eBay Powersellers Now Threatened By Possible Tax Audits
Based on the (thankfully) limited time I have spent in and around prison, there is a clearly defined pecking order amongst inmates, with child molesters occupying the nadir and (failed) bank robbers at the zenith. Illegal immigrants and petty crooks generally fall comfortably in the middle. But I wonder where someone being sent to prison for failing to report income earned from selling porcelain knickknacks or toy trains on eBay will fit in?
We soon might find out. eBay Canada has announced that it will comply (albeit reluctantly) with an order from the Federal Court of Appeal to release to the Canada Revenue Agency gross sales data from 2004 and 2005 for eBay PowerSellers. Participants in the PowerSeller program must average at least $1,000 in sales per month for at least 3 months.
When I heard this news I had to go back and check my old eBay information to see if I was affected. In 2004, I had substantial sales on eBay and tried to get in on the PowerSeller program, but my numbers were just a smidge below the threshold so I wasn’t allowed to join their uppity little club. At the time I was a little pissed, but in hindsight I’m pretty glad they didn’t want me, given that one of the big perks of this optional club has now become CRA audits. It’s kind of like signing up for a Club Z card at Zeller’s and getting a free rectal exam from an angry proctologist with big hands and jagged fingernails. I didn’t want to be in their stupid club anyway.
This should serve as a nice little reminder- if you’re making money, you’re going to be taxed on it. There are all kinds of wonderful ways to reduce your tax burden legally, but hoping that nobody picks up on the thousands of dollars you’re making selling things online isn’t one of them. If you’ve misreported in the past, or failed to include income that probably should have been included, talk to a tax lawyer or accountant to see what can be done. CRA has a voluntary disclosures program that allows you to correct these mistakes and possibly avoid prosecution.
If you’re just selling random junk on eBay, you probably don’t have to worry about the taxman coming to call. While any gains from selling property (even personal items) are taxable, you’re only taxed if there’s an actual gain - that is, you sold it for more than you paid. For the vast majority of people just getting rid of stuff they found in the attic, there’s not going to be any gain at all. Even if you do make a little bit of profit, there’s a $1,000 exemption for most personal property, so you only get taxed on any profit in excess of $1,000. If you’re turning thousand dollar profits on random items lying around your garage that aren’t bags of marijuana, I’m impressed. However, if you’re buying or collecting items for the purpose of selling them online you need to be aware that there may be tax consequences. When your eBay-ing turns into a business, you get taxed just like the rest of us. I don’t like being taxed either, but it’s surely better than the notoriously bad turkey soup at Her Majesty’s Penitentiary.
[thanks to money grubbing lawyer and mike knell via cc]
What a Criminal Tax Attorney Can Do To Help Get You Out of Trouble
Those who find themselves charged with some kind of criminal tax evasion may also be in the rather urgent need of a highly specialized criminal tax attorney. The reason(s) the tax authorities is after you may not matter that much. Regardless if you willingly filed false returns or if you forgot or simply made a mistake, a lawyer may be the only one who can get you out of trouble. Tax crimes are not taken lightly in most countries, and the various forms of IRS tax evasion certainly aren’t the exception to the rule.
Here is a brief outline of the situation when charged with breaking the tax laws.
In the US, it is the federal government that will take care of the criminal proceedings. A criminal tax attorney is hired as your legal representation in these matters. The first step in most investigations will be to determine if the tax violation was committed on purpose or not. If it is clear that you knowingly neglected to follow the appropriate tax laws of your country, the charge will most definitely become a court case. Under such circumstances a good lawyer is always advisable.
As a rule of thumb, the criminal tax attorney will do whatever he can to try and prove that you in fact have done everything in your power to play by the rules – any form of criminal tax evasion was never your true intention. On the other had it is up to the IRS to, beyond reasonable doubt, prove that you did indeed commit a tax violation with a full understanding of what you where doing.
“Not knowing any better” is of course never a good enough excuse for any crime, but at least it shows that your intentions where in the right place.
At some point you will also be explaining yourself to an IRS agent, and it is a good idea to consult with your criminal tax attorney before that meeting. He or she will help you with what to say, so that you do not incriminate yourself further by mistake. Naturally you will be telling the truth to both your lawyer and the IRS, but in most legal matters the details are very important.
Your attorney will also be able to participate in these hearings and to communicate directly with the IRS lawyers, in order to present them with all the relevant information concerning your alleged IRS tax evasion. Like all other legal situations, your attorney should make sure all your rights are protected at all times.
[via the daily digest]
The Debate Over Regulation of Hedge Funds
One of the hottest topics, when Wall Street recently saw a market turmoil, was whether hedge funds need to be more strictly regulated. As a special investment vehicle designed for large institutions and rich personal investors, hedge funds are notorious for their ruthless trading strategies aiming to reap as high absolute returns as possible, which usually came with very high risks. The financial leverages hedge funds often utilize had more or less contributed to almost every financial crisis we have faced in the last decades. Typical examples include the fall of Long Term Capital Management (LTCM) in late 1990s and its recent counterpart Amaranth in 2006.
Therefore, the world has recently seen a desire to put more strict regulations to curb hedge funds by most countries. This was well manifested by what was happening in Germany, which had already started a series of legislatorial moves “against” hedge fund. As Peer Steinbröck, the Finance Minister of Germany commented during G7 meeting of 2007, “any mistakes in the hedge funds’ calculations may well trigger off a vicious circle which will have negative implications similar, or even worse, than the financial crises we saw in the 1990s.” There have been similar moves taken by Steinbröck’s counterparts in the States. For example Connecticut’s attorney general, Richard Blumenthal, said after the fall of Amaranth, which lost 6 of its 9 billion assets in less than a week during Sept. 2006, “The facts about mammoth losses by Amaranth offer additional powerful and compelling evidence about the need to reform disclosure and oversight requirements [for hedge funds].”
In this article, we will briefly review how hedge funds are currently regulated and what problems they have brought to the financial market. At the end, we will argue that based on what we have seen in the past collapses of hedge funds, restricting their operations by more harsh regulations might not be a good idea.
How hedge funds are regulated?
Contrary to what people generally call them, hedge funds are actually not “unregulated”. They are no less regulated than mutual funds, which are more familiar to most common people. The illusion that hedge funds lack regulation generally comes from the fact that hedge funds are exempt from certain laws. Before discussing the major problems facing the hedge fund industry, we need to review relevant legislatorial structures for hedge funds and understand why they are “exempt” from certain provisions.
First, a hedge fund is nowhere different from any other investment vehicles as a general investment company. It is regulated in two basic aspects: tax laws and securities laws. We will only focus on the part related to security laws in this article as tax issues themselves might bring much more complications in a un necessary manner.
Every hedge fund is regulated by the Security Act of 1933 since it is considered as a security. The difference of a hedge fund from another common security is that it usually registers itself under Regulation D as a “private placement”. This is the key different of a hedge fund from a mutual fund or a company publicly offered stock. Thus a hedge fund cannot be advised or offered to the general public. It is, by nature, a game for rich investors.
Secondly, a hedge fund is different from another investment company is that it usually qualifies itself for Section 3 (c)(1) of Investment Company Act of 1940, which relieves registration requirements if an investment company make distributions among less than 100 investors. Compared with most open-end mutual funds who allow any number of clients to buy their funds every day, hedge funds again demonstrate its intrinsic nature: small and private. The National Securities market Improvement Act of 1996 further added one more exemption from SEC registration in section 3 (c) 7 for any investment companies with unlimited client as long as each client has an a net worth of 5 million dollars. These two types of funds are thus nicknamed 3c1 fund and 3c7 funds, which are two most common types for hedge funds legal structures now. That’s also the reasons that people often call hedge funds “unregistered entities”.
Third, we review the Investment Advisers Act of 1940, which governs bookkeeping and reporting activities for investment companies. It also contains an exemption section 203 (b) 3, which relieves the reporting duties of a fund manager who has less than 15 client. As one hedge fund is usually counted as one client for that manager, most hedge funds are exempted again from reporting to SEC.
Besides the basic three Acts we have discussed, there are a few more things that distinguish a hedge fund from another investment vehicle, which could be summarized as liquidity constraints, trading restrictions and marketing restriction. (We will not go to details but interested readers can refer to the book All About Hedge Funds)
Now we are clear that the fundamental principle under regulating a hedge fund is to avoid unnecessary restrictions as long as it can be considered as activities among a small group of rich people, who can take risks and who have enough money not to become social burdens when their aggressive investment fails.
What are the most controversial issues?
Fall of hedge funds usually make headlines of media and received a lot of following coverage. As modern hedge funds become larger and larger, it seemed that they are bringing in instability. They might no longer look as a private group making investment.
When analyzing the fall of a hedge fund, two major problems have been discussed again and again. The first one is the high leverages hedge funds usually use to boost its gains. The famous fall of Long Term Capital Management in 1997 is a well-known example and the fall of Amaranth in 2006 seemed simply repeating the history. The hunger for high-leveraged position simply originates from the greed for high returns. Thus this remains one of the top problems for central bankers or security administrators in most countries.
Aside from that, financial industry often suffers from the issue that hedge funds usually don’t like to disclose their position or trading activities, or anything they can avoid to open. Since most hedge funds exploit certain proprietary trading models, they don’t want other people to follow or analyze their trading styles. Thus it is understandable that they don’t want to disclose their holding. But with almost opaque trading books, most financial problems could be deeply hidden. That’s what exactly happened during the asset-backed security crisis (mostly in the area of sub prime mortgage-backed securities) in this summer. Most investment banks had chosen to bail out their child hedge funds instead of disclosing their position for applying bankruptcy because they don’t want make their positions of asset backed securities public.
Do we need more regulations?
Until this point, there is really not much we can do to better regulate the hedge fund sector. As we have discussed earlier, the first problem a hedge fund might bring is its high leverage. In today’s world, a default of a large leveraged position could be detrimental to the whole market and every single investor could be harmed from it. This argument is one crucial driving force for those who propose more regulations. However, hedge funds usually establish their high leveraged positions by mutual agreed contracts with other fully functional and consenting parties. There are no reasons that the legislators should forbid this. The banks or any institutions providing money or loans should automatically tighten their fund and restrict more on their lending requirement. Thus the situation should be considered as something the market could adjust to with better due diligence. There is indeed not much left to do for the regulators.
The second problem of reporting or disclosures is also difficult to regulate. If quarterly reports are needed from each hedge fund, it could results into ton of papers being sent to SEC. Such is hedge fund’s nature that it usually has very frequent account turnovers looking for quick and imminent profits. This will firstly first make it impossible for SEC staffs to examine all their trading activities or position. Secondly, most reported activities or position would be stale on a quarterly basis so the report itself could become useless. Thirdly, investors in hedge fund are usually rich people and they have necessary resources to carry out due diligence. The hedge fund should be willing to disclose their performance to potential clients and they are well capable of striking a good balance between keeping their strategies secret and marketing to a small circle of private investors. Therefore, requiring hedge funds to report to SEC or the general public is not necessary.
Aside from the two issues, we face more practical problems as to how a hedge fund is legally defined. One of the SEC’s requirement asking large hedge funds to register with them was struck down by a New York District Court because of exactly this reason. “The court specifically attacked the SEC’s definition of the word ‘client’, saying regulators did not provide a detailed enough explanation of what the word means in the context of a hedge fund.” The court specifically attacked the SEC’s definition of the word “client,” saying regulators did not provide a detailed enough explanation of what the word means in the context of a hedge fund. It is also well known that there is only small difference between hedge funds and other private investment entities like private equity or venture capital, which differs in strategy but bear similar legal structures from hedge funds. Private equity and venture capital don’t bring troubles that hedge fund bring to us so that we can’t put the same regulations to all of them.
We conclude this article by how Timothy F. Geithner, the President of Federal Reserve Bank of New York, put it, “The fundamental challenge for policy is how to achieve the appropriate balance between efficiency and financial resilience.”
[thanks to Illinois Business Law Journal via cc]
