THE IRS HAS TAKEN MY TRANSACTIONS VIA PAYPAL AND IDENTIFIED THEM AS TAXABLE INCOME

In order for the IRS to know about these transactions PayPal has to tell them, otherwise it's the honor system and the IRS expects you to report the income. According to PayPal guidelines they are required to report gross payments received for sellers who receive over $20,000 in gross payment volume AND over 200 separate payments in a calendar year. PayPal would also send you a 1099-K in this case. You can also check your PayPal account to see if the 1099-K was issued.

The $20,000 is easy to hit when you're selling audio equipment, but 200 transactions not so much. regardless, if the IRS has contacted you then it's generally best to work with them and not against them.

What I'm still curious about is how the IRS found out about the transactions.

This article sheds more light on what will happen starting in tax year 2022:

https://www.cnbc.com/2021/03/26/its-going-to-get-harder-to-avoid-telling-the-irs-about-income-from-o...