Law Office of Camron Hoorfar, PC

These days, websites like www.craigslist.org and many others allow people to connect with others in order to buy, sell, or trade goods and services.  Websites like these allow people from different parts of cities, states, or even the country.  Some of these websites even allow people to swap or trade items or services for other items or services, which is generally known as bartering or trading.

But what does not occur to most people of the bartering world is that bartering, even though no money has actually exchanged hands, can still be taxable.

Bartering is an exchange of property or services and must be reported by a taxpayer, at the time received, at the fair market value of the property or services received.  Generally, income from bartering must be federally reported on Schedule C or Schedule C-EZ of Form 1040.  Also, if a taxpayer exchanged property or services through a barter exchange, the taxpayer should complete Form 1099-B or a similar statement showing the value of cash, property, services, credits, or scrip that the taxpayer received during the tax year.

If the concept of taxable bartering still does not make any sense, here is a few examples to help illustrate the point:

Example #1 – You are a self-employed attorney who performs legal services for a client who is a small corporation.  For payment of your services, the corporation gives you shares of its stock.  You must include the fair market value of the shares in your income in the year that you receive them.

Example #2 – You are self-employed and a member of a barter club.  The barter club uses credit units as a means of exchange.  It adds credit units to your account for goods or services you provide to members, which can be used to purchase goods or services offered by other members of the barter club.  You must include in your income the value of the credit units that are added to your account even though you may not actually receive goods or services from other members until a later tax year.

Example #3 – You own a small apartment building and in return for 6 months of free rent, an artist gives you a work of art she created.  You must report as rental income on Schedule E of Form 1040 the fair market value of the artwork and the artist must report the income on Schedule C of Form 1040 the fair rental value of the apartment.

Besides criminal penalties (discussed in an earlier post), the IRS also has the power to issue and assess civil penalties on taxpayers for various reasons.  The following is a list of the most common and most used civil penalties by the IRS:

1. Failure to file a tax return – Results in an additional 5% tax of the amount of the original tax required for every month a tax return is not filed.  The month begins the day after the tax return is due.  However, the penalty cannot exceed 25% of the original tax amount.
2. Failure to pay a tax – Results in an additional 0.5% tax of the amount of the original tax required for every month the tax is not paid.  The month begins the day after the tax return is due.
3. Fraudulent failure to file a tax return – Results in an additional 15% tax of the amount of the original tax required for every month a tax return is not filed.  However, the penalty cannot exceed 75% of the original tax amount.  This is usually applied when there is some sort of intent to evade a tax by a taxpayer.
4. Minimum delinquent penalty – Results in a minimum of a $100 penalty when there is a late tax return filed 60 days or more late and no other penalties apply.
5. Negligence – Any failure to make a reasonable attempt to comply with the tax laws results in a 20% additional tax of the amount of the original tax required.
6. Substantial understatement – Any failure to report income by 10% of the tax required to be shown or by $5,000 results in a 20% additional tax of the amount of the original tax required.
7. Gross valuation misstatement – Any failure to report income by 40% of the tax required to be shown results in a 20% additional tax of the amount of the original tax required.
8. Fraud – Any fraud on the part of a taxpayer results in an additional 75% tax of the amount of the original tax that is attributable to the fraud.

Many taxpayers refuse to believe that the IRS does not have the power to send taxpayers to jail for violating the United States’ tax laws.  Nothing could be further from the truth.

The following is a list of criminal actions that the IRS could send a taxpayer to jail for:

1. Section 7201 crime – A willful attempt to evade or defeat a tax or the payment of tax constitutes a felony and is punishable up to a $100,000 fine and/or 5 years in prison.
2. Section 7203 crime – A willful failure to pay an estimated tax, file a tax return, keep records, or supply information constitutes a misdemeanor and is punishable up to $25,000 and/or 1 year in prison
3. Section 7206(1) crime – A willful subscribing of a tax return or other statement containing a written declaration that is made under penalties of perjury that the person does not believe to be true or correct constitutes a felony and is punishable up to $100,000 and/or 3 years in prison
4. Section 7206(2) crime – A willful aiding and assisting in the preparation of a false return or other document that is fraudulent or false constitutes a felony and is punishable up to $100,000 and/or 3 years in prison
5. Section 7212 crime – An attempt to interfere with the administration of the IRS laws by corruption, force, or threats of force constisutes a felony and is punishable up to $5,000 and/or 3 years in prison
6. 18 USC 2 crime – Any person who aids, abets, counsels, induces, or procures an offense against the United States will be held federally criminally liable
7. 18 USC 371 crime – Any two or more people that make an agreement to either commit a crime or defraud the United States will be held federally criminally liable
8. 18 USC 1001 crime – Any statement that is material, false, voluntary, intentional, and known to be false will be held federally criminally liable

The above listed crimes are not a complete list of all of the crimes that a taxpayer could be sent to prison for by the IRS.