Raffles are a popular way for non-profit organizations to raise funds. However, there are important IRS rules that must be followed when it comes to raffle prizes. Prizes over a certain value are considered taxable income by the IRS. Understanding the tax implications for both the organization and the winner is crucial. This article will provide an overview of key IRS regulations for raffle prizes.
What is Considered a Raffle by the IRS?
The IRS defines a raffle as a game of chance in which participants pay money or other consideration for a chance to win a prize. Some key elements of raffles per IRS rules include:
– Chance plays a dominant role in determining the winner. Skill and knowledge do not affect the outcome.
– Prizes are awarded by random drawing or other objective non-discretionary method.
– Multiple prizes may be awarded or all entries pooled toward one large prize.
– Examples: 50/50 raffles, duck race raffles, traditional ticket raffles.
Are Raffle Prizes Taxable?
Whether raffle prizes are taxable depends primarily on two factors:
1. The value of the prize.
2. The tax status of the organization conducting the raffle.
The IRS requires that prizes over a certain value must be reported as taxable income. This threshold is:
– $600 or more if the raffle is conducted by a nonprofit 501c3 organization.
– $5,000 or more if conducted by a nonprofit 501c4 or 501c6 organization.
Any prizes under these thresholds are generally considered non-taxable. However, even if not required by the IRS, an organization may choose to provide a Form 1099-MISC for smaller prizes as well.
How are Raffle Prizes Taxed?
For taxable raffle prizes, the following IRS rules apply:
– The winner must pay income tax on the fair market value (FMV) of the prize. This is regardless of whether the prize is cash, a physical item, trip, etc.
– If the FMV is $600 or more, the organization must provide a Form 1099-MISC to the winner reporting the prize value.
– The organization must also report the prize value to the IRS along with the winner’s name, address, and SSN on Form 1096/1099-MISC.
– The prize value is subject to the winner’s normal income tax rate. It also counts toward their total taxable income for the year.
– No special raffle tax applies. Lottery winnings have a flat 25% federal tax withholding, but this does not apply to raffle prizes.
Can Raffle Winners Remain Anonymous?
For small non-cash prizes under $600, winners can likely remain anonymous. However, for larger taxable prizes, it is difficult or impossible for winners to avoid providing their information.
This is because the organization needs the winner’s identification to properly report the prize value to tax authorities. If a raffle winner refuses to provide their SSN and other required information, the organization may withhold the prize.
There are no IRS provisions that allow raffle winners to remain anonymous for taxable prizes. State laws may also require identifying information from winners of large prizes.
Are There Any Tax Deductions for Raffle Winners?
Unfortunately, raffle winners cannot take any deductions related to winning a prize. All raffle winnings are considered “unearned income” by the IRS, which does not qualify for deductions.
Some examples of what raffle winners cannot deduct:
– The cost of raffle tickets initially purchased.
– Any taxes paid on the prize value.
– Expenses related to claiming or using the prize.
The only offset winners have is if they have gambling losses from other activities exceeding the amount of their raffle winnings for the year.
Do Non-U.S. Citizens Have to Pay Taxes on Raffle Prizes?
Foreign nationals who win taxable raffle prizes in the U.S. are subject to the same IRS rules.
Non-U.S. citizens must pay income taxes on any prizes over the $600 or $5,000 thresholds based on the organization’s tax status. Withholding rules also apply if the winner does not provide a Taxpayer Identification Number.
One exception is if there is a tax treaty between the winner’s country of residence and the U.S. The treaty terms would dictate the tax implications in that case.
On smaller prizes, the IRS does not strictly enforce tax collection from foreign nationals. However, legally they are still obligated to report U.S. raffle winnings on their own country’s tax return.
Do Multiple Small Prizes Count Toward the Taxable Threshold?
If one person wins multiple smaller prizes from the same organization over the course of a year, the values are combined to determine if the taxable threshold is reached.
For example, if a 501c3 nonprofit awards a $300 prize, followed by another $400 prize to the same person, they must issue a Form 1099-MISC since the total exceeds $600.
However, prizes won in separate raffles from unaffiliated organizations are not aggregated. Each organization must evaluate taxability independently.
When Do Winners Report Raffle Prizes to the IRS?
For cash prizes or prizes awarded directly by the organization, winners must report the income in the year they actually receive the prize. The organization will issue a Form 1099-MISC the following January.
However, for prizes from a third party, such as vacations, vehicles, etc., winners must report the income in the tax year the raffle was conducted and prize awarded. This is true even if the winner does not redeem or take receipt of the prize until a later year.
Are Raffle Prizes Deductible for the Organization?
The raffle organization can claim prizes awarded as a deductible business expense if certain conditions are met:
– The organization reports the prize value and winner’s information to the IRS as required.
– The prize must align with the organization’s tax-exempt purpose. For example, an appliance donated to a church raffle would not qualify.
– The organization maintains adequate records connecting the prize to fundraising activities.
Documentation should include receipts showing the purchase or fair value of obtained prizes. Minutes noting the decision to award prizes can also demonstrate the deduction is legitimate.
Unclaimed Raffle Prizes
Raffle prizes can potentially go unclaimed if the winner does not come forward or respond by a stated deadline. In this case:
– The organization should make reasonable efforts to contact the winner such as phone, email, and certified mail.
– If unsuccessful, state laws often allow the prize to revert to the raffle organization.
– For large prizes, it is recommended to have alternative draw procedures in place to award the prize to another entrant.
– Organizations should consult professional tax advisors on proper handling of significant unclaimed prizes.
Using Raffle Proceeds
Net proceeds from charitable raffles must be used to further the nonprofit organization’s tax-exempt purpose.
Proper uses include:
– Donating net funds to stated charitable causes.
– Paying operating expenses related to programs and services.
– Funding exempt purpose activities directly.
Improper use of raffle proceeds can result in penalties, fines, and loss of tax-exempt status. Some examples of prohibited uses:
– Distributions to members/shareholders for personal financial gain.
– Funding political campaigns or lobbying efforts.
– Unrelated business activities outside the organization’s core mission.
– Private benefit of insiders like board members or staff.
Reporting Raffle Revenue
The proceeds from raffles should be reported appropriately on the organization’s annual Form 990 information return. Key items to report include:
– Total gross receipts from raffle ticket sales and other raffle-related income. This should be tracked separately from general donations or event income.
– Deductible expenses directly related to conducting the raffle such as equipment, venue fees, advertising, raffle system costs, etc. Tracking raffle-specific expenses is important.
– Net income which is total raffle revenue less deductible expenses.
– Charitable distributions made from raffle proceeds segregated from general expenses/grants.
– Maintain detailed accounting records on raffle activities for IRS substantiation.
Proper financial tracking and reporting provides transparency and demonstrates compliance.
Obtaining Legal Raffle Permits
Raffles implicate complex gambling and charitable gaming laws. Organizations must ensure they obtain all required state and local permits/registrations before conducting raffles.
Key items organizations may need to operate raffles legally include:
– Registering as a charitable organization authorized to raise funds in that state.
– Obtaining a charitable gaming license.
– Filing a notice of intent to engage in raffle activities.
– Paying required gaming taxes or bonding fees.
– Limiting raffle participation to state residents.
– Following age restrictions for raffle players.
– Abiding by frequency limits for how often raffles can be held.
Failure to follow applicable gambling and gaming regulations can lead to civil or criminal penalties. Nonprofit status does not exempt organizations from oversight and licensing related to their gaming activities.
Using Commercial Raffle Fundraising Services
Working with commercial raffle management companies is one option to assist organizations with expertise running raffles legally and profitably. Considerations when selecting a service include:
– Are they licensed/bonded to provide raffle services in your state?
– Do they handle procuring the raffle permits on your behalf?
– Will they provide customized raffle systems, ticketing, prizes, and marketing?
– What are their fees? Flat rate or percentage of sales? Is raffle accounting/reporting included?
– What additional services do they offer such as web sales or point-of-sale devices?
– Can they provide references from past raffle campaigns?
As with any contractor relationship, due diligence is advised in vetting providers. Ensure there is a clear service agreement detailing services, fees, compliance assurances, and financial accountability.
Penalties for Raffle Violations
There are various civil and criminal penalties at both the state and federal level for violating applicable raffle laws and regulations. Some potential penalties include:
– Fines, generally $500 or more for minor violations. Higher for willful or severe infractions.
– Revocation of an organization’s gaming license or other operational permits/registrations.
– Loss of tax-exempt status is possible for IRS raffle reporting violations.
– Criminal charges depending on the severity of violations.
– Prison time is a possibility for racketeering or embezzlement related to rigged raffles.
– Seizure of illegal gaming proceeds.
– Forfeiture of prizes obtained fraudulently.
– Payment of back taxes owed, interest, and penalties.
– Civil lawsuits from injured parties.
Given the severity of potential penalties, it is vital for nonprofit organizations to ensure full compliance with all applicable raffle laws and regulations.
Conclusion
Raffles can be an effective fundraising tool for charitable organizations. However, there are important IRS rules and restrictions to follow regarding raffle prizes and procedures. Key takeaways include:
– Prizes over certain value thresholds are taxable income to the winner.
– Organizations must report winners’ information and prize values to the IRS appropriately.
– Winners cannot deduct raffle-related costs but can offset other gambling winnings.
– Foreign nationals are subject to U.S. tax rules on winning domestic raffles.
– Net raffle proceeds must only be used to further the organization’s exempt purpose.
– Obtain all required gaming permits and licenses to operate raffles legally.
By understanding the applicable federal and state raffle regulations, nonprofit organizations can properly structure their raffles to stay compliant while effectively raising funds for their mission. Both organizations and winners alike should be sure to claim raffle prizes appropriately on their taxes. With care taken to follow the important rules around raffles, organizations can implement successful and lawful raffle fundraising programs.
