IRS urged to go after eBay sellers

The San Francisco Chronicle reports:

When it comes to paying income taxes, eBay's legions of small-time entrepreneurs are on an honor system in which they are supposed to declare their profits to the Internal Revenue Service. Many users, however, ignore the law or are unaware of their obligation.

Now a growing chorus of tax experts is hoping to crack down on the cheating by requiring eBay -- and other online auctions, such as those on Yahoo, Ubid.com and Amazon -- to track users and report their gross sales to the federal government. Armed with such information, the IRS could better seek any taxes owed, potentially reaping millions of dollars in extra revenue for the U.S. Treasury.

But requiring eBay to out its sellers to tax collectors could send a shockwave across its vast online bazaar, where users trade everything from Ferraris to Ugg boots to pepper spray. Paying Uncle Sam could significantly reduce their profits or even make their businesses money-losers.

The latest call for more aggressive tax collection was heard last week at a congressional committee hearing focused on closing the tax gap, the hundreds of billions of dollars in taxes that go unpaid each year. Nina Olson, the national taxpayer advocate for the IRS, spoke of the heavy burden put on the nation by the shortfall and then cited undeclared online sales -- particularly on eBay, given its size -- as part of the problem.

"The IRS must have the tools needed to address under-reporting of this income," said Olson, whose job is to voice taxpayer concerns to the federal government.

EBay, based in San Jose, has 97 million U.S. users, who, in 2006 sold $25.2 billion in merchandise, exceeding the gross national product of many countries. More than 720,000 Americans make their primary or secondary income from the Web site, according to a 2005 study.

How many eBay users pay the taxes they owe on their online earnings is unknown. But experts suspect the percentage is low.

Virtually all tax filers -- 96 percent -- pay what's owed on income that is reported to the IRS by a third party, such as when a bank reports interest earned on a savings account, according to the IRS. However, when a third party doesn't tip off the government, compliance drops dramatically, to below 50 percent.

The insatiable demand for more government spending.