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Home business tax dodgers beware!

Jennifer Collins Apr 6, 2012

Tess Vigeland: T-minus two, people. Two weeks to file your taxes. If you’re scrambling to get it done, here’s a reminder: If you sold anything for a profit — at a garage sale, on Craigslist or eBay — and you don’t report it? That’s tax evasion. And this year, changes are coming for online retailers who’ve flown under the radar for years.

Jennifer Collins reports.

Jennifer Collins: When we think of tax evasion, this guy often comes to mind:

Archival newsreel: Al Capone finds an enriled government ready to put him behind bars.

You know the story: Capone made a fortune running a vast smuggling operation during Prohibition. He was brought down — like so many other gangsters — because he didn’t pay his taxes. It was tough for Capone to convince anyone that he “forgot” about his considerable earnings; it’s a little different for smaller operations.

Lisa Williams: This is my page, She’s So Crafty Goods.

Williams has been selling art and accessories online for more than four years. She works out of her house in a D.C. suburb.

Williams: When my son was born, I didn’t really want to go back to a regular job.

Sound of sewing machine

Williams makes felt baby booties decorated with rosettes and tiny daisies that go for about $25 a pair.

Williams: Ta-da!

She sells them on Etsy, an online marketplace which specializes in handmade goods. Things like latte cozies knit to fit a Starbucks cup or purses made of a hollowed-out birch log. The sellers are responsible for reporting their earnings. But many people, including Williams, start out thinking of their Etsy shops as a hobby. So when tax time comes around, they just don’t file or they don’t claim everything.

Williams: And I know this for a fact, because sometimes you’ll talk to other Etsy sellers in general who will totally say stuff like “Oh yeah, I’m not filing my, I don’t, I don’t claim this on my taxes, why am I claiming this on my taxes?”

Market research IDC says there are about 14 million home-based e-retailers in the U.S. Their ranks have grown by almost 25 percent since the economy took a dive. While it’s tough to say how many fail to report income…

Martin Press: We believe that it’s millions of taxpayers.

Florida tax attorney Martin Press says the problem’s gotten worse since the recession. Etsy doesn’t issue 1099s or other tax forms for its sellers. So many people don’t realize they need to claim their online earnings. Others forget about the few hundred dollars they made re-selling that vintage gown. And some people cheat deliberately.

Press: More and more people are falling into this realm and no taxes are taken out and they don’t have the money to pay at the end of the year and they’re not filing their income tax returns.

There have been major cases — like the eBay seller who was also an IRS employee and failed to report her $40,000 “side business.” But Press says IRS agents rarely audit small-time offenders, so it takes some pretty glaring errors to tip them off. Things like failing to file at all, which Press says is more common than you’d think. Or having someone report them.

USC tax law professor Ed Kleinbard says — as long as the math adds up, most small offenders never get caught.

Ed Kleinbard: It’s understandable some taxpayers may want to play the audit lottery, because the IRS has very limited resources.

He says the government is starting to pay attention. This year for the first time, PayPal — which processes many online payments — has started sending tax forms to sellers on sites like Etsy, Half.com and eBay.

Kleinbard: Nothing concentrates the mind, like recognizing that the IRS already has that information.

So far, PayPal sends forms only to big sellers who have 200 transactions or bring in $20,000. That’s not Lisa Williams. She says she makes far less than that.

Williams: Let’s see I’m at 81 views already, 10 favorites and one order.

And Williams says only a pair of booties here or there falls through the cracks.

Williams: For me, I would probably say, maybe $25, $30. I think that’s much pretty standard for anybody.

And so far…

Williams: I’ve never been audited. I wear that as my badge.

And she wants to keep it that way.

I’m Jennifer Collins for Marketplace.

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