Raffles

While raffles are common with secular charities, many Christian ministries are hesitant to use a raffle as a fundraiser because of the perceived connection between raffles and gambling in the minds of many Christians. If your organization conducts a raffle, an awareness of the IRS rules is important.

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.)

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 with-holding and backup withholding purposes (IRS Pub. 3079). The applicable withholding rate is 28% of the FMV of the prize won. 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 31% on any winnings not subject to 28% 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 is a raffle a raffle? 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 backup withhold income tax.

What’s it worth? Donors of raffle prizes tend to inflate the values for public relations purposes. However, a prize may be readily available for an amount that is substantially less than the donor’s value through the Internet, a discount outlet, or some other source. When this is the case, the charity may have its own public relations problem with the winner if it issues a Form 1099-MISC or Form W2-G using the donor’s value. Consequently, the raffle sponsor should seek to determine a realistic FMV for reporting purposes, based on the amount for which a prize could normally be obtained.

Withholding cash on noncash prizes. Before releasing a noncash prize on which income tax must be withheld (i.e., when the prize has a FMV exceeding $5,000), the raffle sponsor should get a check from the winner for the amount of the tax based on the applicable withholding rate. Consequently, to minimize the risk that a winner will become irate over this requirement, the charity should forewarn ticket purchasers before the drawing is conducted that income tax must be withheld on a particular prize. Alternatively, a prize can be structured to include both a noncash item and sufficient cash to cover the resulting tax.

Sample raffle rules. An important component of conducting such a raffle are the rules that participants are subject to. While these rules may be dictated to an extent by applicable state law, the following is a helpful example of some common provisions:

By participating in this drawing, you agree to the following:

  1. No more than __________ tickets will be sold.

  2. A tax-deductible donation of $__________ per ticket is requested; no purchase is required (by having a suggested donation, but not absolutely requiring that tickets be purchased, an organization may avoid any state prohibition or regulation of the drawing).

  3. Proceeds will benefit the Organization.

  4. The Organization reserves the right to postpone or cancel the drawing in its discretion.

  5. The drawing will be held at ____:____ AM/PM on ____/____/____, at the Organization’s offices at [address].

  6. The winner need not be present to win.

  7. The winner is responsible for any taxes or other charges and for arranging delivery of the prize.

  8. The Organization makes no express or implied warranty as to the prize.

  9. The prize may not be exchanged for the cash value.

  10. The prize must be claimed within thirty (30) days.

  11. The drawing is subject to all applicable federal, state, and local laws and regulations.

  12. The drawing is void wherever prohibited or restricted by law.

     

     


This text is provided with the understanding that ECFA is not rendering legal, accounting, or other professional advice or service. Professional advice on specific issues should be sought from an accountant, lawyer, or other professional.

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