By Yolanda Smulik Roche. E.A and Roger C. Roche, E.A.
How many of you have won money at a casino and not bothered to declare it as income? Maybe you hit a slot machine for $900, moved to another one, then came back and hit for another $600. Okay, so maybe I'm fantasizing, but you get the picture.
The part of the picture you probably don't get, is that the friendly folks at the IRS expect you to report all your winnings along with all your losses (to the extent of your winnings) on your tax return. Why? Because you are required to do so according to our tax laws. In fact, if you win a jackpot for $1,200 or more, the casino takes down all your personal information and passes that information as well as the amount won on to the IRS on form W-2G of which you will receive several copies.
So with that bit of news to make your day, maybe you better take a look at the following:
THE BASICS OF THE GAMBLING TAX LAWS
- Gambling winnings are taxed by both the IRS and by many states.
- All winnings from all forms of gambling are taxable and must be declared as income on your tax return.
- All losses from all forms of gambling are deductible as an itemized deduction for recreational players, limited to the amount of winnings declared.
- Professional gamblers hold file as a self-employed business using Schedule C.
- The value of "comps" received are considered to be gaming winnings and should be included in your total winnings. This does allow you to deduct gaming losses to offset the income from the "comps."
- Wins and losses are reported only in the year they occur. Excess losses cannot be carried forward or back 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.
- 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.
- The IRS requires that an accurate diary or similar record must be maintained for substantiating your wins and losses, and that the diary should contain at least the following information: (1) the date and type of your specific wager; (2) the name of the gaming establishment; (3) the address or location of the gaming establishment; (4) the names of the other person(s), if any, present with you; (5) the amount(s) you won or lost.
- The IRS also requires that in order to substantiate your diary, supplemental records are required, including the following (these records are not to be submitted with your return, but will be needed should you be audited): (1) W-2Gs; (2) wagering tickets or receipts; (3) canceled checks; (4) credit card records such as cash advances; (5) bank withdrawals; (6) any receipts provided by the gambling establishment.
- The IRS form W2-G is issued to players and is also sent to the IRS by the casino for certain gambling winnings: (1) winnings of $600 or more from state lotteries, horse racing, dog racing or jai alai and other wagering transactions, if the winnings are at least 300 times the wager; (2) winnings of $1,200 or more from bingo and slot machines; (3) winnings of $1,500 or more from keno, less the amount of the tickets bought on the winning game; (4) winnings of $600 or more from horse racing, dog racing or jai alai, if the winnings are at least 300 times the wager.
- W2-Gs are not require for winnings from table games such as blackjack, craps, pai gow, baccarat and roulette, regardless of the amount.
- Casinos and card rooms are subject to the "money-laundering rules," and must report aggregate cash transactions of $10,000 or more in any one day to the IRS. They also can make out such reports for amounts as low as $2,000 if they are suspicious. Once a casino has your SSN and ID on record, they can issue these Cash Transaction Reports (CTRs) without your knowledge.
SO WHAT DO I DO? SOME QUESTIONS AND ANSWERS
Q I won a new car in Las Vegas. The casino offered me $33,000 or the car. I took the car. I was then given a tax form showing my winnings at $33,000. Do I have to show the whole $33,000 as income? I read an article that said I might be able to claim a lesser amount, based on what I could have sold the car for immediately after winning it. I talked to a local dealer who told me he would have sold me the same car for about $29,500 and that he would buy it from me for an amount slightly less than that.
A IRS Regulation Section 1.74-1 states that non-money winnings shall be taxed at fair market value. Since the casino offered you either $33,000 or the car and you chose the car, it seems that establishes fair market value.
Q Do I have to include money won on an Indian reservation as gambling winnings?
A It really doesn't matter where you won the money. If you received a copy of form W2-G or 1099, so did the IRS. Tax liability is based on total worldwide income, including income from sources outside the United States, which includes Indian reservations, unless specifically exempt by treaty or law. In fact, you'll even find income from illegal activities mentioned and listed in the Internal Revenue Code, as being taxable.
Q I'm a Canadian citizen who likes to make occasional trips to casinos in the U.S. Recently, I won $12,856 at keno. The casino withheld 30 percent of my winnings for U.S. income tax, and didn't allow for the fact that I was down $300 on the day and had the tickets to prove it. Someone at the casino told me that he thought the money was recoverable for Canadians once they returned to Canada. Is this true?
A If this was in 1998 or later, you're in luck. As a result of recent changes in the tax treaty between the U.S. and Canada, Canadian citizens who won enough to have the witholding of tax on their winnings, may file a U.S. Non-Resident Tax Return on which they can deduct U.S. gambling losses from their reported U.S. winnings and potentially get a refund for the full amount withheld, if you have as much or more in losses than winnings. If your U.S. losses are less than your winnings, you will get a partial refund.
Q I won some jackpots at a casino on Lake Michigan this year. We have a house in Indiana, but over the years we have claimed California as our residence. Will Indiana expect to collect taxes on winnings because the boat is in Indiana?
A Most states tax income earned in their state, regardless of residence, and most states offer a credit to their residents for taxes paid to other states. This is true in your case. A copy of your W2-G is sent to the state in which the money was won, so they will be expecting you to file a non-resident Indiana return, recognizing the income reported, if you meet their minimum requirement for filing. Most states allow the deduction of gaming losses. If you end up paying Indiana tax, that amount can be credited to the amount of tax on your California return.
KEEP RECORDS OF YOUR GAMBLING TRANSACTIONS
In February of 1998, in a case involving an unemployed gambler who failed to file timely returns for two years and kept no records, the Tax Court ruled that the gambler could not deduct unsubstantiated gambling losses. In addition the Tax Court upheld the IRS which had levied additional amounts for failure to file on time and for the accuracy-related negligence penalty. This increased the gambler's tax liability by 43%!
In other words, they threw the book at this gambler, who actually told the court that although he maintained a gambling log for one of the years in question, it was not accurate because it was too time-consuming to make it precise.
If you are collecting W2-Gs and not keeping accurate records, this very well could be in your future.
The ruling in this case is not a big surprise, but what is interesting is that the Tax Court rejected the application of the Cohen rule, which allows an estimation of the amount of a valid deduction on a tax return in the absence of records. The Cohen rule is a possible means of claiming a deduction for losses without records, but as can be seen from this case, these are NOT the circumstances under which the courts will accept an estimation under the Cohen rule.
Further examination of the facts in this case presented below, will give you an idea of what is allowed and what is not.
The general background in this case was not disputed. The taxpayer, during the taxable years in issue, attended the dog and horse racing tracks on a regular and frequent basis. During those years, the taxpayer gambled on a full-time basis and was not otherwise gainfully employed.
At trial, the taxpayer did not introduce any books or records reflecting his gambling winnings and losses, nor remembers whether he maintained books or records reflecting his gambling winnings and losses for the first year in question (1989).
The taxpayer maintained a gambling log for the other year (1992); however, as stated earlier, such log was not considered accurate. On his 1989 and 1992 Federal income returns, the taxpayer identified his occupation as a professional gambler and reported gambling winnings in the amounts of $29,978 and $140,830, respectively.
Of the $140,830 reported as gambling winnings on the 1992 return, $90,830 represent winnings for which Forms W2-G were issued. The remaining $50,000 represent the taxpayer's estimate of his winnings for that year. Although the record is not perfectly clear, it would appear that the gambling winnings reported on the 1989 return represent only winnings for which Forms W2-G were issued.
On Schedule A of his 1989 and 1992 returns, the taxpayer deducted gambling losses in the amount of his reported winnings; i.e. $29,978 and $140,830, respectively.
The taxpayer filed his income tax returns for 1989 and 1992 in April 1994. The IRS subsequently sent the taxpayer a Notice of Deficiency. The IRS determined that there were deficiencies in the taxpayer's Federal income taxes in the amounts of $5,422 and $39,312 for 1989 and 1992, respectively.
Specifically, the IRS determined that the taxpayer failed to substantiate his gambling losses.
Accordingly, the IRS disallowed the gambling loss deductions claimed by the taxpayer on Schedule A of his 1989 and 1992 returns. In the notice of deficiency, the IRS also determined that, for 1989 and 1992, the taxpayer was liable for: (1) additions to tax under section 6651(a)(1) for failure to timely file income tax returns and; (2) accuracy-related penalties under section 6662(a) for negligence.
In its opinion, the court reaffirms the point of law that in income tax matters, the burden of proof is on you. This taxpayer did nothing to prove that he had sustained losses, other than his own testimony.
The following excerpts from the case transcript highlight the logic applied by the court.
Respondent determined that petitioner failed to substantiate deductions that he claimed for gambling losses on his 1989 and 1992 income tax returns.
Petitioner bears the burden of proving error in respondent's determination. Specifically, petitioner bears the burden of establishing that he sustained the gambling losses that he claimed on his 1989 and 1992 income tax returns.
Section 6001 requires taxpayers to keep books and records adequate to substantiate their income and deductions (see sec. 1.6001-1(a), Income Tax Regs.) If the trial record provides sufficient evidence that a taxpayer has incurred a deductible expense, but the taxpayer is unable to adequately substantiate the amount of the deduction to which he or she is otherwise entitled, the Court may, under certain circumstances, estimate the amount of such expense and allow the deduction to that extent.
However, in order for the Court to estimate the amount of an expense, we must have some basis upon which an estimate may be made. Without such a basis, any allowance would amount to unguided largesse.
We recognize that petitioner must have sustained some losses in view of his substantial gambling activity. However, we are reminded of petitioner's testimony that petitioner estimated a portion of the gambling winnings reported on his 1992 return.
Moreover, the gambling winnings that were reported on the 1989 return appear to represent only those winnings for which Forms W2-G were issued. Thus, we have no assurance that petitioner reported all of his gambling winnings.
This uncertainty, together with the complete absence of any documentation or other credible corroborating evidence concerning petitioner's gambling activity, precludes us from estimating petitioner's alleged losses under the rule of Cohan v. Commissioner.
Accordingly, we hold that petitioner has failed to carry his burden of proof. Petitioner is therefore not entitled to deduct any gambling losses for 1989 and 1992.
We hope that this gambler's experience will motivate those of you who are not keeping records, to reconsider the ramifications of your actions.
For more information on gambling tax laws and how they affect you, pick up a copy of Tax Guide for Gamblers by tax consultants Yolanda Smulik Roche, E.A. and Roger C. Roche, E.A. (1-800-TAX-7271.)