IRS Audits of Gaming Transactions Are on the Rise

If our practice is any indication, the IRS has greatly increased the number of audits it is performing on gaming transactions. Whether you are new to poker or an "old pro," you should be familiar with the basic rules and regulations that apply to gaming so that you can "audit proof" yourself should you get that dreaded notice of an audit, which comes in several flavors. The IRS can select you for an office audit, which requires that you produce your records regarding winnings and losses, or it can just make changes to your return and send you a Notice of Deficiency on which it bills you for increased tax, penalties, and interest. The Notice of Deficiency is handled through the mail, and you are given a time limit to disagree with what the IRS has done. In either case, if you do not have any records, you have no recourse but to pay the deficiency in tax owed, along with the penalties and interest. To prevent having to pay more, you must comply with the rules and regulations as prescribed by law. Unfortunately, some of these rules and regulations are not applied consistently by all of the IRS offices. To assist you in complying with the IRS rules and regulations, we are presenting the tax basics below.

Gambling Winnings are Taxed by the IRS and by Many States

All winnings from all forms of gambling worldwide are taxable and must declared as income on your tax return.

All losses from all forms of gambling are deductible as an itemized deduction for recreational players, and are limited to the amount of winnings declared.

Professional gamblers should file as a self-employed business using a Schedule C.

Winnings and losses are reported only in the year they occur. Excess losses cannot be carried forward or applied backward to offset winnings in other years.

Married couples filing a joint return must combine their winnings and combine their losses, and report only one figure for each.

Please note that the IRS has issued instructions that "lumping" is unacceptable. Lumping is the practice of reporting one net win figure and no losses, or reporting nothing if your net from gambling is a loss. You must report the total of your winning sessions separately from the total of your losing sessions. This applies even if you have a net loss.

IRS Record-Keeping Requirements for Substantiating Winnings and Losses

The IRS requires that an accurate diary or similar records must be maintained, and that the diary should contain at least the following information:

• Date and type of your specific wager

• Name of the gaming establishment

• Address or location of the gaming

establishment

• Names of other persons (if any)

present with you at the gaming

establishment

• Amount(s) you won or lost

The IRS also requires that in order to substantiate your diary, supplemental records are required, such as:

• W-2Gs

• Wagering tickets or receipts

• Canceled checks

• Credit records

• Bank withdrawals

• Any receipts provided by the gambling establishment

These records are not to be submitted with your return, but will be needed should you be audited.

IRS Form W-2G is Issued to Players and Also Sent to the IRS by Casinos for Certain Gambling Winnings

Winnings of $600 or more from horse racing, dog racing, or jai alai, if the winnings are at least 300 times the wager.

Winnings of $600 or more from state lotteries, and other wagering transactions in which the winnings are at least the amount of the wager.

Many casinos and cardrooms issue W2-Gs for poker tournament winnings of $600 or more, but it is not applied consistently, so you may not receive one. Note that the IRS receives a copy of all W2-Gs issued. No W2-Gs are currently being issued for ring game winnings. Do not let this lull you into a false sense of security. Winnings must be reported whether a W2-G is issued or not.

Winnings of $1,200 or more from bingo and slot machines.

Winnings of $1,500 or more from keno, less the amount of the tickets bought on the winning game.

W-2Gs are not required for winnings from table games such as blackjack, craps, pai go, baccarat, and roulette, regardless of the amount.

Casinos and Cardrooms are Subject to the "Money Laundering Rules"

They must report to the IRS, using a Cash Transaction Report (CTR), the aggregate cash transactions of $10,000 or more in any one day.

They also can make out such a report for amounts as little as $2,000, if they are suspicious.

Note that if you have a CTR issued by a casino or cardroom, you probably will not be aware of it. This is how the IRS learns of your ring game play, even though you do not receive a W2-G.

Inconsistencies in the application of the tax laws and regulations that we have encountered in the reporting of gaming transactions include the following: In the case that you are married, your spouse files as a pro using Schedule C, Self-Employed Business Income, and you gamble only occasionally, you qualify as a recreational gambler and cannot combine your winnings and losses with those of your spouse. You must report your winnings on line 21 of Form 1040 and your losses on line 27 of Schedule A. Depending on the examiner, tokes to dealers may be included in your losses; however, some examiners won't allow them unless you are filing as a professional on Schedule C, and then they want them reported under meals as tips, which is subject to a 50 percent reduction.

We want to emphasize that if you have a net loss, don't assume that you do not have to declare anything. A recent court case upheld the IRS' position that winnings and losses still must be reported (although they seem to be a wash). The U.S. Tax Court upheld this position and considered it a criminal offense, and issued the maximum penalties allowed under the law. This offense also could result in jail time.

We have had many questions concerning the reporting of Internet gambling winnings and losses. Yes, you must report your Internet activity. The IRS wants any taxes due. Remember, Al Capone went to jail for income tax evasion, not for murder or any of the other crimes he committed.

Editor's note: As enrolled agents, in addition to tax preparation, Yolanda Smulik-Roche and Roger C. Roche are licensed to represent and defend clients before the IRS nationwide. Their book, The Tax Guide for Gamblers, is the most comprehensive one on the subject. See their website at www.rbstaxes.com for more information regarding their practice, articles, and useful tax links. They do business as R.B.S. Tax Services, are located in Las Vegas, Nevada, and can be reached at (800) 829-7271.