Just when you thought you could get away with making a few extra bucks by selling things on craigslist or ebay, the new form 1099-K will report your transactions to the IRS. Many internet sellers who don't report their sales will no longer be under the radar. Beginning in 2011, any bank or other payment processing company that settles credit cards, debit cards, and electronic payments, including PayPal, will have to issue information returns (1099-K) telling the IRS what merchants receive.

While the majority of online sellers believe their sales are not subject reporting, the IRS believes they can eliminate the confusion by implementing this informational reporting. The IRS claims some don't report because they mistakenly believe that Internet sales are "invisible". Others do so because they are trying to evade taxes.

The use of information returns has grown in popularity with the IRS because they go a long way towards easily matching data and ensuring the proper reporting of income. Computers can match the information reported by taxpayers to the data contained in the informational return and automatically generate a notification to the taxpayer. Some of the most common information returns are W-2s, 1099-MISC for independent contractors and 1099-INT for bank interest.

“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."

Now, the most important part; which sellers are subject to this increased scrutiny? All merchants who accept payments through credit cards, debit cards, gift cards and PayPal will receive information returns telling them - and the IRS - the gross amount of the merchant card transactions. This will be broken down month by month. While the form uses the word "card," the IRS has made it clear that this is interpreted broadly to include third-party network transactions such as PayPal.

Exception: Very small merchants won't be issued information returns. "Small" for this purpose means annual gross sales on merchant cards of no more than $20,000 or 200 or fewer transactions. In other words, reporting is required only if gross amounts for the year exceeds $20,000 and there are more than 200 transactions.

If you sell online, you need to start organizing your books immediately!

Additional Info:
Proposed Regulations of "Information Reporting for Payments Made in Settlement of Payment Card and Third Party Network Transactions"

-david rocci