Question – I heard recently that IRS expects me to pay income tax on the stuff or even the services I receive when I exchange something with my neighbor or help her in return for her helping me! How can that be, since no money changes hands?

Answer – Congress established our system of taxation by designing it around transfer activity. Basically, we have to pay tax anytime there is an agreed-upon transfer/exchange between parties – goods for goods or for services. The parties agree on the fairness of the exchange of value.  It is up to each to assign a monetary amount to the transaction and yes, to report it as part of their income subject to tax. The occasional transaction value would be reported on the ‘Other income’ line on page 1 of form 1040. If a business does exchanges, the income received is also potentially subject to self-employment tax! A business owner reports bartered benefit value on Schedule C as Other Income. And the IRS finds out about any ‘bartering’ activity by asking you directly at the very beginning of any audit.  Rules about bartering are clearly a part of the Internal Revenue Code!