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IRS Set to Begin Monitoring Internet Transactions


Inserted directly into the housing bailout package signed by President George W. Bush was a provision requiring that records of merchant credit card transactions be sent directly to the IRS. “In the past, when IRS wanted to get information from banks and merchant accounts, it required going to a judge and getting a subpoena,” notes IRS enrolled taxpayer representative Eva Rosenberg. “With this new law in place, IRS can now step in and audit at any time – with little or no notice.”


The lifting of constitutional checks and balances on IRS intelligence gathering will go into effect in 2011. The Big Brother creeps in Congress obviously just want to extract more revenue from business owners who may be under-reporting their income. However, the evisceration of basic Fourth and Fifth Amendment rights has ominous implications for all taxpayers. IRS bureaucrats will be able to go on fishing expeditions for any “suspicious” credit card transactions and then put the burden of proof on taxpayers to refute the government's presumption of guilt.


Under the Obama “presumption of guilt” IRS, the tactics the agency will use to try to ensnare eBay sellers have become ominously clear. The following is excerpted from an IRS news release dated November 23, 2009:


The Internal Revenue Service today issued proposed regulations under a new statute requiring that, starting with transactions in calendar year 2011, the gross amount of payment card and third-party network transactions be reported annually to participating merchants and the IRS.


The provision was enacted as part of the Housing Assistance Tax Act of 2008 and is designed to improve voluntary tax compliance by business taxpayers and help the IRS determine whether their tax returns are correct and complete.


“Time and time again, we have seen that better information reporting helps the tax system work better by ensuring that everyone pays what they owe,” said IRS Commissioner Doug Shulman. “The new law gives us an important new tool for closing the tax gap and also provides business taxpayers better documentation to compute and report their income and expenses. The IRS will work closely with stakeholder groups to ensure a smooth implementation of this new program."


These proposed regulations, posted today on IRS.gov, propose rules to implement reporting of credit card, debit card and similar transactions, as well as transactions settled through third-party payment networks, such as third-party organizations that settle online transactions. The IRS also released for comment a draft version of new Form 1099K, Merchant Card and Third-Party Payments, which will be used to make these reports.


The new law requires banks and other payment settlement entities to report payment card and third-party network transactions with their participating merchants. The IRS emphasized that individual cardholders are unaffected by this requirement, and none of the cardholder’s personal information will be shared with the IRS.


The IRS has created Form 1099-K, which is similar to the existing Forms 1099 used to report interest, dividends and other payments. The first information return covering calendar year 2011 must be filed with the IRS and furnished to participating merchants in early 2012.

The IRS’s claim that “individual cardholders are unaffected by this requirement” is a blatant lie. They will be used as a revenue-enhancement tool for the IRS.

 Anyone who offers items up for sale on Internet commerce sites such as eBay should be especially concerned. Sellers who receive make than $20,000 worth of sales and/or have more than 200 transactions will be forced to report their activity on a new IRS form (1099-K).

 In addition to being a hub for online businesses, eBay also enables individuals to hold their own online garage sales. Sales, no matter how much they amount to in gross terms, are only taxable to the extent that they represent a profit. An IRS agent may suspect you are raking in profits based on the volume or dollar amount of your eBay account activity, even though you may actually be selling items at a loss. The agent could demand proof of the original cost basis you report. Absent receipts, cancelled checks, or other records, you could be assessed for “phantom income” and face possible penalties.

This has actually happened to people who have sold personal collections on the Internet, never intending to be “in business” or turn a profit. Most people probably don’t have receipts for items that given to them as gifts years ago or that have been collecting dust in the attic for 20 years. Under the new rules, if you attempt to sell anything for which you lack documentation, you face potential harassment from the tax cops are patrolling cyberspace and monitoring any and potentially all credit card transactions.

 The bottom line is that if you own a business or have an eBay, PayPal, or other account through which you receive credit card payments, you must be prepared for greater, more intrusive IRS scrutiny of your finances. Review IRS Publication 334, Tax Guide for Small Business, to be sure you're familiar with the extent of the record-keeping the IRS could ask you to produce on demand. You can download Publication 334 online (www.irs.gov/publications/p334) or request a hard copy through the IRS Forms and Publications office (800-829-3676).