As you are aware, the IRS isn’t among the most popular government agencies as far as the taxpayers are concerned. There are many reasons for this, starting with the most obvious, which is that nobody likes having their money taken away. The IRS is also notorious for their aggressive collections efforts and the life-altering consequences from a dispute with the agency. And then there are stories like we have today, which can’t help but make you laugh in exasperation.
Winning a whole year’s worth of free doughnuts for being first in line at a Krispy Kreme opening is something to crow about. Adam Brown, a second-year law student at Arizona State University, was first in line for the grand opening of a new Krispy Kreme in Mesa, Arizona. He waited nearly 24 hours in line before the store opened. His prize?
A dozen free doughnuts every single week for a whole year. Other early birds not in the coveted numero uno spot stand to collect a dozen free doughnuts each month. But not content to just eat them, Brown is an aspiring tax attorney. Therefore, he wondered whether the year’s worth of sweet treats are a prize or a gift.
Gifts aren’t taxed to the recipient while prizes are. Can you guess which these doughnuts are? Since 1986, prizes and awards are fully taxable. In fact, the IRS website warns that cash prizes and awards are taxed whether you win the lottery, a Nobel prize or even Olympic medals.
If you win a car? It’s taxed. A year’s worth of doughnuts? Taxed. All such in-kind winnings must be reported at their fair market value. It’s all other income on Form 1040, Line 21.
So yes, the IRS really will tax your doughnuts. And if you don’t pay taxes on your doughnuts, you better believe that they’ll be coming after you if they find out about it. Sure, it’s a humorous situation—but it illustrates why the agency is so difficult to deal with. They are notoriously inflexible, and even a simple mistake can lead to an overwhelming amount of penalties and interest.
If you’re facing an IRS dispute, we can help! Give us a call today and let us get the IRS off your back.