Protect Yourself From Gambling Audits

Cash is the tool of most gaming, whether it's in legal tender or casino chips, but have you ever been audited when you really had no way of substantiating your cash transactions? You buy in with cash, which you keep in a cash box that you rent from the casino. When you are finished for the day, you cash out and receive cash for the chips that you have, and you put the cash back into the cash box. When your cash box runs low (which does not happen that often because you are a good player), you cash a check at your bank, withdraw from your savings or money market account, or sell some stock.

You do keep an accurate diary, following the letter of the law as prescribed by the IRS in Revenue Procedure 77-29 as follows:

"An accurate diary or similar record regularly maintained by the taxpayer, supplemented by verifiable documentation will usually be acceptable evidence for substantiation of wagering winnings and losses. In general, the diary should contain at least the following information:

1. Date and type of specific … wagering activity;

2. Name of gambling establishments;

3. Address or location of gambling establishment;

4. Name(s) of other person(s) (if any) present with taxpayer at gambling establishment; and

5. Amount(s) won or lost."

You dutifully make the appropriate and accurate entries in your diary to record a day's activity according to the rules above. If you think this alone will satisfy an IRS auditor and give you a "no change" outcome to your audit, you are mistaken. Your diary could easily be fabricated and you need to be able to prove it was not. There are more requirements specified by Revenue Procedure 77-29, which are presented below:

"Verifiable documentation for gambling transactions includes but is not limited to Form W-2G; Form 5754, Statement by Person Receiving Gambling Winnings; wagering tickets, canceled checks, credit records, bank withdrawals, and statements of actual winnings or payment slips provided to the taxpayer by the gambling establishment.

"Where possible, the diary and available documentation generated with the placement and settlement of a wager should be further supported by other documentation of the taxpayer's wagering activity or visit to a gambling establishment. Such documentation includes, but is not limited to, hotel bills, airline tickets, gasoline credit cards, canceled checks, credit records, bank deposits, and bank withdrawals.

"Additional supporting evidence could also include affidavits or testimony from responsible gambling officials regarding wagering activity.

"The Service is required to report to the Congress by 1979 on the issue of whether casino winnings should be subject to withholding. In the absence of legislation requiring withholding on casino winnings, the instructions for preparing Form 5754 will not be applicable to winnings from keno, bingo, or slot machines. However, all other items of documentation to verify gambling losses from casino winnings are applicable.

"With regard to specific wagering transactions, winnings and losses may be further supported by the following items:

(Other games omitted)

".03 Table Games: Twenty-one (blackjack), craps, poker, baccarat, roulette, wheel of fortune, etc. The number of the table at which the taxpayer was playing. Casino credit card data indicating whether the credit was issued in the pit or at the cashier's cage.

(Other games omitted)

"The record-keeping suggestions set forth above are intended as general guidelines to assist taxpayers in establishing their reportable gambling gains and deductible gambling losses. While following these will enable most taxpayers to meet their obligations under the Internal Revenue Code, these guidelines cannot be all inclusive and the tax liability of each depends on the facts and circumstances of particular situations."

Note that the regulation specifies that an accurate diary or similar record maintained by the taxpayer, supplemented by verifiable documentation, will usually be acceptable evidence for substantiation of wagering winnings and losses. The key words here are "supplemented" and "usually." In our scenario above, there is no other supplemental documentation. There is no proof that the amount started with according to the diary is really what was taken out of the box, and vice versa for what was put back into the box. You could be systematically "skimming" your own box. Even though you record an amount in your diary, there is no way to verify that the amount recorded is the true amount. The depositing or withdrawing of money from you own bank or other financial institution proves nothing. There is no way of verifying beyond a reasonable doubt that the funds were used for or were the result of gambling. If the above scenario fits you, your only hope of verifying your gambling is obtaining affidavits or testimony from responsible gambling officials regarding how often you played, what limits you played, and whether you usually won or lost.

It is our recommendation that in addition to keeping the obligatory diary, you should open a players bank at the casino, in which you should keep an adequate bankroll. Should you withdraw funds for reasons other than playing, you can have that noted in your bank record. The same applies to deposits; they can be noted as being part of your playing funds or part of your stash for safekeeping. When you add money to your bank, use a check made out to the casino, and when you withdraw funds, have the casino make out a check to you. When you go into the audit, have a copy of the activity of your players bank, which can trace your winnings and losses. Get as many affidavits or testimonies as possible on casino stationery from responsible gambling officials regarding your wagering activity. When you gamble out of town, keep your airline ticket stubs, hotel bills, meal receipts, and parking receipts if you use valet parking. Keep a mileage diary containing a record of driving to and from casinos regardless of how far the casino is from your home. Keep receipts from buying gas when you're on a road trip. If you file as a professional gambler, you need this information anyway. Keep tournament buy-in receipts and W-2Gs for tournament wins even if there was no withholding. The more records you keep, no matter how remotely they are related to your gaming activity, the better your chances of surviving an audit. Be warned that a diary in of itself is not enough documentation, which could cost you a bundle should you get audited by the IRS.

If you have any questions regarding tax regulations as they apply to gaming that you would like to see answered in Card Player, please mail/e-mail them to us. We will keep your identity confidential. If you would like to utilize our professional services or order our book, The Tax Guide for Gamblers, please call (800) 829-7271 (804-0439 in Las Vegas). R.B.S. will prepare your return without your having to leave the comfort of your home, now matter where you live.