Wednesday, May 13, 2015

Why Does The IRS Want To Tax Donations Raised For A Cancer Patient?



Have you heard of a website called GoFundMe?

We are talking crowdfunding, and the technology is a dozen or so years old. It is made possible by the internet. Think of a cause, a website and a means to process payments from interested parties. The cause can vary. It might be a business startup, unexpected medical expenses, a legal defense or even a wedding fund.

There are number of crowdfunding websites, bit today our story involves GoFundMe.

I am reading the story of Casey Charf, a young Omaha woman who in 2013 was involved in a bad car crash. She had broken her neck and back. While in the hospital the doctors discovered that she had cancer.


She was interviewed by local television and her story went viral. There were fundraisers for her medical expenses, and toward that end her sister set up a GoFundMe account.

More than a thousand people donated online, raising over $50,000.

Casey has spent the last two years on medical travel and receiving treatment. The cancer unfortunately is still there, but at least it does not appear to be spreading.

In March of this year the IRS dropped in. They sent a notice that the monies raised through GoFundMe should have been reported as taxable income, and to please remit over $19 thousand in taxes, penalties and interest.

Needless to say Casey Charf is contesting the matter.

And I think she will win.

I speculate, but I think I know what triggered the IRS notice. I suspect Casey received a Form 1099-K notice.

The IRS uses the Forms 1099 series to have a third party report amounts paid you and likely representing income. A bank would send you a Form 1099-INT for interest paid on your savings, for example.

The 1099-K follows in that spirit, but it is sent by payment processors. This immediately tells us that we are dealing with debit or credit cards. Why did this enter the tax Code? Think eBay. People were conducting business activities but not sending the government its due. Congress therefore mandated that the companies that processed the payments issue annual 1099s, and it delegated to the IRS how to handle further details.

The IRS published Form 1099-K and said that the payment processor was required to file the form if (1) gross payments to a person exceeded $20,000 or (2) there were more than 200 transactions with a given person.    

GoFundMe uses WePay as its payment processor. I am willing to bet nickels to dollars that WePay issued a 1099-K to Casey Charf.

And the IRS sent a notice.

Why?

Because the IRS presumes that 1099-Ks are for business activity.

I suspect the IRS was trying to find a “business” number on the tax return that matched or exceeded the 1099-K. Finding none it churned out a notice.

Can the IRS not tell that monies are being raised for a charitable cause?

In short, no, not really.

And there is the unfortunate, inside truth of today’s IRS: every year more and more functions are being automated. The practice started out innocently enough: have third parties send information to the IRS and then have IRS computers match that information to your tax return. 

That worked well enough years ago, when reporting requirements were much lighter. They are becoming – if they haven’t already become – onerous, as the IRS wants to know every creak in the economy so Congress can tax it. Many of these notices are wrong, but they still cause angst and cost taxpayers professional fees. The dirty secret is that the IRS is intentionally shifting the cost of administering tax law to taxpayers with all these notices. They can send out anything and force you to explain how they are wrong. Fail to explain and the IRS can (and likely will) assess you.

Back to our story.

I see no reasonable tax theory under which these payments are income to Casey. There is no business activity, nor is there an employment or contractor relationship providing a backdrop for earnings from personal services. I suppose one could argue that it is akin to a lottery or bag of money found on the street, but that seems a stretch.

There is a donative intent, although as structured the amounts raised do not appear to rise to the level of a tax-deductible donation. There are strict rules with deducting payments made directly to an individual, and for the most part they require the participation of a 501(c)(3).

From a tax perspective these payments most closely resemble a gift. Gifts are not taxable.

Which is why I believe Casey Charf will win on this issue.

More importantly, may Casey have a full and speedy medical recovery.

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