IRS agents must be big fans of Oprah Winfrey. Over the years, the talk show queen has certainly done her part to push her fans into their arms.
Every time the soon-to-be-moving-on host surprises her studio audience with a new car or trip to Australia, the taxman at the Treasury Department gets his due.
Oprah giveth - cars, trips to Australia and televisions - and the taxman taketh away. After an early fumble on this front, though, the beloved talk show host made she sure waved goodbye to her own tax money instead of putting the obligation on her fans.
For most, tallying up income each tax season is relatively straightforward - collecting W-2s and 1099s, itemizing assets and subtracting deductions. Windfalls from out-of-the-ordinary sources such as Oprah's largess, game-show prizes and even criminal activity can complicate how federal and state tax collectors eyeball your cash flow.
An annual tradition for Oprah's audiences has been her annual "Favorite Things" episodes, where a throng of audience members, so excited they're nearly speaking in tongues, collect a variety of (likely donated) luxury items, electronics and big-ticket items. Digital cameras, large-screen TVs, Blu-ray players and even cars have been given out en masse.
Back in 2004, Oprah became embroiled in what has been dubbed "Cargate" after giving away a minifleet of brand-new Pontiacs. Thrilled as audience members may have been at the time, the roughly $7,000 in gift taxes they were soon hit with must have been a hardship and unhappy surprise.
Oprah has changed her game plan, basically adjusting her prize packages so she and her company absorb the tax hit. Otherwise, a recent trip to Australia with about 300 fans would have cost them plenty.
"Most of [these shows]have now made a practice of grossing up the money and holding the taxpayer revenue-neutral on those gifts," says Mark Steber, chief tax officer for Jackson Hewitt Tax Service . "There is actually an IRS equation on how to treat that so you don't get into, 'Well, I'm going to give you $10,000, but here's $15,000, and now it's $15,000, so I'll have to give you $17,000, and so on.' The equation is very specific on how you do it and what you fold into it. You can get more elaborate with the Social Security, Medicare and state elements, but the IRS has the federal element pretty much tied down in terms of how you compute that."
Oprah's employees have been in the same bind as her studio guests. This month, Oprah's media company gave all staffers a $10,000 bonus and Apple iPads in monogrammed leather cases. Alas, gifts from employers need to be counted as income and are subject to income and FICA taxes -- a hit that could detract upward of a third of the perk package's value.
Giveaways such as game show and lottery prizes are never as profitable as they seem once taxes are determined at the state and federal level. And even a moderate windfall could boost the lucky into a higher tax bracket.
Game show prizes have an added headache. Let's say you win a car. At some point, the producers will send you a 1099 form to document the value of the prize. These calculations are almost always based, however, on the manufacturer's suggested retail price, a figure that may not accurately reflect what that model is being sold and bought for. Your choices: Suck it up and pay the extra or go through an appeal process to adjust the value.
"It is as much art as science," Steber says. "It is art because there is an interpretation of what the value is. There certainly is some argument there you see from time to time"
A cautionary tale for game show contestants comes from reality star Richard Hatch, the first Survivor million-dollar winner, back in 2005.
Hatch was convicted of failing to report the prize and other show-related winnings on his federal income tax returns. He would later be sentenced to 51 months in prison.
Crime does pay (taxes)
Even the underworld is expected to pay taxes on their ill-gotten gain. There are federal and state penalties for failing to report income from gambling (legal or otherwise), fraud and drug deals.
Form 1040, Line 21, and Schedule A, Line 28, of federal tax return forms are used to account for any unique gains or losses that might otherwise not be itemized elsewhere. Were you the architect of a billion-dollar Ponzi scheme? Embezzled hundreds a month from accounts receivable? Well, the IRS expects you to 'fess up to the added income (and if you choose not to, don't forget that it was tax evasion charges that brought down Al Capone).
Drug dealers are required to itemize profits from their illicit enterprise for federal income statements. Many states also require a levy in various ways.