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When you win a sweepstakes, the contest organizer will determine the Approximate Retail Value of your prize and issue you a 1099 to claim it on your taxes as income. But what if they got it wrong? In this article, we’ll show you how to effectively lower the ARV of your prize winnings on your tax documents.
ARV stands for Approximate Retail Value. This is meant to represent the price you would’ve paid for the item if you went out and bought it rather than won it. It’s meant to make reporting the prize’s value (and your taxable income) to the IRS easy for both you and the contest organizer. However, sometimes there is a difference between the “Approximate Retail Value” and the “Fair Market Value.”
Fair Market Value is what an item can currently be bought or sold for at any given moment in the real world. More times than not, this is close to the ARV but there are a few occasions where there could be a massive difference.
This happens quite often when cars are won. For instance, if you watch “The Price is Right,” when people guess the price of a new car, they’re often guessing at the MSRP (sticker price) of the car. If they happen to win, the MSRP gets listed as the ARV and they’ll have to pay taxes based on the sticker price of the car.
But let me ask you a question. When was the last time you paid sticker price for a new car at a dealership? Never. There are almost always rebates in play and the dealer is usually willing to discount the car even further. The Price Is Right uses the MSRP as the taxable amount because it makes it easy for them, not you. They are not aware of the local rebates and dealer discounts available on that car in your area and by using the MSRP, they can report the same number to the IRS regardless of who wins.
First, you need to figure out the FMV of your prize to see if it even is lower than ARV. To do this, get quotes for the prize on the same day you take delivery and pretend like you’re buying it yourself. If you’ve won a trip, get a quote for that exact trip online or from a travel agent. If you’ve won a computer, shop for it online locally. If you’ve won a car, contact the local dealership and get a cash price quote for the same model.
It’s important to do this within a few days of you receiving your prize because FMV is time-sensitive. It’s based on FMV at the time of delivery. Car rebates change every month, computers go on sale, airline ticket prices fluctuate. If you don’t take action quickly, you won’t have a strong case if you have to dispute the value later.
If the FMV is close to or more than the ARV, there’s nothing left to do. Pay taxes based on the 1099 the organizer gives you when the time comes. But what if FMV is less than ARV?
If you can provide strong documentation that the FMV of the prize you just won is less than the ARV the organizer is stating, contact them and ask them to reduce the ARV first. You may get lucky and they may adjust it accordingly. If they do this, great. However, chances are, they will not because they are not under any obligation to do so.
If the contest organizer won’t change the ARV of your prize, you will have to adjust it on your tax forms. You will receive a 1099 form from the organizer with the ARV amount on it. Let’s say it’s $20,000 in this example. If you’ve determined the FMV of the prize to be $18,000, under the “Other Income” section of your 1040 you would put the $20,000 and then a negative $2000 adjustment labeled “FMV Adjustment.”
Disclaimer: Always consult a tax professional first before following this advice. This information is purely for informational purposes and the tax filing laws and procedures may be different where you are filing.
When you need to make an FMV adjustment, it’s IMPERATIVE that you keep your documentation of the prize value. If the IRS decides to audit you, you must be able to provide proof of your figures. If you can’t, you’ll become liable for the original ARV amount and will owe additional taxes.
When determining the FMV of a prize, it’s important that you have good, verifiable sources to quote when making a representation. Your friend offering to buy the item for less than it’s worth doesn’t count. Looking at secondary market listings (such as eBay or Facebook) on a used item when you won a new item isn’t going to work either.
Get published advertisements and printed price quotes from at least 2 retailers. You need to be able to convince the IRS that if you were to go out and buy that same item the day you received it, the FMV you listed is the price that you would have paid for the item. A single quote from a car dealer you know isn’t going to hold much weight because of how easily it can be manipulated. However, a timestamped print out from the manufacturer’s website showing all the available rebates at the time of delivery will because it’s coming from an unbiased, trusted source.
Once you have solid documentation, attach it to your tax forms so that it will not get lost.
For the most part, the FMV of any prize won will be close enough to the ARV listed by the organizer that you will not need to make an adjustment. However, it is very important to double check because you could pay more in taxes than you have to if you don’t. The two types of prizes where the probability of an adjustment is highest are car prizes and vacation prizes. Car prizes are often reported at MSRP and organizers often receive heavily discounted travel packages and then list full price as the value.
Again, it is important to act quickly to determine FMV because it’s time sensitive and if you have any questions about an adjustment, it’s best to talk to your local tax professional before making a representation.
Written by Dom Bavaro
Dom is the founder of The Dadapreneur Blog. He makes his living online as a freelance blogger and teaching people how to grow their businesses without being absent from their families.