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"I counted $10,000 in cash (and some payments accepted via Square - yes, I’m reporting the income, IRS" As an aside the only reason he owes taxes to the IRS wo

by larrys 14y ago

"I counted $10,000 in cash (and some payments accepted via Square - yes, I’m reporting the income, IRS" As an aside the only reason he owes taxes to the IRS would be if this was inventory that he purchased and expensed for the business. If you pay money out of your pocket for some CD's and sell the CD's and assuming you recoup only the amount paid you don't owe taxes on the money that you collected. You haven't made a profit. There aren't enough details in the OP to determine the proper tax treatment of the sale of these records. But typically if he was in business he would have bought records and they would be inventory. When he closed down the business he would have had a taxable event and had to dispose of the inventory and there might have been a loss. He could have purchased that inventory as a private person for any amount and then he becomes the owner. At that point typically any gain over what he paid he might owe taxes. The IRS is not trolling around looking for people who post stories and spending time to see if they reported the income. Besides this would relate to 2012 income which wouldn't be reported until April 2013 and with an extension the return wouldn't be due until Oct 2013. And lest you think someone could turn him in or tip the IRS off - not going to happen. If you don't believe me try to contact the IRS and tell them your neighbor is cheating on their taxes. They want tangible proof. Proof enough to open a case which involves access to actual numbers and records. Like you worked in the office not "I know he's cheating" type info. A story is not enough to get them to investigate. Besides there is nothing they can do until he doesn't pay the taxes by the above dates. Side story: I know of pharmacist locally who dealt in drugs (and went to prison) who was found with $200,000 in cash in his home safe. Eyebrows were raised. Oh boy cash! Did he report it! No problem he went to jail for the drug charges but had no problem with the $200,000. He just reported it on his next tax return that was due. Problem solved.

rprasad 14y ago
You've got the right conclusion but the wrong reasoning. Non-inventory sales result in taxable gain if the sale price exceeds the seller's "adjusted basis" (i.e., tax-adjusted cost) in the item sold. For personal property that isn't subject to depreciation (basically, stuff you would sell at a garage sale), the seller's adjusted basis usually exceeds the sale price, so the seller recognizes a loss on the sale. Consequently, the money earned from the sale does not result in taxable income for federal income tax purposes. State income tax laws vary.... Also, income taxes are actually owed at least quarterly. The self-employed and contractors must deal with this timing issue, which can result in penalty interest rates on taxes not timely paid. Employers withhold and remit the taxes with each paycheck using automated payroll systems. April 2012 is the due date to settle up all income taxes for the entire 2012 tax year. In most cases, people will have overpaid taxes b/c remittances over the year were based on estimated income (i.e, prior to deductions and credits).
- larrys 14y ago
  "Non-inventory sales result in taxable gain if the sale price exceeds the seller's "adjusted basis" (i.e., tax-adjusted cost) in the item sold." The assumption here is that the OP was selling inventory. The FB ad said "I used to be a record dealer selling" and he is selling the inventory. We don't know if he had wound down the business or not. Hence my attempt to be circumspect about this. "April 2012 is the due date to settle up all income taxes for the entire 2012 tax year." I'm talking strictly about when the return is due. Not whether you have paid in estimated taxes. If you underpay, sure you will get hit with a penalty and interest potentially. The interest is actually quite reasonable. "For personal property that isn't subject to depreciation (basically, stuff you would sell at a garage sale), the seller's adjusted basis usually exceeds the sale price, so the seller recognizes a loss on the sale." These are typically de-minimis transactions that fly under the radar and people typically avoid paying taxes on because the chance of getting caught is low and the penalty is also low. If for arguments sake you buy 10 iphones and manage to resell them for higher than what you paid and make some money yes technically you owe taxes. Otoh if you are operating and doing this on a larger scale you have a different problem. And unless you are doing this on a grand scale you aren't getting any jail time and that's assuming you get caught. I'm not advocating any particular behavior. Just pointing out what actually happens (which explains why people cheat as well). Also keep in mind that the amount of risk an attorney (such as yourself) should be taking and how squeaky clean you need to be (to avoid losing your law license) is not the same as some guy selling stuff on ebay or by FB ads would do. "The self-employed and contractors must deal with this timing issue, which can result in penalty interest rates on taxes not timely paid." There are of course safe harbors [1] with all of this http://www.irs.gov/businesses/small/article/0,,id=110413,00.html/ http://www.irs.gov/businesses/small/article/0,,id=110413,00.... as anyone who has gotten whipped sawed by their income varying greatly from year to year knows. (Make money one year and you have to meet the safe harbor in order to not have a problem the next year). [1] "if they paid at least 90% of the tax for the current year, or 100% of the tax shown on the return for the prior year, whichever is smaller."

by larrys 14y ago

rprasad 14y ago

You've got the right conclusion but the wrong reasoning. Non-inventory sales result in taxable gain if the sale price exceeds the seller's "adjusted basis" (i.e., tax-adjusted cost) in the item sold. For personal property that isn't subject to depreciation (basically, stuff you would sell at a garage sale), the seller's adjusted basis usually exceeds the sale price, so the seller recognizes a loss on the sale. Consequently, the money earned from the sale does not result in taxable income for federal income tax purposes. State income tax laws vary.... Also, income taxes are actually owed at least quarterly. The self-employed and contractors must deal with this timing issue, which can result in penalty interest rates on taxes not timely paid. Employers withhold and remit the taxes with each paycheck using automated payroll systems. April 2012 is the due date to settle up all income taxes for the entire 2012 tax year. In most cases, people will have overpaid taxes b/c remittances over the year were based on estimated income (i.e, prior to deductions and credits).

larrys 14y ago
"Non-inventory sales result in taxable gain if the sale price exceeds the seller's "adjusted basis" (i.e., tax-adjusted cost) in the item sold." The assumption here is that the OP was selling inventory. The FB ad said "I used to be a record dealer selling" and he is selling the inventory. We don't know if he had wound down the business or not. Hence my attempt to be circumspect about this. "April 2012 is the due date to settle up all income taxes for the entire 2012 tax year." I'm talking strictly about when the return is due. Not whether you have paid in estimated taxes. If you underpay, sure you will get hit with a penalty and interest potentially. The interest is actually quite reasonable. "For personal property that isn't subject to depreciation (basically, stuff you would sell at a garage sale), the seller's adjusted basis usually exceeds the sale price, so the seller recognizes a loss on the sale." These are typically de-minimis transactions that fly under the radar and people typically avoid paying taxes on because the chance of getting caught is low and the penalty is also low. If for arguments sake you buy 10 iphones and manage to resell them for higher than what you paid and make some money yes technically you owe taxes. Otoh if you are operating and doing this on a larger scale you have a different problem. And unless you are doing this on a grand scale you aren't getting any jail time and that's assuming you get caught. I'm not advocating any particular behavior. Just pointing out what actually happens (which explains why people cheat as well). Also keep in mind that the amount of risk an attorney (such as yourself) should be taking and how squeaky clean you need to be (to avoid losing your law license) is not the same as some guy selling stuff on ebay or by FB ads would do. "The self-employed and contractors must deal with this timing issue, which can result in penalty interest rates on taxes not timely paid." There are of course safe harbors [1] with all of this http://www.irs.gov/businesses/small/article/0,,id=110413,00.html/ http://www.irs.gov/businesses/small/article/0,,id=110413,00.... as anyone who has gotten whipped sawed by their income varying greatly from year to year knows. (Make money one year and you have to meet the safe harbor in order to not have a problem the next year). [1] "if they paid at least 90% of the tax for the current year, or 100% of the tax shown on the return for the prior year, whichever is smaller."