gift vs. personal payment - how to report

A recent thread on 1099-MISC, plus "beer for payment" prompts me to ask this: Instructions for Form 1099-MISC state to use it "only when payments are made in the course of your trade or business. Personal payments are not reportable." Suppose person A makes a one-time transfer of $70,000 to person B. From person A's viewpoint, this was payment for services received from B over a period of 18 months, based on a verbal agreement for B to provide bookkeeping, household management, selection of other personal service providers, and so on, for the benefit of A. B was also reimbursed for out-of-pocket expenses such as travel to A's home to provide these services. From person B's viewpoint, this sum was simply a gift, and had nothing to do with any services provided. B does not consider himself in the business of providing such services. So, person A would like to issue a 1099-MISC to B, but is precluded from doing so by the instructions (A does not have a W-9 from B, but does have B's TIN and other personal information). Person A does not want to file a gift tax return, and would not benefit from any deduction for the payment. Person B wants the opposite - to not pay any self-employment or income tax on the amount, rather to simply have it treated as a gift. What does the IRS want to happen in this situation? As it stands, they will receive neither a 1099-MISC (because of their own instructions), nor a report of "other income" (Form 1040 line 21) from B, nor a gift tax return (because of the disagreement as to the nature of the transfer). Oh, and if you hadn't guessed already, person A is an elderly, widowed parent with very little income and modest assets, while person B is her adult child. At the beginning of the 18-month period, A had added B as a joint tenant to A's bank account to facilitate the provision of bill-paying services by B. The $70,000 transfer was initiated by B out of the joint account into his own account, on the last day of the 18-month period. Does this additional information change the situation significantly?

-Mark Bole

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Reply to
Mark Bole
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If they're on good terms, the IRS gets a lot less if A files a gift return (probably nothing, the estate is "modest") than if B has earned income. (That's true if they aren't on good terms, but in that case they might want to hurt each other more than the IRS; on the other hand, in that case A might claim embezzlement.) I would think that a claim of gift is sustainable in those circumstances. Seth

Reply to
Seth Breidbart

It depends who the IRS is auditing. If they are auditing person A, the maximum penalty is $50 for not filing a 1099. (Which is highly unlikely since person A does not have to file a 1099 since they are not in a trade or business). I am not sure what the penalty is for not filing a gift tax return, especially if they won't owe gift tax (I am assuming that they have not used up their lifeitme exemption). The bigger issue is if the IRS is auditing person B. The IRS will want to know why $70,000 suddenly appeared in their bank account. If it was a gift, person B will have to provide some type of documentation from person A that it was a gift. Without person A's cooperation, the IRS will deem it income to person B.

Reply to
Taxbert

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