Do not assume that because you are a casual eBay seller you don’t have to report income from your sales. Regardless of whether you think of your eBay activities as a hobby or a business, you must report all income on your tax return. Failure to do so can lead to severe fines and penalties.
Keep in mind that eBay businesses already arouse some suspicion when it comes to IRS auditing decisions. The IRS computer analysis known as the discriminate function system (or “DIF”) looks for red flags (information that the IRS believes taxpayers are likely to lie about) in a tax return, and one of those flags is the tax return item “losses from an activity that could be viewed as a hobby, rather than a business.” eBay businesses, which often have a pleasure, leisure, or enjoyment component — for example, an eBay business that trades in Hummel figurines — can raise a red flag for an IRS auditor.
Can the IRS get your records from eBay? Yes, although most tax experts admit that a routine tax audit will likely not reach that level of investigation. But keep in mind that is exactly what happened in Australia, where the Australian Taxation Office sought records for Australian eBay PowerSellers. Considering that 430,000 Americans make a significant portion or all of their revenue from eBay, it’s not out of the question to expect the IRS to take a closer look at eBay sales. This is all to say: Keep good records and report your income!