Understanding IRS and Personal Checks

When it comes to financial transactions, especially those involving personal checks, many individuals, particularly those receiving intermittent financial help from their family members, have questions about whether these transactions could raise any issues with the Internal Revenue Service (IRS). This article aims to clarify common concerns regarding personal checks, gifts, and how they affect your tax obligations.

Do the IRS Track Personal Checks?

Rest assured, the IRS does not actively track or trace personal checks for everyday transactions, such as your mother transferring $100 to assist you financially. However, if your income reaches a certain level or if your financial dealings are audited, an IRS auditor may inquire about the source of deposits in your bank account. In a typical scenario, a check from your mother would be classified as a gift, which generally does not need to be reported as income. Let’s break this down further:

Risks of IRS Audit

Even if you have regular financial help from your mother, the likelihood of an IRS audit is very low, especially at your current income level. If an audit were to occur, the auditor might require contemporaneous evidence of the source of funds. This means they would want to see a note on the deposit slip or account register indicating that the funds came from your mother as a gift. Since the money is clearly a gift, the auditor would accept that it was not income. Thus, you should not worry too much about this unless you are in a situation where the IRS is specifically targeting you for an audit.

Tracking Financial Transactions and Crimes

While the IRS does not track personal checks for everyday use, financial institutions and retailers are required to report any transactions of $10,000 or more. The Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) tracks all financial dealings and uses this data to combat money laundering, combat money laundering, and promote national security. This means that any large financial transactions involving personal checks are monitored, but not for tax purposes, unless they are part of a larger financial investigation.

Financial Crimes Enforcement Network (FinCEN)

FinCEN’s mission is to safeguard the financial system from illicit use, combat money laundering, and promote national security through the strategic use of financial authorities and the collection, analysis, and dissemination of financial intelligence. This means that any suspicious or unusual financial transactions, even those involving personal checks, could trigger further investigation. This increased scrutiny is separate from the IRS reporting requirements for personal checks.

Gift Tax and Personal Checks

The confusion around personal check transactions often stems from questions about gift taxes. It’s important to understand that receiving personal checks from a family member for personal use is generally not subject to federal gift tax unless the total amount of the gifts exceeds a certain threshold in a given year. Specifically, the annual gift tax exclusion allows each individual to give up to $14,000 to another person without incurring any gift tax. This amount can be split between you and your spouse, so the total for a married couple can be $28,000.

Gift Tax Exclusions and Irregular Financial Dealings

If you receive checks that total $14,000 or more in a single year, your mother will need to file a Form 709 (U.S. Gift (and Generation-Skipping Transfer) Tax Return) and potentially pay gift taxes. The tax is typically paid through a reduction in the donor's (in this case, your mother) estate tax exemption or by paying the tax directly. It is not directly a tax on you as a recipient, though it may affect your mother's financial planning and estate taxes.

Conclusion

In summary, unless you are in a situation where you are subject to IRS scrutiny or irregular financial dealings trigger flags in FinCEN, receiving personal checks from family members is generally not a concern for tax purposes. The IRS focuses on income, large transactions, and suspicious activities, not on everyday personal check transactions unless they are part of a larger financial audit or investigation. Always ensure to keep records of gift-giving, especially if the total exceeds the annual exclusion amount to maintain financial clarity and ease in case of any future inquiries.