How to Dispute an ARV on Your Sweepstakes Taxes
Are You Paying Too Much Tax on Your Prize Winnings?
Are you paying more than your fair share of taxes on your sweepstakes prizes? If you are simply reporting your prize winnings to the IRS based on the ARV that the sweepstakes sponsor gives you, you may well be. But there's an easy way to ensure that you only pay what you owe in taxes and no more.
The secret lies in knowing the difference between a fair market value (FMV) and an approximate retail value (ARV).
The ARV is what you usually see listed as the prize value in the sweepstakes' rules, and it is usually the value that the giveaway's sponsor uses in their 1099 tax documents. However, the IRS only requires that you report the FMV of the prize on your income forms when you win a sweepstakes prize,
There are several good reasons why an ARV might be higher than the FMV. For example, months may pass between the time when the sponsor writes the rules and the time that you actually receive your prize, and the value may have dropped in the meantime. Or the sponsor may use a more expensive vendor for the prize, where you can find the same model cheaper with some price matching.
This means that researching your prizes' FMVs and disputing any big differences on your taxes can save you a significant amount of money. Here's how to do it.
Step 1: Check the Fair Market Value as Soon as You Receive a Prize
Most prizes will fluctuate in value over time, sometimes becoming more valuable but usually dropping in value.
So which value do you use? You need to report the FMV of the prize as it stands when you take possession of it, so start looking for proof of the prize value as soon as you receive it. If you wait until tax time, it's going to be difficult to find out exactly how much that computer or refrigerator was worth months before.
You'll want to look for established retailers that are advertising the exact item that you received. You can use sale prices from retailers, but not second-hand prices, eBay bids, and the like. You also can't have a friend or family member offer you a low price for the item and claim that as your FMV. Make sure that you keep the advertising flyers or other documentation that shows your justification for the FMV that you are going to use.
If the sweepstakes prize was a vacation, ask travel agents and online websites for quotes for the exact days when you will be flying, the exact airlane, and the hotel where you will be staying. Keep receipts for actual expenses on the trip whenever possible.
Step 2: Compare the FMV to the ARV
If you discover that the FMV of your prize is similar to the ARV, you can skip to step 5.
Step 3: If the ARV is High, Contact the Sweepstakes Sponsor
If your FMV is significantly lower than the published ARV, contact the sweepstakes sponsor and politely ask them if they can lower the value when they send out their 1099 forms at the end of the year. Many sponsors will do this automatically.
In the case of a vacation prize, ask the sponsors to substantiate the prices.
Oftentimes they will receive discounted vacation packages, which can lower the FMV even farther than you expect.
Step 4: Ask for the IRS' Assistance
If the sponsor can't or won't lower the value on the 1099 forms, don't worry, you can address the matter with the IRS directly. Call the IRS at (800) 829-1040 and ask them to send a Form 4598, Form 1099 Not Received or Incorrect to the sponsor. This step is not absolutely necessary, but it reinforces your claim that the prize value was not correct if the IRS wonders why the amount has been changed on your tax return.
Step 5: Check the Value on the 1099 Form
Whether the sponsor has agreed to change the ARV or not, check the prize value when you receive your 1099 forms. It's easy for the sponsor to make a simple mistake.
If you do not receive a 1099 form from the sweepstakes sponsor, don't think that you won't have to pay your taxes.
You are liable whether the sponsor sends the proper forms or not. Read the IRS guidelines on what to do about missing 1099s.
Step 6: Enter the FMV on Your Tax Forms
Even if it varies from the value on the 1099 form that you received from the sponsor, enter the FMV under 'Other Income' on your 1040 form. Read How to Pay Your Sweepstakes Taxes for more information on how to do this.
Step 7: Adjust the Prize Value on Your Tax Forms
In order to show the proper amount on your tax forms, submit the difference between the reported ARV and your FMV as a negative amount. List it under Other Miscellaneous Income with the description "Prize FMV Adjustment."
Step 8: Keep Your Documentation
Make sure to keep your documentation of the Fair Market Value of your prize wins. The IRS may question why your valuation of the prize varies from the sponsor's, and if so, you'll want to have solid proof to back up your claim. If you do not have any solid proof of the correct FMV, then you should use the amount listed on the 1099 form.
If You Don't Get a 1099 Form, Can You Skip Reporting a Prize?
No! Legally, you are required to report all of your prize winnings whether you receive a 1099 form or not.
So if a sponsor fails to send a 1099 form, don't assume that you can safely skip reporting the prize. Keep a record of your prize wins throughout the year, and report them with your taxes.
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