December 10th, 2018 Dominique Molina (Taxloopholes.com Tax Strategist)
The cancer survivor expected her GoFundMe receipts to offset her medical bills. She certainly did not expect a $19,000 tax bill.
As they treated her for car crash injuries, doctors discovered that Ms. Charf had several malignant tumors. Cancer treatments often cost over $10,000 a month, so her medical bills quickly mounted. Her sister then created a GoFundMe page called Casey’s Cure. Subsequently, the IRS sent Ms. Charf a bill for $15,457 in back taxes and $3,676 in penalties and interest. “We’ve already used that money for my doctors’ bills and everything that I’ve needed,” she remarked. “It’s donations, it’s not income. So how can they tax you on that? I don’t get it,” she added.
The family has appealed the IRS demand, and a decision is expected sometime soon.
The Crowdfunding Receipt Rule
Many crowdfunding sites, including GoFundMe, began as places where artists could showcase their talents and/or aspirations and raise money. Now, they are part of the conversation about the legal and financial implications of the “gig economy.”
Uber drivers are perhaps a more well-known example. These individuals do not fit the traditional definitions of either independent contractors or employees. So, how should they be classified? The California Supreme Court recently declared that Uber drivers were employees, and other jurisdictions may follow suit.
Back to crowdfunding and tax policy. Many GoFundMe sites are basically charitable contributions. Others, however, are basically political contributions. A site which purports to raise money for Dr. Christine Blasey Ford’s “security expenses” has raised over $700,000. Many people would not consider these gifts to be charitable contributions.
In Information Letter 2016-0036, the Internal Revenue Service declared that crowdfunding receipts are tax-exempt gifts if the revenue is not:
Somewhat ominously, the letter also cautions that voluntary transfers, even if they contain no quid pro quos, are not necessarily gifts per U.S. tax law.
How the Rule Applies to This Case
Contributing to medical expenses is clearly not a capital contribution with an equity return. The money is also not a loan payment. So, are these contributions altruistic gifts without a quid pro quo? Maybe.
Altruism usually means giving without any expectation of reward or return. The people who chipped in for Ms. Charf’s medical bills probably do not seek any material reward or return. From that perspective, the GoFundMe receipts appear to be gifts.
But what is a “gift,” in the context of federal income taxes? If Jim buys a car for his girlfriend, he probably expects no material return. But such a purchase is clearly not a gift for tax purposes.
As if this inquiry was not confusing enough, the GoFundMe tax exemption only applies if there is no quid pro quo. Significantly, the letter places this phrase in quotation marks. That grammatical oddity suggests that the phrase has a specific meaning in this context. Indeed, the IRS elsewhere defines a “quid pro quo” as “a payment made to a charity by a donor partly as a contribution and partly for goods or services provided to the donor by the charity.” Does this definition suggest that the crowdfunding contribution must be to a registered charity for the gift exemption to apply?
There’s also the matter of how the donor used the money. Mr. Charf said she used the crowdfunding money for medical bills “and everything I’ve needed.” That’s a little vague.
Going forward, expect the IRS to routinely send tax bills to crowdfunding recipients. If the recipient has a legitimate defense that the contributions were a “gift” per 2016-0036, the recipient has the burden of proof in tax court to prove the defense. Most crowdfunding sites sent 1099-Ks if the campaign raised more than $20,000. That event definitely puts the taxpayer on the Service’s radar.
The IRS probably wants a test case as well. A unilateral declaration from an IRS letter is not binding authority. The three-prong test did not even go through a public comment period. If the Tax Court makes this same ruling, the Service’s definition of a crowdfunding gift will probably have a lot more force.
If you’ve received GoFundMe money, it’s probably best to assume that the money is probably a gift but the IRS will scrutinize the situation. If you would rather avoid the steely gaze of the IRS, as most people do, it’s best to report the income.
Our website contains a number of resources which enable you to save a lot more off your tax bill!