Like any sensible American, I have a healthy respect for the IRS. The Internal Revenue Service has the power and authority to do things that other government offices cannot. According to their own website, they may “levy (seize) assets such as wages, bank accounts, social security benefits, and retirement income.” They could seize your property including your home, car, collectibles, and anything else that they could sell at a public auction to satisfy an alleged tax debt. They even have the authority to intercept and appropriate your Federal or state income tax refunds. Like vultures picking over a corpse, if you run afoul of the IRS they could literally strip you of all of your financial assets leaving you broke and homeless.
My father once had problems with the Internal Revenue Service. While working abroad in Pakistan as a doctor attached to the U.S. Public Health Service he abruptly realized that if he quit his job, the U.S. Consulate would hire him to stay on as a private contractor for nearly twice what he had made as a government employee. He did this in 1985 and enjoyed a large income until he decided to retire a few years later. After returning to the United States, he was audited by the IRS. They claimed that as a Federal employee, he had not been paying his income tax. Since income up to a certain amount that’s earned abroad is tax exempt (on the premise that most people will have to pay the host country income tax), my father stopped paying his income tax after he left government service. When he was in government service, it wouldn’t have mattered how many years he had worked abroad. All U.S. Government employees including Consulate officials, teachers at American schools on U.S. military bases overseas, and all members of the U.S. military are always liable for the U.S. income tax regardless of where they live and work. As a private citizen, the one year rule should have applied to my father and his foreign earned income should have been tax exempt.
The IRS claimed that even though my father had been a private contractor, he was still working on behalf of the U.S. government. They demanded nearly $40,000 in back taxes, interest, and penalties. When my father refused, they froze his bank account. He couldn’t pay his mortgage. He couldn’t pay his utility bills. He couldn’t even put gas in his car or food on his table.
After different relatives loaned him money, my father retained an attorney. The attorney had my father pay the IRS which promptly released his bank account. The attorney then sued the IRS for a refund. Although the IRS lost the lawsuit, their attorney claimed that the court had made a mistake. The IRS filed an appeal. In 1995, this case was heard by the United States Court of Appeals, Ninth Circuit.
The Court concluded that my father indeed had been an independent contractor. His office was not at the U.S. Consulate or at any U.S. facility. It was instead inside Pakistan’s Ministry of Health. His work was not overseen by any U.S. personnel but was in fact subject to review by Pakistani health officials. The IRS had to pay for my father’s legal fees. They also had to reimburse him for the back taxes, interest, and penalties that he had paid.
As a result of this experience, I have a healthy fear of the IRS and would never do anything to rouse their ire. What does any of this have to do with making candles and selling them?
Everyone who sells candles on Etsy, eBay, 3dcart, or some other on-line platform needs to have at least three things.
- They need documentation for all transactions because any income that’s earned through on-line sales is taxable.
- They need to have a valid business license.
- They also need a seller’s permit.
People who are found guilty of tax evasion can be fined up to $250,000. Their undeclared income could be assessed up to 75% in penalties. There would also be interest and back taxes to pay.
If you were found to be selling products without a license, the government could allege fraud and the court would likely award an automatic default judgement against you. For that matter, an unhappy customer could also allege fraud and file a civil lawsuit. A default judgement would make you liable for issuing a refund and for paying the plaintiff’s court costs and legal fees. Punitive damages could also be applied.
Without a license, your business would have to shut down. Your reputation would suffer. The government could also impose a probationary period that could force you to wait for a fixed amount of time before you could apply for a license.
Given all of the grief that the state government, the IRS, and disgruntled customers can rain down on you, why would anyone NOT get a business license?
In Nevada, a sole proprietorship costs $200 per year. That seems like a lot of money for a hobbyist wanting to start a part-time business. The good news for me is that Nevada also provides statutory exemptions for anyone “whose net earnings from that business are not more than 66 2/3rd percent of the average annual wage as computed for the preceding calendar year pursuant to NRS Chapter 612 and rounded to the nearest hundred dollars.”
Since the average wage fluctuates from one year to the next, 66 2/3% of $38,603 (annual wage for 2021) is $25,732.56. So long as my gross earnings stay below this amount, I won’t have to pay $200 for an annual business license.