Winning is nice, but most prizes come with a price – from a tax standpoint, that is. At least this was the case for our member, an avid bass fisherman from Northern California.
The member and his buddy had won first place in a fishing tournament, and their prize was a certificate for a boat. The trouble came when the IRS sent him a letter contending that he had not included the value of the prize on his tax return.
When I spoke with the member he told me that he had, in fact, reported the prize winnings. I reviewed his return and did find the entry for “other income,” but the problem was that it just didn't match what the IRS said it should be.
The member told me that in the bass fishing world it is not uncommon to receive a certificate like this, which has an expiration date, and post it on a forum for interested parties to buy. This is what he and his buddy did, but they were unsuccessful in their efforts to sell the certificate. With the expiration date fast approaching, his buddy offered to buy out the other half of the certificate for $9k. The member took the money and reported the actual amount he received − instead of the amount reported to him on the 1099-MISC form − as “other income.”
I thought I would get some feedback from the other audit reps so I sent out an email asking if anyone knew how the bass fishing world worked and if they had run across this before. Their responses confirmed what I had been thinking: if I could prove the FMV of the prize I could get a “no change” on this audit.
The taxpayer sent me the printout from all the tournaments he had received any winnings from along with the copy of the check his buddy had given him for his half of the new boat certificate. Since this was the amount a willing buyer was willing to pay a willing seller, it was the true fair market value.
I submitted our response to the IRS and was successful in getting the “no change” I was expecting. The member was happy with the outcome and now understands the importance of documenting the FMV of prizes won, having learned first-hand how they can be reported at an inflated value.
Even though there may be tax implications involved in some types of winning, it’s still better to win than not to win. Winning this audit case was a lot of fun, and, happily, my feeling of victory is one prize the IRS can’t tax!
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