IRS Leans On Auction Sites To Spill Customer Information

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Would you trust eBay to keep your name, address and taxpayer identification number safe? What about uBid.com , or what about an obscure online broker you've never heard of?
The Center for Democracy and Technology is raising a red flag over the prospect after language appeared in the President Bush's budget that would require brokers of personal property - including online auction houses and consignment stores - to collect personal data from customers and to share it with the Internal Revenue Service.

The push to put personal customer information into the hands of the Feds is coming from the U.S. Treasury Department, which is attempting to track down millions in unreported small business income. There's serious money at stake: The Treasury Department's proposal in the president's budget estimates that it could raise $20 million in 2008, increasing steadily over the years to hit a cumulative $1.974 billion by 2017.

Nobody's defending the rights of tax scofflaws, but privacy groups see a range of negatives that the legislation could bring about, from potentially increasing loss or theft of personal data, to spawning a new breed of phishing scams, to indulging the government in its quest to hold more sway over information collected easily online.

The CDT also sees the move as specifically targeting Internet-based businesses including eBay and Amazon - two businesses whose customer databases comprise millions of Internet users.

"The IRS proposal is disturbing on many levels - not least in that it calls for the collection, storage and transmission of large amounts of sensitive personal information at a time when Internet users are increasingly concerned about identity theft; and when public- and private-sector data breaches have become routine," the CDT said in its posting, which went up earlier this month.

"It would also potentially burden many smaller businesses that lack the technology or security infrastructure to safely collect sensitive personal information."

When the CDT raised the issue with the Federal Trade Commission, the FTC pointed out that tax information such as Social Security numbers and TINs (Taxpayer Identification Numbers) were originally created for the purpose of collecting taxes, said CDT Deputy Director Ari Schwartz in an interview with eWEEK.

The IRS getting hold of this information is nothing out of the norm. But what about these online brokers whom the government would have collecting such sensitive personal information? "The question is, Is the private sector supposed to get more of it, and at what risk?" Schwartz said.

The language in the president's budget, in fact, does not reference the collection of SSNs, only that of TINs. When eWEEK asked a tax spokesperson for the Treasury Department whether TINs have the potential to be used in identity theft, he said that the question stumped him. "I'm not sure if it can be used in identity theft," said Andrew Desouza of the Treasury Department.

"This is simply information that's being shared between a broker and the IRS," Desouza said. "All the information that the IRS deals with in terms of taxpayer - data - is never shared."

Privacy experts aren't questioning the IRS' attention to safeguarding taxpayer information, however - it's the brokers they're worried about. Desouza said the Treasury Department wouldn't know about the details of brokers storing and transmitting taxpayer information, saying that the IRS handles the details.

As the CDT points out, ironically enough, a U.S. task force created to stem identity theft just last month urged federal agencies to stop unnecessary collection and storage of Social Security numbers. A two-volume plan issued by the task force - headed up by Attorney General Alberto Gonzales and FTC chairman Deborah Platt Majoras - contained recommendations on fighting the scourge of identity theft. One of the recommendations:

"Decrease the usage and collection of Social Security numbers on the state, local, and federal levels. The Task Force recommended that the federal Office of Personnel Management (OPM) complete its review of how various agencies utilize SSNs, and to help develop guidance on limiting their collection to absolutely necessary functions."

The legislative language in the president's budget would require auction houses, consignment stores and other transaction brokers to collect personal data on customers who conduct 100 or more transactions that generate $5,000 or more in gross income per year.
The IRS proposal would require such businesses to submit a form including name, address and Taxpayer ID Number of each seller that fits those parameters.

But to comply, brokers would likely have to keep track of such information on all sellers, given that they wouldn't know until year's end which sellers would meet the threshold, the CDT says. "For small sellers this will almost always be an SSN," the CDT's posting says.
No lawmaker has yet stepped forward to support the IRS proposal, but the CDT points out that the measure "could easily find its way into a larger legislative package."

It's the small fry brokers that have privacy experts concerned, not outfits like Amazon or eBay. "There are big guys like eBay and Amazon. One assumes they're pretty much reputable, but how about some of the other companies? It certainly does increase the prospect for fraudulent use of SSNs," said Paul Stethens, a policy analyst for the Privacy Rights Clearinghouse.

"The problem here is you're getting involved with entities that in many instances might not be well-known to the person who's doing the selling," he said. "We provide SSNs to banks and to employers, but they're well-known. When you're dealing with a company online, how do you check that company out? What standards do they have for protecting your SSN?"

A bigger, theoretically more reliable company such as eBay might be trusted to store TINs. But the issue is in fact moot to eBay, which claims that the proposal wouldn't apply to its business model, given that it's a marketplace, not an auctioneer or broker.

"Most states have a legal definition" of what an auctioneer is, said eBay spokesperson Catherine England in an interview with eWEEK. "We don't actually mediate the transaction. We never take possession of the items; we don't take possession of the money. That happens between the buyers and sellers."

eBay can only track listings and can determine if a given listing has closed. But whether transactions have occurred is information it can't confirm, since transactions happen off eBay's platform.

It's a good thing that eBay has been working with federal agencies to try to educate them on how its business model works, because those agencies sure don't share eBay's notion of whether or not their proposals apply.

A recent report that came out of an IRS committee on Small Business/Self-Employed Subgroup called the growth of the Internet "explosive" and said that it has brought about an increased number of ways to open a business, one of the more popular type being the selling of new and used items "through auction sites such as eBay.com, uBid.com, etc."

The report goes on to reference a 2005 ACNielsen report that found that more than 724,000 Americans report their primary or secondary source of income through eBay.com. It is likely, the subcommittee continues, that a "significant number" of eBay or uBid customers either "choose to ignore income reporting requirements or are unaware of their obligations, thus contributing to the tax gap."

There's an underlying assumption at play with these proposals, eBay's England pointed out, namely that "folks are assuming our sellers, who are engaged in frequent transactions, aren't already reporting - taxes - ," she said. "I've seen no research or evidence to indicate that's the case. Most of our sellers are running small businesses. The assumption that eBay business are underreporting to the IRS" hasn't been demonstrated in any research that she's seen, she said.

The Treasury Department does base its proposal on research, Desouza said. That research, however, is a tad dusty, dating back to 2001.
They may be old numbers, but that's all the Treasury Department has to work with, Desouza said. "We stated in [documentation] and in the president's budget that we're requesting additional funding to increase our" taxpayer compliance reporting, he said.

"Our specific proposals were done off of 2001 research on how much taxpayers are compliant," he said. "Through that study and a vetting process of sorts, we came up with 16 proposals to make sure there's a balance between increasing compliance and unduly burdening taxpayers. And this is one of them. Throughout the study, we found that compliance significantly increases with third-party reporting."

Even if the government were to collect substantial amounts of unpaid tax, privacy experts still fear the possible impact. "It will open up a Pandora's box with requiring individuals to provide a SSN for transactions for which they've never had to provide SSNs before," said the Privacy Rights Clearinghouse's Stethens.

Copyright 2007 by Ziff Davis Media, Distributed by United Press International

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With a growing number of people generating income from online auction and other sales sites, the IRS is stepping up efforts to collect income taxes on that income. The IRS has not yet gone to the lengths of other countries. According to

An article in the Toronto Star in 2007, Canada is cooperating with Austria, Denmark, the United Kingdom and the Netherlands in an international tax-enforcement cartel. They are using a "spider" type of software that crawls the Internet looking for unreported income from auction, gambling and shopping sites.

The IRS continues to rely on the honor system for reporting online income for tax purposes. In the interest of closing the tax revenue gap as well as leveling the playing field and promoting fair competition between online sellers and brick and mortar sellers, arguments have been made for the IRS to exert more efforts to collect information on online sales. One way to do this would be to require Internet auction sites to report their customers' income on Form 1099. One reason that this has not yet been done is because Internet sites claim to be "venues" and not brokers, and therefore are not required by IRS regulations to report their customers' income.

In 2006 an IRS advisory committee made up of tax experts from outside the agency recommended that the IRS strengthen its enforcement of tax reporting by online auction sites. The committee recommended requiring sellers to submit a federal tax identification number that would enable the IRS to track transactions. Another recommendation was to require auction sites to provide the IRS with duplicate reports of sales transactions.

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Details emerge on IRS plans to tax eBay auctions

By Nate Anderson | Last updated May 16, 2007 12:55 AM

The IRS has made no secret of the fact that it wants Internet auction companies like eBay to provide more information about high-volume sellers to the government in order to help close the "tax gap" between what Americans owe and what they pay. But now the official proposals are finally on the table, and Ars has had a look at the documents. Here's what you can expect if the changes go through.

Changes are contained in the President's 2008 budget proposal. Instead of targeting only Internet auction sites, the current proposal actually expands the definition of a "broker" to include middlemen that don't actually function as the customer's agent in a transaction—like eBay, for instance. Brokers currently need to file a form with the IRS that gives the name, address, and gross proceeds of each customer they work for; under the new proposal, many more companies would need to do the reporting.

The Treasury Department wants the change because, as the budget request notes, "compliance increases significantly for amounts that a third party reports to the IRS." But this isn't a change that will apply to all eBay sellers; in fact, most will be exempt from the new reporting requirements.

Internet auction sites will only be required to report customer revenue information if the customer does more than 100 separate transactions in a fiscal year and generates more than $5,000 in gross proceeds. In a report from the Information Reporting Program Advisory Committee (part of the IRS), the new proposal is supported by a 2005 study showing that over 700,000 Americans have a primary or secondary source of income through eBay. Essentially, these people are running small businesses, but IRS research on small business tax returns shows that "non-farm sole proprietors under-report 57 percent of business income on Schedule C" (if you're a non-American who has never experienced the wonders of "Schedule C," count yourself lucky).

IRPAC dryly notes that "initial resistance should be expected" but tries to pitch the new plan as a benefit to consumers. The idea is that sellers who claim to be in the US can at least be verified as a US resident because the auction sites will need to secure additional information from US users at sign-up. According to the report, "customers of the auction sites would then gain greater comfort in that the item they are about to purchase actually comes from the country mentioned in the listing."

The IRS expects that the proposal, if it goes through, will bring in $20 million in 2008, the first year it would be in effect. By 2012, revenue from the change should rise to $220 million.

Criticisms

But trying to close the tax gap in this way has its share of critics, among them the Center for Democracy & Technology, which earlier this month laid out its concerns about the proposal. The group is not objecting to the IRS attempt to have small businesses pay taxes on their earnings; what does worry them is that the proposal will become a data retention nightmare and cost businesses a substantial amount of time and money for which they will not be compensated.

One of the worries is that Social Security numbers may need to be collected by every site that allows for small storefronts (like Amazon and eBay) or online auctions. Because these companies won't know until the end of the year which sellers have exceeded the reporting threshold, they will need to collect the necessary information from all sellers—and that means a lot more companies simply have databases of Social Security numbers, names, and addresses.

"While the IRS needs SSNs for tax purposes," says the CDT analysis, "and private sector tax reporting is partly what the number was created for, this proposal essentially requires Internet commerce companies to collect and store the SSNs of millions of people, most of whom will never even meet the requirements for reporting their auction income to the IRS." As SSNs are spread among more databases, the possibility for identity theft rises.

There's also the issue of cost—not for the IRS, which stands to rake in more money, but for the businesses who are required to implement the changes. "Particularly for smaller operators," says the CDT, "the Treasury proposal represents a potentially crippling increase in record keeping, storage and paperwork."

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NEW YORK (CNNMoney.com) -- Facing a $345 billion tax gap, the Internal Revenue Service has set its sights on a new target - the rapidly expanding world of online business.

In an effort to crack down on under-reporting by individuals and businesses that sell goods online, an IRS official said the tax agency is discussing creating new tax reporting requirements. The review of tax policy was first reported on Tuesday by the tax-law trade publication Tax Notes.

While no details were given, the new reporting requirements could mean big changes for stand-alone Web retailers as well as individuals selling family heirlooms through popular online auction sites such as eBay Inc.

E-commerce continues to grow rapidly. Retailers generated $87 billion dollars in online sales in 2005, according to the Commerce Department's Census Bureau, up 22 percent from 2004.

The changes, which have been bandied about by the IRS for some time, are part of a larger IRS initiative to narrow the tax gap, or the difference between what taxpayers should have paid and what they actually pay.

Under current tax law, an individual who sells an item online and collects more money than its purchased value is expected to report that money as income on their tax return. If an item's original purchase value cannot be determined it is typically valued at $0 under current tax law.

Often times, those individuals that sell items online - such as a rare baseball card worth five times what it was purchased for - may not realize that they are obligated to report those earnings, says Tom Ochsenschlager, vice president of taxation at the American Institute of CPAs.

"They don't understand where they have crossed the line between a business and a hobby run out of their garage," says Ochsenschlager.

The IRS' attempts to promote better reporting of online profits has been stymied by the fact that most online transactions leave behind very little evidence for the tax man to track, especially if shoppers don't use a credit card or opt for an online payment system such as PayPal, which is also owned by eBay.

"A lot of things go unreported because there's no paper trail," explains Cindy Hockenberry, a tax information analyst at the National Association of Tax Professionals.

One remedy the IRS is considering is third-party reporting, or having an outside source, such as an online auction site, report information to the IRS.

Representatives from eBay stressed that maintaining their clients' privacy was of the utmost importance, but that they would turn it over to if the government request were accompanied by a subpoena.

At the same time, third-party reporting could prove to be a giant headache.

"It will be an administrative nightmare to figure out who has to report and what has to be reported and trying to track these millions of people that buy and sell on the Internet," says Hockenberry.

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A new law will require payment card processors and third-party settlement organizations to report online merchants' transactions to the IRS beginning in 2011. David Montague, founder and President of The Fraud Practice, explains what merchants need to know about the Housing and Economic Recovery Act of 2008 and how it may effect their bottom line.

David's background includes an in-depth application of innovative solutions for preventing business to consumer ecommerce fraud. Prior to founding The Fraud Practice, he held positions as Director of Risk Solutions at CyberSource Inc and National Principal at IBM Global Services. He has a Master's Degree in Information Management and is author of "Fraud Prevention Techniques for Credit Card Fraud." He speaks regularly about ecommerce fraud and has been a featured speaker at such events as the Direct Response Forum, National Retail Federation Fraud and Loss Prevention Conference, Retail Week's Retail Solutions Show, Retail Week's United Kingdom Risk Management Conferences, CyberSABOTAGE Conferences, Nestor Fraud Symposiums, Microsoft Tech-Ed and a host of other seminars and workshops around the world.

EcommerceBytes Insider: What is the new IRS reporting requirement included in the Housing Economic Recovery Act of 2008?

David Montague: The Housing and Economic Recovery Act of 2008 contained a provision, H.R. 3221-6, TITLE III-REVENUE PROVISIONS, creating an IRS 1099 reporting requirement for all credit card payment providers (i.e., PayPal, Google Checkout, Amazon) to report individuals that receive deposits totaling more than $20,000 from over 200 debit/credit card transactions in one year. In short, for any person or entity that is selling goods or services online today and receiving payments through a payment processor, the money collected from sales will be reportable as income, if they exceed the reporting thresholds.

EcommerceBytes Insider: Is the new requirement expected to increase tax revenues, and if so, how?

David Montague: The belief in government is that many small businesses are either not reporting or are providing only partial reporting of their revenue from online sales. For example an eBay PowerSeller that has setup a side business but hasn't actually been reporting the revenue generated from the business in a Schedule C in their tax return. For these businesses, they would now be paying taxes on this income, creating more tax revenue for the US government. The proposed provision could deliver tax revenue in the amount of $9.529 billion over 10 years. This is not just related to the likes of PayPal, Google Checkout and Amazon - traditional payment processors are also affected by this, and there have been a couple of recent legal requests for these companies to disclose the deposits processed for certain merchants.

EcommerceBytes Insider: Will services like PayPal, Amazon Payments and Google Checkout be more attractive to online sellers or less so with these new reporting requirements?

David Montague: For valid businesses and sellers that have been reporting their income, this change should be seen as a neutral event. For the casual user of these payment processing services, the change should also have a neutral view, as they will not likely exceed the reporting thresholds. For the population of small businesses and power sellers that will meet the reporting threshold, and are not fully reporting, the change will be seen as a negative event. This population will most likely direct their displeasure of the 1099 reporting at the payment processers.

This change could put more pressure on companies like eBay to offer multiple payment methods over just PayPal.

EcommerceBytes Insider: How do you think sellers will try to avoid hitting the numbers that will trigger reporting by payment processors, and are there legitimate ways to do so?

David Montague: There are 2 ways sellers could attempt to get around exceeding the reporting threshold:

1) Account holders could set up multiple accounts (i.e. 1 personal, 1 business, 1 in my wife's name) to purposely spread out revenue; While this may seem obvious and trivial, this presents a problem for a number of payment processors who view the world as 1 person equals 1 account. Payment processors will have to adjust their velocity systems to pool accounts which can increase record keeping costs, customer service inquiries and maintenance costs.

2) Some sellers from auction sites such as eBay or Craigslist will attempt to avoid the reporting requirements by diversifying their payment strategy. This would entail utilizing several different payment processors to try and go "unnoticed" by staying under the reporting threshold with any single processor. Sellers on these portals can pretty much dictate payment terms to the buyer.

There is nothing illegal about setting up and offering multiple payment choices, but to do so with the intention of avoiding reporting is. There is the potential that this could spark a rise in the number of supported payment processors for small (less than $100k per year) businesses and sellers, as they attempt to avoid the reporting requirements.

EcommerceBytes Insider: It seems there are a number of reasons why there may be legitimate discrepancies between what merchants claim on their taxes and what processors will report to the IRS. How do you think the IRS will handle this, and will it result in an increase in the number of audits conducted by the tax agency?

David Montague: While I am not an accountant or lawyer, my opinion is the IRS will do little to "handle" this. From the IRS perspective, this is nothing different from any other business. For other businesses they are required to track all monies coming and going from the top level down. The concept of gross and net is essentially the same, what is different is that a lot of the smaller merchants are most likely not keeping the proper accounting on their sales, which means they will most likely report incorrectly, or be unable to write off the appropriate levels of the reported gross deposits to the IRS. I would expect this will cause a number of audits.

Sellers will really have to keep books, tracking cost of goods sold, eBay fees, PayPal fees, chargebacks, refunds, shipping fees and deposits. Sellers will have to estimate taxes and prepay those taxes.

EcommerceBytes Insider: Are there unintended consequences of the new IRS reporting requirements?

David Montague: For payment processors, this is not just a simple matter of developing an accounting and reporting system. Payment processors will need to integrate tax reporting into their customer facing applications; they will have to change the way they collect and authenticate account holder data; they will have to setup customer service support for tax related inquiries and they will likely have to change the fundamental way they look at account holders.

Payment processors will also have to deal with the potential for brand damage from "guilt by association." This association will come from account holders expressing their displeasure of the new requirements in the blogosphere and from the increased damage caused to victims of fraud. In terms of fraud, fraudsters that setup accounts using stolen identities will be causing 1099 income to be reported on the victims. In this case a 1099 would be generated and the consumer may not have any idea that it has occurred until they are contacted by the IRS for not reporting the income. The burden of proof will be with the taxpayer to prove their innocence to the IRS, and the burden of proof will be on the payment processor to prove to the victim they didn't do anything wrong. Needless to say, this scenario is likely to receive a lot of attention in the press and blogosphere that a payment processor doesn't want to have.

All of this could mean higher fees for merchants.

EcommerceBytes Insider: When do you believe the IRS will provide guidance to clear up some of the confusion in how the law will be enforced?

David Montague: I actually don't know, but I would expect any guidance from them will come in their 2010 tax regulations.

EcommerceBytes Insider: Are there resources where sellers can learn more about the Housing and Economic Recovery Act of 2008?

David Montague: Here are links to two such resources.

Information on The Fraud Practice website

A PDF File containing the fulltext of HR 3211

About the author:

Ina Steiner is Editor of EcommerceBytes Insider, AuctionBytes.com and author of "Turn eBay Data Into Dollars" (McGraw-Hill 2006). If you have story ideas, comments or questions, send them to ina@auctionbytes.com.

[El Negro]

I see why you recommend a merchant's account instead of 3rd party sites.