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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 . 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 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 .

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. , 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. users, who, in 2006 sold $25.2 billion in merchandise. More than 720,000 Americans make their primary or secondary income from the Web site, to a 2005 study said.

As part of his proposed federal budget for 2008,
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President Bush made what many believe is the first step to more vigorously collect taxes on online sales. Although vaguely worded, the proposal would require “brokers,” or middlemen, to collect taxpayer identification numbers from clients and report their sales of personal property to the IRS on a 1099 form if sales surpass 100 transactions or more than $5,000 annually.

Under current law, eBay and other auction sites aren’t considered brokers. But definitions can be changed.

In November, a citizen advisory group for the IRS recommended as much. Expanding the definition to include online auctions, the group said, would open the door to reporting and increased tax compliance.

, chairman of the citizen advisory group, made up of accountants and tax preparers, applauded the president’s proposal but called it so nebulous that it’s unclear what kind of businesses he’s targeting. Heller, a vice president for JPMorgan Chase, suspects that the provisions are at least partly aimed at Internet sales. “I have no idea who it would be referring to,” he said of the proposal, “if not online auctions.”
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