Is income from crowdfunding taxable? It's a popular way that many people raise money for emergencies, charities, businesses and more. But the funds could be taxable.
Tax rules: Under federal law, gross income is income from all sources, unless it's excluded by law, such as a gift. For crowdfunded donations to qualify as gifts, certain conditions must be met. For example, the organizer must give all donations to the person the campaign was set up to benefit and donors must have contributed without expecting something in return. Some crowdfunded donations may be taxable, such as when an employer donates to a crowdfunding campaign for an employee. Contact your tax advisor with questions or click here for more details from the IRS.
Taxpayers who owe more taxes than they can pay may seek an Offer in Compromise (OIC) from the IRS to settle the debt for less. If the IRS finds that a taxpayer is able to pay in full, the OIC will likely be rejected.
In one case, a warehouse worker submitted an OIC proposing $10,000 to settle his tax liability of nearly $65,000, plus interest and penalties. The man was estranged from his wife and claimed to support four children (including a "developmentally challenged" child). An IRS Appeals Officer analyzed his assets, income and liabilities. The tax agency found that he claimed only one child as a dependent on his tax return. In addition, his monthly income and assets were deemed to be sufficient to cover expenses for himself and one child without hardship. Plus, he had $152,000 in equity in his house.
The IRS rejected the OIC and the U.S. Tax Court found the IRS didn't abuse its discretion when it rejected the offer. However, the IRS did place his account on "currently not collectible" status until his financial situation improves. (Serna, TC Memo 2022-66)
Taxpayer identity theft is alive and well. However, progress has been made in combating this crime. The IRS, state agencies and tax professionals urge taxpayers to protect themselves with an Identity Protection PIN (IP PIN). This 6-digit number must be requested from the IRS and is renewed each year. The number must be entered on your tax return upon filing.
The IRS explained that "the IP PIN serves as a critical defense against identity thieves," who attempt to use your identity to file for a tax refund. You can get an IP PIN proactively rather than after being victimized, but you must first pass an identity verification process. Learn more and request an IP PIN here.
Another type of tax-related scam targets students and staff at educational institutions. Fake messages impersonating the IRS are sent to people with ".edu" email addresses at public, private and nonprofit schools. The emails display the IRS logo and may refer to a "tax refund" in the subject line. The sender then tells recipients that, to claim a refund, they must click a link and enter personal information, (which may lead to theft of assets and identity). Taxpayers who believe they may be due a refund should check the status with the IRS here.
To combat IRS impersonator scams, the IRS has created a fact sheet explaining how it contacts taxpayers. The first contact is not by text or email. Usually, the first contact is by mail (though under some conditions, the IRS may make contact by phone). IRS employees aren't permitted to be aggressive or threatening or demand payments by methods such as gift cards or prepaid cards. Here are more ways to spot an IRS scammer and report suspicious contacts.
Finally, be careful of charity-related scams. When disasters happen, scammers often look for easy prey among two groups: disaster victims seeking help and taxpayers who would like to donate funds to help them. How can the public be sure that the person or agency they're dealing with is legitimate? One red flag is unsolicited contact. Scammers reach out by phone, email, social media and in person. They may claim to work for the IRS, offering to file loss claims for victims. If you're a victim, call the IRS disaster help line at 866-562-5227. Would-be donors can click here for more information and to check the legitimacy of a charity before contributing.
The IRS Whistleblower Office pays monetary awards to eligible individuals who submit information to the IRS and the information is used by the tax agency. The award percentage depends on several factors, but it's generally between 15 and 30% of the proceeds collected and attributable to the whistleblower's information.
Awards are only issued once a final determination is made. That means award payments may not be made for a long time because they can't be made until the taxpayer: has exhausted all appeal rights, can no longer can file a claim for refund, or otherwise seek to recover the proceeds from the government.
The new IRS Whistleblower Program director John Hinman admits that his group needs the public's help. Specifically, it needs "people with first-hand knowledge of non-compliance who are willing to share what they know with us so we can investigate it when warranted." Whistleblowers can report their specific, timely and credible claims about individual and corporate tax evaders by filing Form 211, Application for Award for Original Information. Claims are then evaluated in a process that can take up to 10 years. Since the program's inception in 2007, the IRS has collected $6.39 billion from non-compliant taxpayers based on these tips. It has awarded approximately $1.05 billion to whistleblowers.
Business versus hobby? It's an important question because although you must report hobby income on your tax return, hobby expenses aren't currently deductible. In general, an activity is considered a business if you pursue it with continuity and regularity and your primary purpose is to generate income or profit. If your activity is considered a business, you can deduct the full amount of expenses related to the operation. In addition, you may be able to use business losses to offset other income such as investment earnings or wages from a full-time job.
Some other factors the IRS and courts consider are:
On the other hand, hobbies are activities you engage in for pleasure with no expectation of profit. Click here for more information from the IRS.
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