Originally Posted by Tax_Man

Right on, boncovi. Banks are "deputized" to report all transactions over $10K, and most banks report all transactions over smaller thresholds such as $3K. You will not taxed on these transactions from this reporting, and the IRS may ultimately take no action. However, you really get into trouble when disguising smaller amounts to thwart being reported over the $10K. The IRS has software, and will detect small transactions designed to hide transactions under the $10K reporting requirement.

Furthermore, on your personal income tax return you need to report and pay personal income taxes for all income activities as separately stated from any deductions allowed (cost of goods) regardless if it's reported to the IRS (1099 or bank $10K requirements). Being the financing conduit carries risks of under reporting and makes your tax filing complex. Additionally, you and the other party should determine whether or not either side meets any 1099 filing for this purchase/sale agreement. The dollar amount requirements are much lower (and shrinking) for business activities individuals.

Another problem you will run into is state/local sales/property/income tax, and regulatory business registration, and reporting/collection requirements. While there are exemptions for retailers purchasing goods for re-sale and occasional sales (think garage sales), the tax auditors like to come out and "go on fishing expeditions" to collect further information about you and your business activities for reporting to other taxing and regulation authorities.

Whether you claim to be an occasional seller or just two individuals, the facts and circumstances as proscribed by law will dictate whether or not you are a "retailer" versus "occasional sale" or engaged in business activities versus "two friends helping each other." You'll be setting yourself up as an audit risk and the IRS and/or state/local Departments or Revenue. Upon (lengthy and costly to you) audit, they will request all such information three or so years down the road, only to discover that your activities are not correctly or adequately disclosed on your tax returns. You may also start out with a few small transactions, but may quickly creep into becoming deemed as business activities or into other tax jurisdictions. Each state has their own set of rules, and compliance becomes complex very quickly.

I can only vaguely comment on the hypothetical situation given for discussion purposes, and do not express any tax advice. I am unemployed and do not work for any taxing authority, but couldn't sit still on this one. Many of us here in the money-starved northeast states understand various reporting requirements, and the creep into multi-state reporting. Back to lurking...