See, instead of spending millions of dollars on recruitment advertising no one will actually see, the IRS instead spent thousands of dollars to create an IRS Careers Island in Second Life which no one will actually see. That's much cheaper! I actually visited the island as soon as I heard about this, and one can definitely see how they saved millions. It's a bunch of booths with clickable information signs, and a couple of lounges with some very pretty penguin clip art that must have cost them a small fortune to secure.

Frank Stipe, Virtual Worlds & Social Networking Project Manager for the IRS, explains why the IRS needs a Virtual Worlds & Social Networking Project Manager.

In the physical world, we could spend hundreds of thousands, if not millions, on sponsoring a race car that displays our brand in a field of thirty or more other cars. In the SL virtual world, we have spent a few thousand dollars to build complete entertainment and communications venue that includes a race course. IRS branding throughout the venue not only displays our messaging, but it also instantly dispenses marketing collateral and links to our Careers web site.

Wait, there's an IRS race course in Second Life? Excuse me a moment.

Wheeeeee! The IRS rocks!

The service is currently working with Universities and other academic institutions to raise awareness of its Second Life presence. Those interested in more information can contact recruiter Robin Laviscu or sim engineer RobinRasberry Sorbet.

IRS Saves Millions by Using Second Life to Market Its Employment Opportunities [College Recruiter]

In her annual report, Nina Olson, whose job is to recommend to the IRS "how to improve the average consumer's tax-paying process," noted that more than $1 billion changed hands in RMT during 2005, and that more than 16 million participate in virtual worlds "many of which have their own virtual economies and currencies."

The problem, she said, is that individuals and firms within these worlds who make enough of an income to get into hot water if they didn't report it, don't know how best to do so on their tax returns. "Economic activities in virtual worlds may present an emerging area of tax noncompliance, in part because the IRS has not provided guidance about whether and how taxpayers should report such activities," she said in her annual report to the IRS.

She's suggesting that the IRS issue guidance addressing how taxpayers should report these kinds of economic activities. The good news, it legitimizes and mainstreams these virtual worlds and their economies somewhat; the bad news, anything legitimate and mainstream pays taxes.

China's already taxing RMT at 20 percent. Olson's suggestion isn't like that or sales tax, it regards how sellers report it as income, so it doesn't need a new chapter of the tax code per se. But "active guidance" to "improve voluntary compliance" with reporting income can definitely be taken to mean, "where's my money, man."

Whatever the IRS does, I really do hope they provide some sort of threshold for RMT, because I can scarcely imagine that selling a few $20 items in a virtual world would require filing Schedule C, the same way Joe Average with a real job elsewhere doesn't report the video games he sells on Half.com.

IRS May Push for Tax Compliance in Virtual Worlds [Washington Post via GameRates, thanks Andrew S.]

The Entertainment Software Association paid more than $5 million last year to stop hosting their annual trade show in Los Angeles, only to bring their new, downsized show back to the city a year later, according to IRS documents obtained by Kotaku.

The expense of breaking a contract that locked the show in LA through 2012, along with the expected drop in E3 revenue associated with the event's downsizing, led the association's board to drastically increase their membership dues last year.

Rich Taylor, Entertainment Software Association senior vice president of communications and research, said that all of the changes made by the association, including the costly jump from LA and the increase in dues, were decisions made by the group's board, which is made up of executives from 19 of the association's 25 member companies.

"I don’t think it’s a mistake," he said. "There was a model in Santa Monica that we tried and after the event we polled participants across the board about what they thought of it and then we tried to figure out what we could do to make it better and returning to the Los Angeles Convention Center was the right decision."

But that decision, the accompanying jump in dues, may have been the impetus for three high-profile member companies dropping out of the association. Lucas Arts, Vivendi and Activision all canceled their memberships with the association in the past month. While all three companies declined to comment for this article, it is rumored that the increased cost in dues played a part in their decision to leave the association.

Taylor also declined to comment on their departure.

Documents filed annually with the IRS by the Entertainment Software Association, and obtained through open records request by Kotaku, spell out the more than $5 million dollar change of heart and its almost immediate repercussions.

According to the forms, the association paid $5,377,808 in "event cancellation fees" tied to getting out of their contract with the Los Angeles Convention Center. Those same forms show that the association's membership dues more than quadrupled in their 2006 fiscal year, which ended on March 31, 2007, jumping from more than $1 million in fiscal 2005 to more than $4.5 million in fiscal 2006.

Taylor said that the board members knew going into their decision to move from the convention center that there would be sizable fees, they also realized that it would mean what they called a shift the annual show from a "profit generating E3 to a revenue neutral summit."

"In the past the membership dues here were deflated significantly because of income that was coming from other sources including the summit," Taylor said. "Now we're closer to what other trade associations charge."

Historically, the association survived mostly on the revenue generated by the summit, but when the board decided to cut down on the size of the show and make it "more intimate" they realized revenue would drop.

Although the 2007 fiscal year ended in March, the association had not yet filed that information with the IRS and figures from the form were not yet available. In the 2006 fiscal year, which included the last of the big E3 shows, the association brought in nearly $18.5 million from the show, up about a million from the previous year. Taylor declined to say how much was brought in from last year's smaller show.

"We are still working to close the books on last fiscal year," he said.

Taylor disagreed that this year, with three well known members dropping out and the E3 Critics Awards in jeopardy, has been a trial by fire for the E3 Summit & Trade Show.

"Traditionally there have always been a lot of issues leading up to E3, this time they are just more public," he said. "This is just part of the pleasurable experience of putting on a trade show. I don’t think there is any trial by fire, I think it’s how the process works.

"Anyone who is anybody who has anything to do with the industry will be at this year's E3."

Said John Smedly, SOE president:

"The Station Exchange White Paper results demonstrate beyond a doubt that there is a significant demand for a secure, sanctioned online marketplace where players can enhance their gaming experience by spending real dollars."

EverQuest auction site turns over $1.8m in first year [GamesIndustry.biz]

Over at Terra Nova they link to a piece in Legal Affairs that says the IRS is considering trying to find a way to charge people for virtual commerce. No, I don't mean using IGE, I mean taxing you on that gold you made for selling an Arcanite Reaper. Because the real world value of gold can be quantified, selling an item for 1000 gold, which has a value of (for the sake of argument only) $60. The IRS' thinking is this: "Goods taken in trade or won at play are taxable the moment they fall into somebody's hands, even if they are not sold for money."

Would a policy like this be the death knell for MMOs? Is the IRS overstepping its boundaries, here? Or are they within their rights given the popularity of virtual commerce?

The Taxman Cometh [Terra Nova]
Dragon Slayers or Tax Evaders [Legal Affairs]