Forbes has published an article, “How IRS Can Tax ‘Gifts’ and Impose Big Penalties”, which discusses the importance of reporting gifts to avoid costly tax penalties. The article begins as follows:
Are gifts income the IRS can tax? Fortunately, no, but the line between what is income and what is a gift is sometimes fuzzy. Let’s say you do major favors for your employer and get a gift of $20,000, is that really a gift? You might try to document it that way, but it’s not likely the IRS would agree. The IRS would say it is a bonus, even if it is not run through usual payroll. What of more usual family gifts, where your uncle or grandmother sends you money? That is safer and is probably made with what the IRS calls detached and disinterested generosity. Ideally you don’t just want money to show up in your bank account, since the IRS could someday call it income if you cannot explain that it is not. Having a contemporaneous instrument of gift or at least a letter from your relative saying it is a gift is a good idea. But assuming that it’s a gift, any gift tax or gift tax return is the problem of the person who gave it to you, right?
Posted by Anthony Tran, Associate Editor, Wealth Strategies Journal