Cash Gifting and the IRS – A Negative Theory

If you have either investigated or participated in a cash gifting program, you’ve have heard that cash gifting is a legal method used to lower your taxes.  This is true.  The Tax Code 26, Sections 2501–2504 and 2511 states that you may give  $12,000 per person to as many individuals as you choose throughout the year of 2007, and these gifts will not be subject to additional taxes by the giver or the recipient of the $12,000.  The IRS makes it quite clear that in order for the money to qualify as a gift under Title 26, your gifts must be given with no expectation of a return of something of equal value.  Title 26’s intention was to allow people to gift their heirs prior to their death in order to reduce their estate taxes.

Cash gifting program will invoke Title 26 as proof of their legality.  However, they may not be being totally honest with you as to how the IRS views the activities of the cash gifting program.  IRS agent Connie Lorz, President of the California Society of Enrolled Agents made this comment on the subject.

“Some of these ‘gifting’ organizations claim the money to be tax-free, but the IRS considers all income derived from them to be reportable income.  Of course, for most of those who get involved in these gifting parties, it’s a moot point, a they’re never going to see any profit or even get their original stake back.

Those individuals who go involved in the scam early and have their piece of dessert are subject to tax evasion charges if they haven’t declared their gains.”

One such cash gifting program called the “Elite Activities Resurrected” has tried to bypass IRS requirements by calling themselves charitable organizations under a Internal Revenue Code 501 ©(3) license.

The IRS classifies some charitable groups as tax-exempt:

To be tax-exempt under section 501( c)(3) of the Internal Revenue Code, an organization must be organized and operated  exclusively for exempt purposes set forth in  section 501( c)(3), and none of its earnings may inure to any private shareholder or individual.

But there is more to 501( c)(3):

An organization will not be regarded as operated “exclusively” for IRC 501( c)(3) purposes if more than an insubstantial part of its activities is not in furtherance of an exempt purpose.  The presence of a single non-charitable purpose, if substantial in nature, will destroy the exemption regardless of the number or importance of truly charitable purposes.

Better Business Bureau v. United States, 326 U.S. 279 (1945)

The IRS refers to an organization’s illegal activities, which are a substantial part of the activities deems the organization does not qualify for exemption under IRC 501(c)(3).

1. The Texas Court of Appeals upheld his conviction when his case was represent in the court of appeals in 2007.

Once prospects join a cash gifting program, they may also be advised on various means of depositing and handling of the cash gifts received in order to prevent the arousal of suspicion or trigger flags at financial institutions, which will routinely report activities to the IRS.  If cash gifting programs would adhere strictly to the tax code, no instructions of this nature would be necessary.

Note:  Not all cash gifting programs are operating outside the laws.  The cash gifting programs mentioned above may not have been following the law to the letter.  The circumstances of that case are unknown at this time.  If you are considering joining a cash gifting program to better your life and your future, make sure to do some checking before you join.

Since the tax code does state that this money is not considered to be a gift if you give the gift with the expectation of receiving something of equal value in return.  You should claim the money on your taxes.  However, that is your decision and is between you and the IRS.

Make your own decision, but do it wisely.