Cash gifts are never considered income to the person receiving them, so cash gifts do not need to be reported to the Internal Revenue Service (IRS) by the receipient. The person making the gift, however, must file a gift tax return and might have to pay a gift tax if the gift is large enough. Even for large gifts, though, there are certain exceptions to which the gift tax doesn't apply.
Gifts are not considered income under federal tax law. Because a gift is not income, the gift never needs to be reported to the IRS. If you deposit the cash into a bank, your bank might have a duty to report the cash deposit to the IRS (if the deposit is large enough), but the person receiving the gift never has to report it to the IRS.
The person who gives you the cash, however, might have to pay a gift tax. People are often confused about the federal gift tax, thinking it is the person who receives the gift that must pay the tax.
As of 2012, gifts that are less than $13,000 annually do not need to be reported to the IRS. However, any gift that exceeds $13,000 must be reported to the IRS, by the person making the gift, on IRS Form 709.
Some gifts never need to be reported to the IRS, even if they exceed $13,000. Those exceptions include gifts to pay tuition, gifts to pay medical expenses, gifts to your spouse, gifts to a political organization and gifts to charity. In fact, gifts to charity can actually qualify you for an income tax deduction.
Even though you might have to file Form 709 with the IRS (say, for example, you give a friend a $15,000 cash gift), that doesn't necessarily mean you have to pay the gift tax. In addition to the annual gift exclusion of $13,000, there is also a lifetime exclusion for gifts. The lifetime exclusion, as of 2012, means that you can give somebody up to $5.12 million during your entire life, tax-free. So if you give a friend $100,000 and you have never given that friend any other money, you still won't have to pay the gift tax because your lifetime gifts to your friend are less than $5.12 million.
Coming in 2013
Beginning in 2013, the annual gift tax exclusion will rise to $14,000, which means each person may give away up to $14,000 annually, per person, in cash or property, without having to file a gift tax return with the IRS.