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Beware of Gifts That Will Get You On the IRS Naughty List

Many individuals and businesses will be considering tax-saving gifts this holiday season. Whether you are making contributions to charitable organizations or making a large gift to a family member, it's important to take advantage of legal tax benefitswhile making sure your year-end tax saving strategies don't get you in trouble with the IRS.

The IRS has a very narrow view of what kinds of gifts are allowable and the government agency catches thousands of taxpayers every year for improper tax deductions. Don't be one of them. With the latest increase in IRS tax collection aggression and the slowly rebounding economy, it's important to keep in mind that the money you "save" from tax deductions is not worth the IRS penalties that you can incur.

If you are unsure about what qualifies as a proper gift, you can get professional tax help from a tax professional. And if you think you may already be in trouble with the IRS, it's important to consider hiring a tax attorney or Certified Tax Resolution Specialist to help you relieve IRS tax problems.

Gifts That Will Put You on the IRS Naughty List #1: Gifts that exceed the IRS's annual exclusion.

The IRS currently allows an individual to gift $13,000 on a family member without incurring a taxable event. If you're married, this means that you and your spouse can combine gifts to total $26,000 to each family member without penalty. The gifts can consist of cash, investments, or property. This can be particularly beneficial for folks looking to minimize their estate taxes.

A gift is defined as giving property or the use of or income from property without expecting something of equal value in return. If a non-cash gift appreciates, its liquidation will trigger a taxable event. For example, if you purchase stock for $10 per share and you give it to a family member who later sells it for $100 per share, income tax would be due on a gain of $90 per share.

If you exceeded the annual exclusion, you needed to file an IRS Form 706. If you didn't file the appropriate form with the IRS, you will want to consult with a professional tax attorney or Certified Tax Resolution Specialist to help you obtain tax relief.

Gifts That Will Put You on the IRS Naughty List #2: Contributions to an account in a child's name that aren't an UGMA/UTMA account (within the annual exclusion).

An UGMA/UTMA account is an investment or savings account in a child's name. These funds can be used in the future to help pay for any number of financial hiccups like college, a wedding or buying a house. The account can consist of savings accounts; Series EE U.S. Savings Bonds and individual securities such as stocks, Treasury bills, zero-coupon bonds or mutual funds. One adult acts as custodian. If you are the custodian of your own gift, the account will be considered part of your estate.

Depending on the size of the account, you will need to lend tax help and complete a return for the minor. The first $950 per year of investment income is tax-free. $951-1,900 in unearned income is taxed at the child's rate. Beyond $1,900, the income is taxed at the higher of the child's or parent's rates. For individuals over 18, all unearned income is taxed at his or her rate.

When the child reaches their majority as defined by each state's law, the money belongs to them free and clear. Regardless of your intentions when you gave it, recipients can spend their money as they like.

If you have created accounts that don't follow these guidelines or have exceeded the annual limits, you will want to consider getting professional tax help to resolve any resulting back taxes or IRS problems.

Gifts That Will Put You on the IRS Naughty List #3: Gifts to close friends who are not your spouse. Playing house isn't the same as being married in the eyes of the IRS. Anything you give to your legal wife or husband is not subject to the gift tax rule. In fact, you and your spouse can both give separate gifts to the same person, doubling the exclusion limits. When you split gifts, you won't owe a gift tax payment, but you must report the gift to the IRS using Form 709.

If you didn't cleave to the IRS's rules and you're in trouble, it's best to consult with a tax relief expert or Certified Tax Resolution Specialist to help bring you into compliance.

Gifts That Will Put You on the IRS Naughty List #4: Nondeductible payments for a person's medical and educational costs. If you pay for the medical care of a family member or someone's tuition, you must write the check directly to the institution. These payments are not included in the gift tax rule, and if these are the only gifts you've made, you don't have to file a Form 709.

If you have paid someone's medical or educational expenses by giving money to the individual, you may find yourself under IRS scrutiny and should consider contacting a back tax attorney or Certified Tax Resolution Specialist.

Gifts That Will Put You on the IRS Naughty List #5: Unallowable political donations.
Cash gifts made to political organizations are tax free as long as they are registered with the IRS as a 501(c)3. If the group isn't registered with the IRS and your gift exceeds the allowable limits, these improper deductions may cause you to become IRS audit fodder and you will need the assistance of a back tax attorney or Certified Tax Resolution Specialist.

Gifts That Will Put You on the IRS Naughty List #6: Unallowable charitable donations.
The same is true of donations to charitable organizations. Check to make sure that the organization you are interested in donating to has the appropriate IRS designation. A portion of these gifts may be considered deductible charitable contributions.

If you have run afoul of Uncle Sam, an experienced tax attorney or Certified Tax Resolution Specialist will be able to provide expert tax help to ensure that you get tax relief from back taxes, IRS audit or other collection-related issues.

Note: Always keep your checks and receipts to substantiate your deductions. You never know if/when the IRS will audit you and you do not want to be caught in a position where your truthful deductions are not accepted based on a lack of proper documentation.

For more information on achieving a tax resolution for your IRS problems, visit for a free tax relief consultation or call 888-851-5894.

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About the Author

Michael Rozbruch is one of the nation's leading tax experts. A Certified Tax Resolution Specialist (CTRS), licensed CPA and the founder of Tax Resolution Services. He helps individuals and small businesses solve their IRS problems and is dedicated to educating the public on tax planning and other strategies for managing their personal and business finances.