The IRS Keeps Tight Rein on Gifts

QUESTION: My boss handed out some new rules on accepting Christmas gifts from clients, and it set off a debate about whether the government similarly restricts this yuletide graft. Do you know?--H. A.

ANSWER: The government doesn’t concern itself with Christmas gifts you give or receive--unless someone tries to take a tax deduction for them. Then, it has some strict rules that must be followed.

To be tax deductible, the value of a gift to someone you hope to get business from can’t exceed $25. And that $25-per-gift maximum is a yearly limit, so you can’t give to the same client more than once a year and expect separate deductions.

Novelty items such as paperweights or pens with your name or your company’s name that don’t cost more than $4 aren’t included in the $25 limit.

You and your spouse or you and your business partners count as one unit for business-giving purposes. So you can’t drastically increase your tax deduction by adding the name of your spouse or business associates to the gift card.

There also are restrictions on who merits a tax-deductible gift. The Internal Revenue Service says recipients must have a direct or indirect relationship with the giver, and the gift must be given with the intention of furthering the giver’s business.

Thus, if you are audited, you must be able to show that you had a business relationship with the recipient of your gift and that your business or your income was directly or indirectly improved as a result of your gift.

Who fits the “business relationship” mold? Customers, clients and employees are the most obvious. But, surprisingly, so do the spouses and children of such people. The rationale is that spouses and children have an indirect relationship with people who give business gifts to their parents or spouse.

Gifts to such people as doormen, elevator operators and secretaries of clients are harder to win tax deductions for, because taxpayers usually have a difficult time proving to the IRS’ satisfaction that the tips or gifts actually generated business or income.

Q: When the stock market crashed, I had the money in my mutual fund switched from stocks into money market instruments. Do I have to report that to the IRS? I figure that as long as it is still in the same mutual fund family, it is none of the government’s business.--T. H.

A: The IRS doesn’t see it that way. IRS officials say that every time money is switched from one instrument to another--even if you don’t stray from one mutual fund family to another--you must report the transaction to the IRS.

The reasoning is that each time money is switched, the owner in effect sells shares in one fund and buys into another. So, there is a profit or loss that must be reported to the IRS--on Schedule D of your tax return.

Q: Our house was destroyed in a tornado several months ago. My wife and I later found some of our important papers, but all of our tax returns for the past 10 years were lost. Do you know how we can get copies of them? Every time I try to get through to the IRS, I get put on hold for so long, I give up.--P. Y.

A: If you were part of a federally designated disaster area as a result of the tornado, you can get free copies of old tax returns. Just write “Disaster” at the top of the form requesting a copy of your old tax returns--IRS Form 4506.

If your area didn’t qualify for federal disaster relief, you complete the same form but include $4.25 for a copy of each back return you need.