By Special Contributor on IRS Issues, CPA Don Shelton
The IRS has advised sponsors of poker tournaments that they have an obligation to issue W-2G forms and to withhold tax from payments that exceed $5,000. This has been done by issuing what is known as a revenue procedure, Rev Proc 2007-57. A revenue procedure is the IRS announcing what it believes are the duties of taxpayers and how they are meant to comply with the IRS interpretation of law.
Congress has not enacted any new laws. This is just the IRS now interpreting what Congress did back in 1976 when it enacted the present, confusing law on withholding from various gambling activities. The IRS is also looking at what the ninth circuit court of appeals, based in San Francisco and covering California, Nevada, and other western states, concluded in U.S. V. Berent, 523 F.2d 1360 in 1976.
Why now?
I believe the IRS has been emboldened by Congress' recent attitude towards gambling and a recent Tax Court case, Tschetschot, TC Memo 2007-38. There, the court found that tournament poker is not a professional sport. Tournament poker, unlike tournament golf but like non-tournament poker, is a wagering activity and losses are deductible only to the extent of winnings.
In its procedure, the IRS went on to say that it will not add any additional taxes or fines as long as tournament sponsors have complied with the information-reporting requirements by issuing W-2G forms. On the other hand, if the tournament sponsor does not provide the winners with a W-2G, the sponsor may be liable for taxes and penalties. One interpretation of this is that as long as they issue W-2G forms, they do not have to withhold.
So, all of this for a form? What gives?
The IRS now does the majority of its auditing with its computers. The IRS is looking for ways of collecting taxes without using IRS agents' time. The IRS collects data from employers, banks, brokers, and others electronically and then matches this data to your tax return. They then send out audit notices for corrections along with a bill for the tax. Along will the audit notice, they also send information to you on how you can set up a payment plan. You do have certain rights of appeal and due process. The IRS can accomplish all of this with computers and a minimum of agents' time. The IRS does make many errors with these notices, and it can take a while to get your information straightened out with them. This process can be long, challenging, and even expensive if you use a professional. Your goal as a taxpayer should be to get all of your data into your tax return that can be matched, then look at ways to save on taxes.
The reason the IRS is willing to settle for just the form is that it will match these W-2G forms to your tax return using its extensive computer systems. Sponsors who issue more than 250 W-2G forms must file these electronically with the IRS. The IRS will know what you have been paid and can use its new victories in court to limit your ability to take losses and collect more tax dollars for the government.
Less sophisticated sponsors may just create a hard rule for its employees that they must withhold on winnings in excess of $5,000. This will keep them out of trouble with the IRS, should they fail to comply with the letter of the law.
Don Shelton has more than 27 years of experience in public accounting and is a business and tax consultant for the health care industry. He is a managing member of Perry, Shelton, Walker & Associates, PLLC, in Washington State.
