IRS to Track Online Sales in Search of Unpaid Taxes

People who make money selling items online will face extra scrutiny from the Internal Revenue Service when they file income tax returns for this year.

For the first time, payment processing networks such as PayPal will tell the IRS about sellers who use credit cards and debit cards to collect at least 200 payments that total more than $20,000 during 2011.

People who sell more than that amount online should take steps now to track their business expenses, said Mark Patrick, a Jacksonville certified public accountant. He said people who think they're making money from a tax-free hobby will discover the IRS is treating them as a taxable small business.

"They need to start keeping at least a spreadsheet or ledger of all the expenses they have," he said.

The stricter IRS oversight is part of the federal government's attempt to track down unreported income and boost the amount of taxes paid. By requiring the payment processing networks to report when a seller has garnered $20,000 in sales from online payments, the IRS can check whether the seller has fully disclosed his amount of sales.

"They suddenly find they have a business they didn't think they had," Patrick said.

Sellers should keep accurate records of their expenses so they can claim deductions that will lower their net taxable income, Patrick said.

For instance, he said people who sell online obtain many items at garage sales and flea markets.

"I've seen the guys come by garage sales and they've got a roll of $20 bills in their pockets," he said.

They will be totally unprepared for the new IRS enforcement if they don't keep track of how much it cost to buy the items that are later resold online. Another cost of doing business is mileage from driving to garage sales and flea markets. Any other overhead expenses should be tracked as well for deductions, he said.

The new regulations will require the payment networks to compile information about sales exceeding $20,000 on 1099-K forms. One copy of the 1099-K will go to the taxpayer and another copy will go to the IRS.