Crowdfunding has been around for a long time (at least if that Wikipedia thing is to be believed) and, like a lot of activities, the internet has made it way faster and easier than it used to be.
Not surprisingly, as it gets easier to raise money for a cause, more people are jumping onto sites like GoFundMe.com to start their own campaigns.
A lot of these campaigns are set up by caring, well-intentioned people who ask for gifts to help pay for someone else’s medical bills. Since gifts aren’t usually considered to be taxable income, you might wonder why I’m talking about it.
But if you’ve seen the news articles online about the IRS going after the GoFundMe account creators for thousands of dollars in taxes and penalties (like this one where they asked a cancer survivor for 19k), then you might be wondering why more people aren’t talking about this.
How Could This Happen?
My guess is that the IRS doesn’t have a system in place yet to distinguish between credit card payments that are gifts and those that are purchases of goods or services.
If you start a GoFundMe campaign and get more than $20,000 or 200 donations, then WePay (the company that processes the credit card transactions) will be required to issue you a 1099-K to report the total amounts of the payments they processed for you.
WePay will also have to send a copy of that 1099-K to the IRS. If you don’t report the 1099-K on your tax return, the IRS may think you’re attempting to underreport your income (since they are only used to receiving 1099-Ks that report credit card payments that are the result of business operations).
When that happens, the IRS will typically attempt to “correct” the tax return that you filed and send you a letter asking you to pay additional taxes and penalties. The kicker, of course, is that most reasonable people would agree that you shouldn’t be assessed taxes on gifts you received.
I don’t think that the IRS is intentionally targeting taxpayers who use crowdfunding to seek gifts, they just don’t have a way to know that all those credit card payments were gifts by looking at the tax forms.
So What Should You Do?
Come up with a plan for how you’re going to deal with the tax implications of your GoFundMe campaign. And keep meticulous records.
If you don’t feel comfortable dealing with the Form 1099-K, and you don’t want to pay thousands of dollars in taxes on gifts you raised to pay for medical expenses, you may need help coming up with a plan (and you may not be able to get it from DIY tax software or a part-time tax preparer at a strip-mall chain store).
An unexpected 1099-K on its own probably wouldn’t justify becoming a client and working with us, but if you’re looking for some good tax planning ideas for your business, and a proactive approach to the whole tax return thing, then let’s talk.
You can learn more about what we do, and who we can help here.