Huntington Press: Tax Help for Gamblers

Tax Help for Gamblers
by Jean Scott

Description
Table of Contents
Excerpt

Excerpt:

The Basics:
[Editor’s Note: The writer alternates throughout the book between Jean and Marissa. When a change occurs, the writer is identified in the beginning of the first paragraph.]

JEAN: “Paying taxes on my gambling wins? You’ve got to be kidding. Sure, sometimes I win, but my losses are always much larger than my wins by the end of the year. So I don’t have to mess with it on my federal or state tax returns.”
Wrong! You probably should “mess with it,” especially if you hold any of the following common, but mistaken, beliefs:

     • I can lump together all my wins and losses for the year and, if I have a net loss, I don’t need to put wins or losses on my income tax returns. After all, I didn’t have any gambling income.
     • The IRS can’t “catch” me, even if I win a lot of money gambling, as long as it’s done slowly over a considerable period of time in different gambling venues and I get no official forms like a W-2G or 1099.
     • Federal and state tax agencies know most gamblers lose over the long term, so they aren’t very interested in auditing them.
     • If I do get a few W-2Gs, I can just count that total as my gambling income for the year and be safe in an IRS audit.
     • If I gamble online, the IRS doesn’t get any records of this, so I don’t have to report any of my winnings.
     • If I gamble on a cruise ship in waters three miles from U.S. soil, I don’t need to report my winnings.
     • If I play poker only in home games, I do not have to report my winnings.
     • Winnings from illegal gambling are not taxable.

Before we go any further, let me emphasize: The purpose of this book is not to moralize about reporting or not reporting your gambling wins and losses. However, as casinos spring up around the country and, as a result, more and more people gamble, the IRS is becoming more interested in this area of potential under-reporting. If you report any W-2Gs, or don’t include them when you’ve been issued them, it's becoming more likely you'll be asked by the IRS to provide more details of your gambling. And it’s becoming more likely that you might be questioned about gambling if you come to the attention of the IRS for other reasons, even a routine audit.

     MARISSA: However, you should also know that the IRS can’t go on “fishing expeditions” if you’re being audited. When the IRS audits you, they have to tell you specifically which area of your tax return they’re examining. For example, if they’re questioning the part of your return that shows you’re claiming a room of your home for a business office, they must keep their investigation and questions to that one subject. However, if you open the door by commenting on other subjects, i.e., gambling, then they can question you about that area. (This is the reason it’s usually best to have professionals speak for you at an audit—they know to stick carefully to the subject at hand. Taxpayers are often so nervous that they ramble all over the place in their effort to “explain.”)
     You should be aware that the Criminal Investigative Division (CID) of the IRS is beginning to investigate gamblers more thoroughly. The CID looks for people who willfully, with intent, try to defraud the IRS by under-reporting income or overstating losses and deductions. And they like to jump at the chance to leverage the publicity that they would get by making an example out of a gambler who is not properly reporting his gambling income.
     Remember, not reporting income constitutes tax evasion and can have severe consequences. Just look at Richard Hatch, winner of the first TV “Survivor” show, who is in prison for skipping just one “little” detail on his tax return, his win of one million dollars!

JEAN: A Nevada note. On July 1, 2007, Nevada casinos, which for many years had been permitted to operate under the slightly different rules of state statue Regulation 6A, were required to switch to the Title 31 federal reporting rules that other states had been following for years. I discuss these new rules in Chapter 5 under the topic of “Big Brother is Watching You.” The main difference that’s bothering gamblers is that they’re now asked for their Social Security numbers more often and for smaller amounts than $10,000. It’s a catch-22 situation. You aren’t required by law to give your SS number when buying in or cashing out for amounts that don’t put you over the $10,000 report trigger for the day. However, the casinos are being more aggressive in asking for it anyway (so they won’t accidentally run afoul of the new reporting rules and find themselves in a messy audit), and they may fill out that dreaded SAR (suspicious activity report) if you refuse to give it.
Supposedly, these stricter federal rules were forced on Nevada to stop money laundering by terrorists after 9/11, but some have speculated that it’s really a way for the government to better track individual gambling action, so more taxes can be collected on previously unreported winnings.

GAMING WINS AS INCOME

JEAN: IRS publications clearly state that gambling winnings are income and must be reported. The instruction booklets that come with tax forms list gambling winnings as one type of income to be put under “Other Income.” One court case put it this way: “It is illegal not to report winnings, and you’re risking possible prosecution for criminal tax evasion.”
This means gambling winnings from legal, or even illegal, sources anywhere in the world: lotteries, raffles, drawings, prizes; racetracks; bingo games; and casino games, whether they’re on Native American reservations, cruise ships, the Internet, or in another country. It means all gambling winnings, whether you get a W-2G, a 1099, or no paperwork at all.

MARISSA: Internal Revenue Code (IRC), section 61, states that … gross income means all income from whatever source derived. For example, if you sit down and play a penny slot machine for an hour, happen to win $1, and walk away, you’re technically required to report it on line 21, “Other Income,” of Form 1040, even though there’s no paper trail to your “income.”

JEAN: Many people think they understand the gambling-income concept. “Hey, I’d be glad to report income for a year in which I actually won money gambling, but that hasn’t happened yet.” What they don’t understand is that the IRS is not talking about one net win-or-loss figure at the end of the tax year, but win/loss figures for individual gambling sessions. They say: You cannot net out your gambling for the year. You must add up all the winning sessions and all the losing sessions separately. To emphasize this, the IRS puts this, in plain non-technical easy-to-understand language, in the instructions that come with your tax forms: You cannot reduce your gam-bling winnings by your gambling losses and report the difference.

     MARISSA: In one famous court case in 1999, USA v. Scholl, a heavy gambler was found guilty of under-reporting his gambling income even though he was always a net loser at the end of the year. Those years he had a net loss he didn’t report wins or losses. Years he got W-2Gs, he reported only that amount as his win.
     The IRS must have information about both gambling income and gambling losses in order to determine whether income tax is owed. Whether Scholl believed (correctly or incorrectly) that he had lost more than he had won is irrelevant; the fact is that Scholl failed to report winnings and losses. “Whether there was an actual tax deficiency is irrelevant because the statute is a perjury statute.” [See United States v. Marashi, 913 F.2d 724, 736 (9th Cir. 1990).]
     Why was he accused of the more serious criminal offense of filing a false federal-income-tax return, rather than the less serious offense of violating tax laws? For one thing, he was a well-known Arizona Superior Court judge and the IRS loves to make examples of prominent taxpayers. However, another part of this case is that he was charged with “structuring”—that is, trying to circumvent the currency transaction reporting limits. He would make $5,000 cash deposits to different banks on the same day and not inform the banks involved. This is a federal offense. I’m just guessing here, but I think the IRS had a stronger case with the two pieces combined than if they had just one or the other. In any case, he was found guilty—but was sentenced to probation only.
     Obviously, this is an extreme example. However, when you sign your return, the fine print says this is what you are doing: Under penalty of perjury, I declare that I have examined the return and accompanying schedules and statements, and to the best of my knowledge and belief, that they are true, correct and complete. And be assured that having someone else pre-pare your return does not relieve you of taking this final responsibility.

ONLINE GAMBLING

     JEAN: This is a good place to discuss online gaming. IRS regulations state that U.S. citizens and anyone who is considered a U.S. resident for tax purposes (i.e., resident aliens) must declare as income all gambling wins, from anywhere. IRC, Section 61, states that … gross income means all income from whatever source derived. … Although it isn’t mentioned specifically, this includes cyberspace. It doesn’t change just because online casinos don’t issue W-2Gs or are headquar-tered in a country outside the U.S. Therefore, wise players do report wins/losses from online gaming, just as they do from bricks-and-mortar casinos. (However, I’m sure that many “forget” a lot of their wins and “remember” all their losses when April 15 comes around. Obviously, this is a common occurrence in any activity where no paperwork is sent to the IRS from the source of the income.)
     This IRS requirement to report all income makes the question moot, at least in the taxation area, about whether online gambling is legal or not, no matter how long it takes for this to be decided by the U.S government, if it ever does become clear-cut. People earn money at more clearly defined illegal activities (i.e., prostitution, bookmaking, etc.) and do report that income—or at least some of it—on their tax returns.
     In any case, if you have an online gambling account based in a foreign country with a balance of $10,000 or more at any time during the year, the Bank Secrecy Act requires you to report it to the IRS by filing a Report of Foreign Bank and Financial Accounts (FBAR). This is from the IRS Web site: The FBAR is a tool to help the United States government identify persons who may be using foreign financial accounts to circumvent United States law. Investigators use FBARs to help identify or trace funds used for illicit purposes or to identify unreported income maintained or generated abroad. To file the FBAR, you check the appropriate block on Schedule B of your 1040 tax return and file Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts, with the Department of the Treasury (not the IRS).

MARISSA: I’m guessing that most people who earn income illegally aren’t concerned about lawfully reporting it on a tax return. That’s why criminals often get nailed. It’s easier to convict someone for not filing a tax return than it is for drug dealing or prostitution. Remember, Al Capone was arrested and sentenced on tax evasion, which was easier to prove than the actual horrific crimes he committed.

     JEAN: An aside here. The IRS end of the government is not supposed to share records with other government entities and the Supreme Court has previously ruled that the government can’t use information on a tax return to prove an illegal activity.

     MARISSA: Many gamblers have felt “safe” in not reporting their online wins, since online casinos, being headquartered in countries outside the U.S, do not issue any paperwork, like a W-2G, to the U.S. government. If I’d written this section a few years ago, I would have talked about the danger that the government in the future might decide to get records from credit-card companies and money-transfer businesses like SafePay, NETeller, and FirePay, to catch the past actions of online gamblers. This is what they did in 2000, obtaining MasterCard and American Express transactions billed to bank accounts in Antigua, Bermuda, the Bahamas, and the Cayman Islands to look for tax evaders using offshore accounts.
     This is no longer a vague fear for online gamblers; it’s already happening. Witness the ongoing investigation of NETeller. The U.S. Department of Justice now has complete information on everyone who has or ever had a NETeller account.

     JEAN: You may wonder how things have changed since the surprising middle-of-the-night passage of the Unlawful Internet Gambling Enforcement Act of 2006 dealt a stunning blow to online gaming. Actually, it did not address the legality of online gaming, but knocked the legs out from under it, making it difficult for money-handlers to do business with American online players. Although a very few savvy online gamblers have found ways to get around these obstacles, the average U.S. online gambler has been stopped cold from betting with anything but play money.
     Several bills in Congress are currently addressing this situation in different ways: by completely repealing the onerous (at least to gamblers) legislation passed last year, or by making online gaming legal but regulated, or by making poker an exception, because it’s a game of skill rather than chance. And there’s pressure from other countries that feel the U.S. is flouting international law.
     Few want to predict how this will play out in the future. But no matter what’s decided, I think I can safely say that the U.S government will always consider gambling wins as income, no matter from what source they come, and it will want these wins accounted for on a U.S. income tax return. I will even go out on a limb here, but probably a pretty safe one, and predict that there will be more government intervention in gambling matters in the future. And casinos, on land or sea or in cyberspace, will have to submit more, not fewer, records about player action.

DEFINING A “WIN”

JEAN: OK, let’s say you now understand that you must report all gambling income to the IRS and your wins are subject to taxes. The first question that may come to mind is, “What exactly is a gambling win?”

     MARISSA: In my personal experience representing clients in audits, the IRS seems to define a gambling “win” as the net win one achieves in a particular session.

     JEAN: “Okay,” I hear you asking, “Just what is a session?”
     Is it the few seconds during which you pulled the handle of a slot machine while waiting in line at the buffet and got back four more quarters than you put in? Is it a $10 win as you played one hand of blackjack with a coupon on the way to the restroom? Is it a $500 slot jackpot, although you already had lost $600 in the same machine that day? What about a $10,000 jackpot on a lucky trip to a riverboat near your home, which you took to Vegas the next week and blew it all, plus some more? Or three winning months of play in a casino wiped out completely by nine losing months that followed, giving you a net loss at the end of the year?

MARISSA: The problem is that nowhere in the entire tax code does the IRS use the word “session,” much less specifically define it. IRS record-keeping guidelines speak about “specific wager or wagering activity.” Obviously, a “specific wager” is the smallest unit of gambling time. But “wagering activity” is synonymous with “gambling session,” and neither is specifically defined. There’s no basic unit of accountability that will fit all gambling situations.

JEAN: But there’s one key word that every gambler should understand and remember, and that’s “records.” What the IRS has to say about gambling record-keeping gives us a starting point in our quest for the answer to what a session is. We’ll discuss this basic tax obligation in the next chapter.

Description:

     The complete tax implications of gambling are a big mystery to gamblers, accountants, and even the Internal Revenue Service itself. The IRS offers surprisingly few details to guide gamblers through the tax maze and what it does say is often general, vague, even contradictory.
     Tax Help for Gamblers deals with the innumerable nuances and gray areas of gambling and taxes. It covers all the whys and wherefores of this complex subject, including tax-code specifics, record-keeping, filing your tax return, state-tax considerations, and audits and other tax problems. Numerous charts and forms help you see the practical application of the information.
     This book is for recreational and professional gamblers, including low and high rollers, table-game and machine players, video poker and live poker players, online enthusiasts, international and cruise ship players, and people who live or gamble in states with income taxes.
     Whether you’re a do-it-yourself tax filer or you use a tax professional, Tax Help for Gamblers is an indispensable guide to staying square with the taxman.

Reviews/Media Mentions:

Las Vegas Review-Journal, Las Vegas Sun, Metro—The World’s Largest Global Newspaper, Midwest Gaming & Travel, The Press of Atlantic City, Southern Gaming & Destinations, Casino Player, Fun N' Games, Kansas City Star

“I got a letter yesterday from the State of Alabama Department of Revenue requesting: ‘Documents to show your gambling winnings and losses for 2006.’ Thank God I read your book and have a detailed gambling log.”
—Henry Tamburin

“IRS blues?
   Think that year-end statement of your gambling activity that almost any casino will provide on demand will get you through an IRS audit? Think again, gamblers.
   If you get lucky and win a big jackpot, you can save a bundle on taxes—but only if you've prepared ahead of time.
   Jean “The Queen of Comps” Scott (The Frugal Gambler) shows you how in her latest gambling book, Tax Help for Gamblers (Huntington Press; $24.95). Written with tax expert Marissa Chien, the 169-page paperback is a fast read that should be read with care by anyone who wants to give less of his winnings to Uncle Sam.
   The book offers detailed advice for all gamblers, recreational to professional, and includes sample tax forms, reviews of the latest tax-court decisions and links to helpful Web sites.”
   —Kansas City Star