Q: "I am confused and sick in the stomach about the issue of selling on eBay and dealing with the IRS. I have things around my home that I have been saving and collecting for many years. My daughter is now twenty-two, and I have saved much of her childhood stuff also. Not to mention that I have always loved shopping at yard sales and thrift stores, which has caused my home to be very cluttered. I have made myself stop because I end up buying things I do not need. I also became addicted to eBay a few years back, and for about three years got caught up in buying way too many things— mostly dolls, teddy bears, and old toys—mementoes of my childhood. I have them all over the house. Some of them I have donated to thrift stores and some I have been selling on eBay. Much of the stuff I list on eBay does not even sell and when I pay eBay's fees I suffer a loss, but some things I have gained on. I do not count on this for my income and never considered it a business. The thought of having to go back over the past few years and amend our tax returns because I may have made a profit selling something on eBay or in my local pennysaver paper makes me feel ill from the stress. I take medication to deal with the problems of excessive worrying, depression, and anxiety, and this kind of situation could trigger them again, which scares me. Thanks so much for any help."

A: A lot of longtime eBay sellers are waking up and finding out they should have been paying taxes on their selling profits. Unfortunately, I can't give you the "get out of jail free" card you so badly want. Since you obviously didn't keep good records of what you sold and what you paid for it (most eBay sellers don't), you have no idea whether you made or lost money at the end of each year. The amount of any profit or loss was probably small, given that these were household items and not precious antiques...still, the law is the law is the law. If you have a hobby and you make as much as $1 in profit, the IRS wants you to report the profit as hobby income on Form 1040 and pay the taxes on it. If you fail to do so, and the IRS picks up on it during an audit, you're toast.

For peace of mind, if nothing else, you should go back and attempt to figure out whether you made a profit in any of the years you sold on eBay. If you can document that overall you lost money each year, then you're probably okay— the IRS does not require you to report hobby losses on your tax return (they actually prefer that you don't).

If the records show that you made a profit in one or more prior years, you have a difficult choice, and neither option will be stress-free. If you amend your tax returns for the prior years in which you made a profit, you will have to pay interest and penalties on the overdue taxes, and you may be "waking a sleeping

Rottweiler" in the form of an IRS audit to determine whether you've failed to report any other income. If you decide not to amend those returns, you will have many sleepless nights, hoping you won't get audited, until the statute of limitations on each return expires (currently three years from the filing date, unless the IRS suspects fraud, in which case there is no statute of limitations). Is there anything you can do in this situation? Yes.

You can't change the past, but you sure can change the future. You should get into compliance this year, by keeping good records for any eBay listings and sales you make during the current tax year, which began on January 1. If you show a profit at the end of the year, you should pay the taxes due plus a little extra, say 5 percent.

Why the extra 5 percent? In a word, penance for your past sins and a little insurance in the event the IRS audits your past tax returns and discovers your goof. The IRS (and any other government agency, for that matter) is always going to go easier on someone who they see is working hard to get into compliance than they will on those who stick their heads in the sand and hope the bogeyman goes away. As an IRS agent once told me, "Even a dog knows the difference between being kicked and being stumbled over."

 
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