Forgot to Pay Taxes on eBay Income?
August 9, 2007
Minimize Your eBay Taxes & Maximize Your eBay Profits with eBiz Tax Tips
What should you do if you “forgot” to pay taxes on your eBay income? I asked this question of a tax friend recently and got a multi-part answer that will likely interest you.
The Politically Correct Answer
The first part of the answer was to be expected. According to the tax code you should file an amended return with form 1040X and report the additional income you omitted. I did a little bit of research on how this works when I recently ran across an electronic copy of a 1099–INT from ING Direct I thought I had forgotten to report. Luckily it turned out the interest had been reported but this is what I found in my search.
* Your filing status
* Your total income
* Your dependents
* Your deductions or credits
It’s likely the IRS will eventually notice your error and want their money if the problem is in their favor. However, if you catch the mistake first and report it they may waive some penalties. Why will they eventually notice? Because the money was probably reported to the IRS by the company associated with the income.
In this case you’ll have to work with your tax preparer or through your tax software to file the 1040X. If you used TurboTax it will help you with the form.
The Other Answer
Now for the second part of the answer. If you report income on form 1040X for previous tax periods, you are liable for interest and penalties from the date it should have been reported. The IRS may waive the penalties but they have no obligation to do so. In addition, your state will be notified of the income as well and can also collect interest and penalties.
In my example above, ING Direct sent in a 1099–INT to the IRS informing them of my income. Although it will likely change in the future, eBay has not yet sent any income information to the IRS on its sellers. This means the IRS is not aware you missed reporting income.
My tax friend pointed out that you can still pay the original taxes you owe and avoid the penalties by reporting the income on the next year’s tax return. Of course, the tax code requires you to report the income in the period in which you earned it and if you ever get audited you’ll owe even more interest and penalties than you would have because more time will have passed. I’m not a tax expert so ask your accountant about the potential implications of this approach.
Think Before You Act
I’m not recommending you wait to report missed income, just passing along what I found in my research. Personally, I paid taxes on my eBay income from last year and paid estimated taxes for this year so I should be all set.
Some people feel if you catch an honest mistake and report it you shouldn’t be penalized. They might ask what’s worse, someone paying the taxes late vs. not paying at all because they don’t want to get hit with penalties. Of course, the IRS doesn’t care if the mistake was honest or not, they just want their money and will take as much of it as the law says they can.
Take Control of Your eBay Taxes
The simplest solution is obviously to not miss anything on your tax return. The best way to do that is to keep good records and not put off doing taxes until the last minute. A great tax resource for eBay sellers that’s really helped me stay on top of my taxes is a book by small business expert Tim Knox and tax expert Kristine McKinley called eBiz Tax Tips.
Knox and McKinley help make sense of the tax requirements for your eBay business and show you many ways to reduce your tax burden. The tag line of the book is how to minimize your taxes & maximize your income and I think the book really does deliver on that promise. If you’ve been slacking on your eBay taxes, wonder if you’ve been doing it right, or are looking for ways to reduce the amount you pay I would definitely check out eBiz Tax Tips to help get your eBay taxes under control.
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All posts by Ben Edwards