The Reporting Mistake That Could Get You in Trouble With the IRS


Winning cash or things of real value, like a car, vacation or makeover — or a house (!) is an incredible thrill that will have you jumping up and down with joy. But do you know who else has their eye on your prize? The IRS. And you’ll remember to pay up for those biggies, but it may not be enough to keep you out of trouble if you forget this: You owe taxes on any prize you win, regardless of size.


The size of a prize doesn’t matter when it comes to taxes. The value is considered income, and you must count it as such when you file your income taxes. Failure to do so could get you in a great deal of trouble with the IRS — trouble that starts at high-interest rates and could go as far as their reach extends.

How Prizes Are Taxed

According to H&R Block, prizes won through sweepstakes, contests, raffles and the lottery are considered taxable income. So, if you earn $40,000 in any given year and win another $2,000 worth of prizes, you have to count your income as $42,000 for that year and pay income taxes to both the federal and state governments on that full amount.

The amount of income you should report is based on the cash value of the prize. This is true even of non-cash prizes. If you win a prize worth more than $600, you will likely receive a 1099-MISC form, which will have all the information you need to file your taxes. That said, you’re still responsible for keeping track of and reporting smaller prizes. (We use a spreadsheet.)

Penalties for Not Reporting

The IRS considers the act of deliberately hiding or omitting income a form of tax fraud. As such, you could face criminal charges, fines and penalties. Penalties can grow to a maximum of 75 percent of your tax underpayment. But even if the IRS finds that you didn’t commit fraud, you will have to make up your underpayment and pay penalties on the amount of tax you failed to pay — and if it’s been outstanding for years? Ugh, the interest will eat you alive.

The Bottom Line

The IRS makes it your responsibility to report all of your prize-winning income, regardless of how much it is. Smaller prizes ($20 to $100) are easy to forget about after some time has passed, so it’s a good idea to keep a spreadsheet listing all the prizes you’ve won. Be sure to keep track of all paperwork (receipts, tickets, statements, etc) you receive as well — we use a portable file box for entries, receipts, stubs, 1099’s and all of that stuff.

Adequate record keeping is an essential part of playing and winning games responsibly. Be sure to track your winnings and include them in your taxable income when you file. Doing so will help you avoid a lot of headache in the future.