Client wins a diamond ring in a sweepstakes contest. Issuing company says the diamond ring has a FMV of $3,000 and will 1099 my client for $3,000. Client goes out and gets a written appraisal from a jeweler who says the ring is only worth $2,000. Client wants to report only $2,000 on his tax return. I say he's out of luck-he's got to report the full $3,000. Anyone else ever have this problem? How do we deal with the 1099 we will get for $3,000 on the client's tax return if we should use $2,000?
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IRS Pub 525 says the following:
"Prizes and awards. If you win a prize in a lucky number drawing, television or radio quiz program, beauty contest, or other event, you must include it in your income. For example, if you win a $50 prize in a photography contest, you must report this income on Form 1040, line 21. If you refuse to accept a prize, do not include its value in your income.
Prizes and awards in goods or services must be included in your income at their fair market value."
Notice it says fair market value. It does not say "what ever they put on the 1099." Fair market value is a subjective thing. So it could be that the 1099 is the true fair market value, or what the appraiser says is the true fair market value.
How do you know? You are not an expert in the fair market value of a diamond ring. So don't try to tell your client what is taxable if you are not an expert appraiser.
As to the reporting difference, you simply attach a statement to the return indicating why the amount reported does not match the amount on the 1099. -
I agree with bees assesment , however while you are not a professional at determining
the value of a ring you should ask your client to show proof that said appraiser is qualified. Some kind of justification for this persons qualifications and ask him/her would they attest to those findings in an audit. If they will not attest to their findings or provide something in writing it is you who the client will blame when uncle sam comes a callin.Comment
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I would say a written appraisal from a jeweler is all the investigating we tax preparers need to make. We are not the IRS. We are not the tax police. We do not need to make clients prove their claims. Work for your client - give them the facts and rules - but if it comes down to opinion, error on the side of your client, not the IRS.Comment
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Originally posted by Bees Knees
You can go ahead and "simply attach a statement" but my experience has been that by doing so, you have an even chance of getting a notice from the Service, so you can expect to spend time with your client dealing with the IRS correspondence. You need to explain this possibility with your client ahead of time.Comment
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My experience is it works every time. Never had a notice...and I've done plenty over the years.Originally posted by UnregisteredComment
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