Time to Empty the Mail Bag

Once again, our tattered old mail bag is bulging at the seams, which means it is time to answer your questions. We thank all of you who take the time to send us your questions, and regret that we cannot answer all of them due to space limitations and the similarity of the questions themselves. We do edit the questions to conserve space and to keep your identity confidential.

Q: I have a question regarding my 1999 taxes, which my accountant is having some trouble with. I am a nonresident alien, present in the United States on an H-1B visa. I declared $38,000 in poker winnings for 1999, as well as $38,000 in poker losses. The IRS claims that I cannot offset my winnings with my losses, as a nonresident alien.

A: The deductibility of gambling losses for nonresident aliens is determined by both the Internal Revenue Code (which allows you to deduct losses to the extent of winnings) and the contents of the tax treaty that the United States has with your country. These treaties vary from country to country. Some make gambling winnings nontaxable by the United States while others declare winnings taxable. The deductibility of losses can go either way depending on the treaty. Your accountant needs to research the treaty with your country to determine the rules that apply in your case.

Q: You advised me previously to give casinos IRS Form 5754 when my friends and I played partners and won a video poker jackpot. Three out of four casinos would not accept it. New question: Some of my friends are going to back me for one of the World Series of Poker tournaments. What forms do I fill out (in advance) so that everyone reports his share of the winnings and I don't get stuck with the whole tax bill?

A: The form to use is 5754, which instructs the gaming establishment who gets what. The fact that many casinos will not accept them for slots, keno, and other games is a policy that we believe is illegal but they get away with it. The reason they do not accept the 5754 is to make it difficult for "teams" to allocate their winnings per their agreement. This can be circumvented by having the recipient of the W-2G issue a form 1099-MISC to allocate the winnings.

Q: If you win gambling at an offshore sportsbook, can you still pay taxes on your winnings even though it's an illegal practice?

A: Of course there is a way to pay taxes on money earned illegally; you just report it as gambling income, which it is. The IRS just wants its cut. If it becomes aware that the income was earned from an illegal activity, it rarely informs the appropriate law enforcement agency. If Al Capone had paid his taxes on his various illegal activities, he probably would not have gone to jail.

Q: Please advise if I should engage your help in obtaining a carry-back of self-employed professional gambler losses for 2001 against some type of winnings reported for 1999 and 2000. I filed Schedule C for both earlier years, about $14,400 in business Income for '99 and $10,400 for '00. For 2001, I had a net loss of about $10,000 and did not file, ignorant of the fact that I might claim losses against earlier years.

A. Whoever advised you that you can carry back gaming losses that were not deducted because the law limits deductible gaming losses to the extent of winnings in any given year is ignorant of the tax laws. There is a section of the Internal Revenue Code that specifically states that losses in excess of winnings in a given year cannot be carried forward or carried back to offset winnings in other years.

Q: I believe many aspiring tournament players would like to have a professional explanation of how to factor in the tax ramifications when negotiating and consummating a deal at the final table. As an example, suppose there are two players left, and first place pays $20,000 and second place pays $10,000, for a total of $30,000. If the players are about equal in chips and agree to accept $15,000 each, what happens? Does the tournament official get involved? Are both players given $15,000 by the cardroom holding the tournament and a W-2G stating that they received $15,000 each? Do the players just play it out and split the money after the cardroom pays one of them $20,000 and the other $10,000? And if that happens, how does the person who collected $20,000 from the cardroom and received a W-2G for $20,000 prove to the IRS that he received only $15,000 because he had to give the other player $5,000 to make it an even split?

A: It has been our experience that the tournament director will recognize an agreement to divide the prize money differently than the published amounts for each place. In many cases, players just tell the director what amounts they have agreed upon and they receive those amounts and W-2Gs that match the amounts received. This also applies to those cases in which a player has a "backer" who put up the buy-in. Technically, the player should use form 5754 (see above) entitled "Statement by Person(s) Receiving Gambling Winnings." The instructions for this form state the purpose of the form as follows. "You must complete form 5754 if you receive gambling winnings either for someone else or as a member of a group of winners." The form has a place for information about the person to whom the winnings are paid, including the amount paid. Then, there is room to list as many as 13 persons who shared in the winnings, including the amount each actually received per the agreement. This form should be prepared and presented to the tournament director prior to the issuance of any W-2G. The person who played is listed in Part I, and those who shared in the winnings, including the player, are listed in Part II. Everyone who profited receives a W-2G reflecting the amount received, and it's taxable.

Editor's note: As enrolled agents, in addition to tax preparation, Yolanda Smulik-Roche and Roger C. Roche are licensed by the Treasury Department 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. They also maintain an office in California. They do business by appointment only.