Raffles or drawings can accomplish fundraising goals for a tax-exempt organization while also providing entertainment for the organization and participants. But these fundraising events require a bit of tax planning to keep IRS issues at bay (and note that separate laws apply to state-level and federal income tax exemptions).
The IRS views raffles and drawings similarly to lotteries: participants pay for the chance to win prizes, and the host typically determines winners by drawing tickets at random.
When hosting a raffle or drawing, tax-exempt organizations may need to:
- Obtain information about the prize winners
- Report prizes to the IRS
- Notify the winners of this reporting
- Withhold federal income tax on the prizes