I live in the US. A complete stranger knocked on my door, gave me a pallet of $20 bills (which in total amount to several hundred thousand dollars), and left without saying a word. As far as I can tell, this money is legally mine. What do I do about my tax return?
As a gift, the responsibility lays with the giver to file a 709 with their taxes for gifting to a single entity (barring certain exclusions) an amount over $14,000 within the (2017) tax year. https://www.irs.gov/pub/irs-pdf/i709.pdf
If this person is a foreign entity from outside the country, you might need to provide in your tax filing a form 3520 https://www.irs.gov/businesses/gifts-from-foreign-person The reporting limits are: more than $100,000 from a foreign estate or non-resident alien, or more than $15,102 from a foreign company.
If you don't know who/where the money came from i.e. cash, it would be considered found money and fall under income (not a gift).
Do I have to explain the source of all income on my taxes?
"Yes, you do", say the ghosts of Ermenegildo and Mary Cesarini.
The Cesarinis argued to the IRS that the money wasn’t income, and so it should not be taxed as such. The IRS wasn’t swayed by the couple’s argument. The case went to federal court, and the IRS won. “Found” property and money has been considered taxable income ever since.
If You Find Cash
The IRS plainly states that taxpayers must report “all income from any source," even income earned in another country, unless it is explicitly exempt under the U.S. Tax Code. This covers a wide range of miscellaneous income, including gambling winnings. According to the Cesarini decision, money you find isn’t explicitly exempt.
The tax impact won’t be significant if you find an item of property with a fair market value of only $500 and are in the 25% tax bracket. You’ll owe the IRS $125 ($500 x .25 = $125).
However, if you are a finder and keeper of $10,000, your tax burden will be $2,500 ($10,000 x .25 = $2,500).
This is a case where you sit down with an advisor or two. There are legal, and tax issues.
When you deposit the cash, or buy a car with it, the large cash transaction will trigger a notice to the US Government. So they will eventually find out.
Before you get to that point you need to know what obligations and consequences you will be facing. Because you don't know if it was a gift, or found money, or if the owner will be back looking for you to return it; therefore you need expert advice.
You can report it as illegal income and you don't have to elaborate any further.
For instance, spirit the cash off to a state where pot is legal and set up a dispensary. That is not legal at the Federal level, so it is in fact "illegal income" vis-a-vis your Form 1040 and that's all you say.
Make sure you look, walk, and quack like a fairly successful pot distributor. That will most likely be the end of their inquiry, since they're not terribly driven to investigate the income you do report. Having to give 33% of it to the IRS is generally strong motivation for folks to not report fake income. You're not claiming the money is from pot, you're allowing them to infer it.
@RonJohn's answer for pallet of $20's is right for the specific case. For the general case of all income, it depends on whether or not the the source of the income was potentially criminal.
I am not a lawyer, but reading that article, one needs to provide the total amount, but not the source if there's a risk of self-incrimination.
Well, that's probably not even all of it. If that stranger did his taxes properly, then he already paid about a third of it to the government because wherever he got it from it was income for him and thus it must have been taxed.
Now, the remainder is in your hands and yes, according to US law it is now your income and so now you too, must pay about a third of it to the government, and yes you are supposed to explain where it came from.
Be careful giving it to somebody else or it'll be taxed yet again.
disclaimer: I am not a US citizen
Appears to be a hypothetical question and not really worth answering but...
Must it be explained.. no, not until audited. It's saying that for everything reported on a tax return, people have to include an explanation for everything, which you do not, unless you want to make some type of 'disclosure' which is a different matter.
Must it be reported.. Yes, based on info presented. All income is taxable unless "specifically exempted" per the US Tax code or court cases.
Gift vs Found Income... it's not 'found' income as someone gave (gifted) the money to him. Generally, gifts received are not taxable and don't have to be reported.