what she saw as an ongoing “online garage sale” through eBay. But the Tax Court upheld an IRS ruling that, as a result of these activities, she underreported her income by $ 30,663 for 2004 and $ 11,179 for 2005. The court suffered injuries. deficiencies totaling $ 12,428 and accuracy penalties of $ 2,486. The court noted that 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 penalties for accuracy) that it “cannot be expected that a taxpayer will keep records for a few small items sold on eBay,” but noted the number of Orellana transactions: more than 7,000 between 2000 and 2005.
Nonetheless, online sales could put taxpayers at risk of underpaid taxes and penalties – perhaps more from next year if their transactions are reportable – if, like Orellana, they mistakenly believe that they are not required to report income (amount realized minus base and selling expenses) simply because they do not consider themselves to be in business.
RECONCILIATION OF RECORDS WITH FORM 1099-K
Others who consider themselves in a trade or business and understand their online sales income reporting obligations might have difficulty reconciling their records with the amounts reported on the new Form 1099-K that the IRS drafted at this end. They would be well advised by their CPA to begin instituting procedures to do so. While many are concerned that the return will not reflect net amounts after “chargebacks” or other adjustments, the final regulations have complied with reporting only gross amounts. The regulations specify that an amount to be declared is determined on the date of the transaction and “is not intended to correspond exactly to the net, taxable or even gross income of a beneficiary”. Nonetheless, tax practitioners should at a minimum note the amount reported and attempt to reconcile any differences from what is reported in Schedule C.
CPAs should educate their corporate clients about these new information reporting requirements, as well as the expanded transaction reporting under Section 6041 starting in 2012 (see “The Next 1099 Revolution: Are You and your customers ready? â JofA, August 2010, page 40).
Tom preto, CPA, MBT, ([email protected]) adjunct professor at American Jewish University in Los Angeles.
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