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As a result of a business competition we won for school, $10,000USD was transferred from my University's Accounts Payable department, to me. It should have been transferred to my business, a C-Corporation.

I am a foreign student, meaning, if the $10K was paid to me - it would be subject to 30% tax, while if to my corporation, 21% tax at the end of the year after losses and other overheads.

I was told to write a letter to my corporation saying the money was transferred to me in error, and that I will transmit the money to the company. I believe banks are required to notify the IRS of transactions greater than $10K, which is why I want to ask - do I have to copy the IRS on this letter? Or ask the bank to change how they notate the transaction?

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    When you say "we won for school", who is "we"? Was $10K a portion of the total prize, or was $10K the full prize and it was only given to you? Do you have to split it with other people? – TTT Jan 25 at 5:06
  • @TTT it was supposed to be split between 3-4 people but university took over a year to split it, so we just asked for it to be disbursed to one person - i.e. me. $10K the full prize only given to me! – unicornication Jan 25 at 23:07
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The IRS requires reporting of cash payments over $10k, so it shouldn't affect you.

  • I read "Deposits Of $10,000 Or More If you make a cash or check deposit of $10,000.00 or more in one transaction, then the bank must make you fill out and file IRS form 8300. This form is also required when any related transactions made within 24 hours of each other total $10,000.00 or more, or money transactions between two parties that total $10,000.00 or more. This law was primarily created to allow the IRS to detect money laundering by criminal elements, but it applies to anyone making these types of deposits." - then again they haven't made me fill anything, also I don't have a tax ID – unicornication Jan 25 at 23:10
  • @unicornication+ you read somebody mixed-up or careless. Banks and certain other financial institutions, including large casinos, must report cash (not check or book transfer) in and/or out over $10k to FinCEN (not IRS) on CTR. They do this, not you, although they might ask you for some of the info. Other businesses that receive cash and in some cases other bearer instruments (but not regular check) over $10k from one customer -- commonly places like car dealers and jewelry stores -- report on 8300 to IRS, and usually need info from you to do so. Both under BSA, which yes is AML. – dave_thompson_085 Jan 27 at 16:49
  • To be clear, the non-cash payment doesn't need to be reported now as a transaction. However, IRS does expect this income to appear on an appropriate tax return in due course. In most cases if you received a payment properly due someone else and forwarded it you should issue them a 1099 -- but most 1099's are exempted when the recipient is a corporation and I'm not positive whether this is amoong them. – dave_thompson_085 Jan 27 at 17:07
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I would take the check back to the university and have them cut it correctly. Seriously.

However, failing that, I would endorse it in your capacity as treasurer for the company. Your should know how to do that, since you are a treasurer for a company.

Oh. It's an e-transfer.

Absolutely not. You need to go back to the payer and tell them to reverse the transaction and send it to your corporation. A corporation is a separate legal person in tax law, so They literally paid the wrong person.

You can't receive a payment for your corporation. Proprietorship, yes. LLC, maybe. Corporation, nuh-uh.

I'm going to accept it personally anyway

You will get nailed by this. You will get a "1099" issued to you personally, and the IRS will expect personal income tax to be paid on that. You can talk them out of it - I have - but your documentation will need to be tip top, hence the advice for the letter. You must say that the payment was made to you in error and you must transfer the full $10,000.

Also in some instances such payments are subject to backup withholding e.g. That 30% you mentioned. Withholding is not tax. Withholding is a bank account on deposit with the IRS, to assure you have deposited enough money to pay your taxes on April 15. It's technically your money and you get any extra back after you file your taxes.

So if they only sent you $7000, you still have to transfer the full $10,000 to the corporation. And if that creates cash flow problems for you, tough beans: IRS does not recognize the existence of cash flow problems. You might try having the corporation loan you the amount you are shy, but the corporation will need to put all this on paper, set an appropriate interest rate, etc.

If you don't transfer the full $10,000, or if your argument of erroneous payment is not effective, then it becomes two things: a) a prize award to you personally for $10,000, on which you owe personal income tax; and a $whatever investment, for whch you should receive shares of stock. You could also characterize it as a loan to the company.

You kinda see where this "accept it into my personal bank account" option sucks.

I get where passively accepting this is easier right now, I don't think it'll stay easier.

What were the prize rules?

There's one last snag. You have to review the contest rules. Are they allowed to pay a third party? Your corporation is not you. It is quite possible that A) only individuals (natural persons) can enter the contest, e.g. College students, e.g your corporation is not a student of that school..... and B) rules require the prize be paid to the actual winner rather than some other entity according to winner's instructions. (although that last would be pretty stupid, you should be the right to redirect your prize to charity.)

There may also be a tax issue with this. In principle I don't see a problem, the money is income to the corporation and it will pay tax on it via its annual taxes (Form 1120). But I am not a tax attorney.

  • As it was a direct deposit, I can't have them cut the check again, or endorse the deposit as a treasurer! – unicornication Jan 25 at 23:15
  • Yes you can! This answer addressed that: "You need to go back to the payer and tell them to reverse the transaction and send it to your corporation". The university can reverse the direct deposit. Then you need to decide whether you want the university to direct deposit it to the corporation account or issue a check to the corporation which you can endorse as treasurer and deposit. – Ellie Kesselman Feb 4 at 9:57
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The IRS is informed about 10+k$ cash transactions, not direct deposits.

But independent of that, it wouldn't matter. just because money comes into your account doesn't imply it's taxable income. You can simply transfer it to your company's account (and treat it in its books correctly), and that's it.

If the IRS would ever ask you, you simply tell them that it went in the wrong account and was transferred out right away. As long as the correct receiver treated it correctly, there is no problem.

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