CHARITABLE RAFFLES Raffles are a popular form of fundraising for charitable organizations. But sometimes the applicable tax rules can cause unpleasant surprises for both the raffle winners and the sponsoring charities. Information Reporting Requirements. Form W2-G (Certain Gambling Winnings) must be filed for each person who wins a prize with a fair market value (FMV) of more than $5,000. Such form is also required if winnings are at least $600, and not more than $5,000, if they are at least 300 times the cost of the raffle ticket. (Where multiple tickets are purchased for a single prize, such amount is prorated to each ticket received.) If more than one person shares the winnings from a single ticket, the requirement to file Form W2-G is based on the total amount of the winnings (less the cost of the ticket), not the amount received by each person. Income Tax Withholding. A charity must withhold (and remit to the Treasury) federal Income tax on any payment exceeding $5,000 (net of ticket cost) that is made as part of a lottery fundraiser [IRC Sec. 3402 (q)(3)(C)(i)]. A raffle is considered a lottery for withholding and backup withholding purposes (IRS Pub. 3079). For 2004, the applicable withholding rate is 25% of the FMV of the prize won. [Such rate is the third lowest tax rate applicable to single individual filers, in accordance with IRC Sec. 3402(q)(1).] Warning: The sponsoring charity is liable for the tax that should have been withheld even if none is withheld. If a winner refuses to provide a taxpayer identification number (TIN), the raffle sponsor must backup withhold at the rate of 28% on any winnings not subject to 25% regular withholding. Thus, backup withholding applies if the winnings are at least $600 but not more than $5,000 and are at least 300 times the ticket cost. When tickets must be separately purchased for the holder to be eligible to win a prize, the drawing is a raffle and the reporting and withholding rules applicable to gaming activities must be followed. However, if the ticket to an event automatically makes the ticket holder eligible to win a prize (commonly referred to as a “door prize”) the drawing isn’t considered a gaming activity (PLR 8642002). Nevertheless, if the value of a door prize is $600 or more, Form 1099-MISC (Miscellaneous Income) must be filed and if the winner refuses to furnish his TIN, the sponsoring charity must back up withholding income tax. Financial Service Mailing November 2004