How irs can tell if money received is income or gift?

[tax_info_seeker987]

By self employed, I was referring to people like house painters, when we pay them, for example, $1500, we don't make a 1099 for it, so what if they try to evade taxes by claiming it as a gift?

[Anonymous_]

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@tax_info_seeker987 wrote:

By self employed, I was referring to people like house painters, when we pay them, for example, $1500, we don't make a 1099 for it, so what if they try to evade taxes by claiming it as a gift?

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That is not your problem. 1099s are generally for trade or business reporting (i.e., reporting payments made in the ordinary course of business).

Paying someone (or some company) to paint your personal residence is not a payment made in the ordinary course of a business. If the house painter choses to claim that the payment is a gift, that is a potential issue with which they will have to deal if they are ever audited.

[Anonymous_]

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@tax_info_seeker987 wrote:

Of course, the name of the person will be on the personal check or Zelle payment, so easier to keep track of the source? That's what I meant?

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Yes, so if you receive a gift (most notably a large one) via a personal check or Zelle payment, it would be prudent to retain a record of that. 

[tax_info_seeker987]

But how will IRS find out if any product or service was provided in return for money received without auditing the recipient if they don't report it on their tax return? My point is that, wouldn't it be better if there is a requirement to report all gift money, even smaller amounts, on tax return upfront, so there is less confusion or chance of audit later?

[Anonymous_]

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@tax_info_seeker987 wrote:

,,,,wouldn't it be better if there is a requirement to report all gift money, even smaller amounts, on tax return upfront, so there is less confusion or chance of audit later?

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Perhaps, but only annual (total) gifts to any one individual that exceed the exclusion amount (currently $16,000) are required to be reported by the donor; donees (recipients) of gifts do not have a reporting requirement (other than in certain, limited, instances).

See https://www.irs.gov/instructions/i709#en_US_2021_publink16784xd0e649

[TomD8]

Without a doubt billions of dollars in taxable income goes unreported each year.  But if the evaders are caught by the IRS, the penalties can be very harsh, up to and including prison time. Last year the IRS carried out over 2,500 criminal investigations and had a 90% conviction rate.

https://www.irs.gov/newsroom/irs-criminal-investigation-releases-annual-report-highlighting-2500-plu...

By the same token it's true that, to a large degree, our tax system rests on voluntary compliance by honest citizens.

[tax_info_seeker987]

• I believe, there should be a mechanism whereby "gift money transactions" less than $16,000 per recipient per year are also "labeled at source" as "gift" in order to allay fear/risk of audits and penalties due to receiving gift money and their being no declaration of it? After all how can the recipient prove that it was a gift? Only the gifter can declare that it was a gift? So auditing the recipient and questioning the recipient wouldn't be fair? What do you think?

[Anonymous_]

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@tax_info_seeker987 wrote:
What do you think?

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What I think is largely irrelevant. If you want to change current tax policy, write letters to your representatives in Congress.

[TomD8]

https://www.legalmatch.com/law-library/article/elements-of-proof-for-a-gift.html

[SweetieJean]

multiple threads on same subject