Group Wagering - or How Not to Get Left Liable for the Taxes

Let us consider this scenario: You and nine of your poker-playing buddies from the weekly game back home decide to put up $260 each and play a "satellite," with the winner getting to buy in to the $2,500 Omaha high-low split event at the World Series of Poker. Of course, you win, and you're off to the city of lost wages to claim your seat in the event. As agreed upon before the "satellite," any winnings that you might receive are to be split equally among all of the "satellite" players. And, of course, you end up in the money (otherwise, we would have no reason to continue on with this article).

Binion's Horseshoe will issue W2-Gs to those who win $600 or more in a poker tournament. The purpose of this form is to inform the IRS of your good fortune, so that Uncle Sam will get his fair share come tax time. And today, this fair share can be significant, especially if you score a big win that throws you into the 36 percent or even 40 percent bracket. You, of course, do not want to get stuck paying, say, 36 percent on these winnings and then have to give 90 percent to your buddies back home, which would make you one big loser.

This sort of activity is referred to by the IRS as "group wagering." We tell our clients that they have several choices in situations like this. The IRS conveniently has Form 5754, "Statement by Person(s) Receiving Gambling Winnings." The instructions for the form state, "You must complete Form 5754 if you receive gambling winnings either for someone else or as a member of a group of winners." The instructions go on to state, "The information you provide on the form enables the payer of the winnings to prepare a form W-2G … for each winner to show the winnings taxable to each." We recommend that you complete Form 5754. The form is simple; it requires the name, address, taxpayer identification number, and share of winnings of each involved. Once you fill out the form, you present it to the payer, collect your winnings, and receive W-2Gs that reflect the actual amount won by everyone. The operators of a tournament may not want to do this, or believe that they must, in which case your only recourse is to issue 1099 forms to those who have a share in the winnings. If you must take this route, you should have an agreement in writing to share the winnings. In either case, you must have the name, address, and social security number of all persons involved.

Our business is now headquartered in Las Vegas. Our new mailing address is: RBS Tax Service, 8170 W. Cheyenne, Suite 109, Box 177, Las Vegas, NV 89129. We accept questions and comments regarding our articles by mail and E-mail: [email protected]. We are now accepting new clients; see our ad in this issue or contact us at (800) 829-7171 or (702) 804-0439.