Explain What Cash Gifting Is
- Taxes on gifts, better known as a "gift tax," do exist. The Internal Revenue Service (IRS) is very interested in which persons receive funds because it can involve attempts to avoid paying income or estate taxes already required.
A gift tax by definition is a tax applied whenever property of value is being transferred from one party to another for nothing in return (or in some cases for something of lesser value). Regardless of what was intended by the party providing the funds, the tax has to be paid and by the paying party. The IRS' authority to tax gifts in specified in the U.S. Tax Code, Title 26, Sections 2501 through 2504 and 2511. An exemption is allowed per tax year on how much can be transferred in a gift from one specific party to another without a tax charge (it's $12,000 for 2010). - Aside from helping a family member or friend out, or being charitable, cash gifting can allow transfer of estate assets without paying taxes, at least for a limited amount. This is important because estate transfers normally suffer two potential taxes. First, if the estate is over a certain amount (at least $1.5 million), the IRS is allowed to tax the value moved as an inheritance tax. Second, new monies going to a party are considered income and must be reported for income tax. So it's conceivable a beneficiary could see as much as a 50 percent loss of value by the time he or she actually is done with taxes on estate assets received.
- Cash gifting does not need to be between relatives only. Friends and non-related parties can give cash as well to each other. Where this runs afoul with the law is when it gets structured as a pyramid or Ponzi scheme.
A Ponzi scheme is the promise of making money back at unrealistic levels of return from multiple sources in return for your own cash deposit. As you deposit in, you become one of a group doing the same to a receiving party. You in turn recruit others to give to you. This giving continues, which keeps the cash flow moving from the outer, new rings of the group to the central, older members, all with the promise that members will share in the riches. The system collapses when the promised cash distribution doesn't occur; this usually occurs because there's not enough money going around to pay everyone the same promised return.
Cash gifting groups basically use the same Ponzi model but try to circumvent the illegality by avoiding any appearance of being a business. However, state police have figured these programs out and prosecuted them successfully as pyramid schemes. - One-Up cash gifting is a bit of twist. Instead of an entire group giving to older members, the giving is from one party to another in the network only. This is an attempt to stay within the literal wording of the IRS gift exemption. However, the result is the same.
- If investigated and prosecuted, the Federal Trade Commission or the Securities Exchange Commission will try to recovery deposited moneys in cash gifting organizations run like a business. However, it's rare that duped members will recover all of their lost funds. Recovery tends to be partial, if any.