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

[tagteam]

Did you give anything in exchange for the money (such as property or services)?

[tax_info_seeker987]

In other words, does IRS audit you if you received or deposited money in your account but did not pay taxes on it?

[tax_info_seeker987]

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[tagteam]

IRS Audits generally never get to that point. Typically, there is a specific item (or items) on your return that will be questioned.

If, however, any brokerage/bank statements are requested and examined, the taxpayer typically has the burden of explaining the nature and source of any deposits (primarily large deposits).

[tax_info_seeker987]

No, but how would IRS know that? Money that you received is not "labeled" gift, or does it have to be?

[TomD8]

Payers of income have strict reporting requirements with the IRS.  This is the purpose of forms like the W-2, 1099-NEC, and other "1099" forms.  Gifts that exceed the annual gift tax exclusion amount must be reported to the IRS by the donor.

And there can be criminal penalties for evading taxes:

https://www.irs.gov/pub/irs-utl/tax_crimes_handbook.pdf

[tagteam]

For example, if one of your bank statements are examined and the IRS notices a $20,000 deposit, you are going to have to reveal the source and nature of that deposit.

If you cannot, the IRS (absent any other explanation) is going to consider the $20,000 to be taxable income.

[tax_info_seeker987]

I was wondering if self-employed people might evade taxes by claiming them as gift, a little far fetched, I guess.

[tax_info_seeker987]

So, I guess it is better to receive gift as a personal check or as a Zellepay transfer rather than cash, that way the source is already declared, right?

[tagteam]

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@tax_info_seeker987 wrote:

I was wondering if self-employed people might evade taxes by claiming them as gift, a little far fetched, I guess.

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That would be illegal, of course, and subject those people to civil and criminal penalties.

As @TomD8 mentioned, there are tax reporting statements (1099-NECs and others) that are filed with the IRS to minimize, or eliminate, the ability to conceal income.

Again, if ever examined and questioned, deposits are presumed to be taxable income if there is no other explanation for their source and nature. 

[TomD8]

If you're self-employed, any client who paid you $600 or more during the year must issue you a 1099-NEC, a copy of which goes to the IRS.

[tagteam]

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@tax_info_seeker987 wrote:

So, I guess it is better to receive gift as a personal check or as a Zellepay transfer rather than cash, that way the source is already declared, right?

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No, a personal check or transfer from Zelle is not the source.

The individual or company that wrote the check (or initiated the transfer) is the source.

[TomD8]

Bottom line: it's not a good idea to try to get slick with the IRS.

[tax_info_seeker987]

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?