Today's comment is by Mark Nestmann, Privacy Expert for The Sovereign Society and President of The Nestmann Group.

Dear A-Letter Reader,

If you can take the IRS at their word, then supposedly the U.S. Treasury loses nearly US$100 billion in unpaid taxes from small businesses.

That's a big number, and I believe it's a gross overstatement. I'll explain why in just a moment. But in reality whatever the number is, the new housing bailout bill is designed to dramatically reduce it.

The IRS believes that America's small businesses are evading billions of dollars in taxes through unreported credit card transactions. And for that reason, it's long been at the top of their legislative agenda to require credit card issuers and electronic payment systems like PayPal to report sales data to the IRS.

Tax Inquisition Planned to

Bailout Deadbeat Homeowners

The housing bailout bill does just that, broken down in terms of payments to businesses accepting the cards. Essentially, the bill requires Visa, MasterCard, Discover, American Express, PayPal, Amazon, Google Checkpoint, and virtually every other "electronic payment system" to track, aggregate, and report to the IRS, information on nearly every electronic transaction.

They must report:

• The gross amount of payment card and third-party network transactions
• The name, address, and taxpayer identification number of the participating merchant

However, the bill gives these systems more than two years to gear up for these requirements. Mandatory reporting won't come into effect until 2011.

Basically, what the bill does is to give the IRS a way to check what a credit card company or electronic payment system is actually paying a small business compared to what the business owners are reporting on their tax returns. If the two numbers are wildly out-of-sync, then you're likely to be audited.

eBay Powersellers, Beware!

How might this bill affect you? If you're an eBay Powerseller, for instance, and sell US$40,000 of cosmetics each year over the Internet, at the moment, eBay doesn't have to tell the IRS anything about the sales.

But starting in 2011, eBay will have to send you - and the IRS - an annual report. The report would say for example that Connie's Cosmic Cosmetics received US$40,172.13 in gross payments from eBay for that year.

And here's where it might get very dicey with the IRS. People who operate businesses are supposed to declare their gross income on Schedule C (or a corporate tax return). Then they're supposed to deduct all the costs of doing business to arrive at a net figure of taxable income.

However, a lot of small businesses don't keep particularly good records. All the owners may know are what they have left at the end of the year. And that's what they report as their income, without accounting for their gross income or their expenses. Any Internet business that takes this approach after 2011 will be in for a serious wake-up call!

The Numbers Don't Add Up!

As I mentioned a moment ago, the IRS believes small businesses are evading taxes to the tune of US$100 billion annually. That's the number IRS Commissioner Mark Everson dangled in front of the Senate Budget Committee in 2006.

Everson also said that if Congress unleashed the IRS against small business, it could recover "between US$50 billion and US$100 billion without changing the dynamic between the IRS and the people."

Now, Congress has done exactly that. Only the numbers don't add up. A more recent study from the Treasury Department says that credit card transaction reporting would net less than US$10 billion in added revenue.

And indeed, according to the Congressional Budget Office, the new provisions will raise slightly less. The Budget Office estimated they'll raise a total of US$9.8 billion over a 10-year period.

The Hidden Agenda for Reporting Credit Card Transactions

That's a lot of dough, although it's a pittance for the tax-and-spenders inside the beltway.

For that reason, I don't think matching up credit card transactions with eBay power sellers is the real reason Congress enacted this part of the housing bailout bill. Instead, I think there's a hidden agenda for a much bigger take.

I could be wrong, but it seems to me that setting up an infrastructure that matches credit card transactions with payments to Internet merchants is a tailor-made solution to help collect sales tax.

Right now, most Internet transactions still aren't subject to any form of sales tax. States will be chomping at the bit to get the IRS to share this data with them, so they can directly bill merchants for in-state sales. Any company that does business on the Internet, but doesn't charge sales tax is at risk.

It's not necessarily simple to "know what you owe," either. In addition to the sales tax regimes in effect in nearly all 50 states, online merchants that collect sales tax must negotiate a maze of city, county, and municipal taxes.

Plus, they must file sales tax returns in the jurisdictions in which they sell goods or provide services. Small merchants that can't justify investing thousands of dollars in software that can make the necessary calculations, and file the necessary returns, will be forced out of business.

Then there are the periodic calls for some kind of future national sales tax or value-added-tax. The infrastructure this bill creates will make this tax easy to collect. Everything will be in place, and the IRS can simply send a bill to merchants that don't pay the tax.

Even if this worst-case scenario doesn't come to pass, it's quite clear that if you operate a small business, the IRS has you in its sights. And come 2011, you'd better have the data to track every dollar you spend in business expenses against the gross income reported to the IRS. And if you don't, you can count on a tax inquisition.

MARK NESTMANN,

Privacy Expert & President of The Nestmann Group

www.nestmann.com