b.glazer wrote:
I don't have experience with non-gambling 1099s, haven't won any
drawings etc. yet.
I'll intersperse your post with some related comments. These are
largely anecdotal and far from authoritative. Hopefully they'll
constitute something a little more substantive than total b/s and give
some room for further contemplation.
I do have experience (limited, unfortunately) with poker tournaments,
where I've won at Bellagio, where they issued NO tax papers to me -
it was a 45-person tournament where I split first with someone, and
they said that it is considered a "pool".
I have no direct experience with poker tournaments. But I can see how
the prize pool funding might make a difference. Specifically, if
Bellagio weren't contributing any equity and the pool were 100%
particpant funded, than Bellagio wouldn't have an interest that would
require administering reporting -- their merely functioning as
administrative staff.
At Indiana riverboats, they seem to have a different policy and
issue a W2G if you win over $1200 (and deduct state income tax from
it).
You later cite in this post the recently discussed tax court decision
regarding a active ("professional") tournament player. You might
recall that the judge effective said, "screw the paper used to report
the win ... we all know that casinos are indiscriminate in reporting
various types of win". Point is that, from a federal standpoint,
casino policy is subordinate to the true nature of the transaction
(gambling vs. sweeps/drawing/tournament, etc.), and the IRS's
interpretation thereof. My point is simply that casino "policy" is
ultimately irrelevant in the scheme of things, were the IRS to
question your reporting.
It appears that which way to go is "company policy" and not subject
to IRS rules; a previous post suggested that the IRS did have some
rules about poker tournaments, but I think that is probably not the
case.
As I've indicated, I disagree with this expression of "way to go".
I'll suggest that the technically correct "way to go" is to file in
whatever manner that you feel you can best defend based upon your
knowledge of the subject (incl that gleaned from others), and/or your
preparer's.
However, I think for those with a reasonably strong stomach the way to
go is to file according to what you think represents a mix of what you
think you can reasonably defend and what is most favorable to you
economically.
If your return should be challenged, provided that you can convince a
reviewer that you filed in good faith (as demonstrated by a reasoned
argument supporting your filing, even if rejected) and not with an
apparent intent to fraudulently misrepresent the facts, the worse case
is that you'll face the assessment of additional taxes based upon the
review finding and related interest for deferred payment of those
taxes. More than likely, on first pass, penalties will be assessed
for things such as late payment, negligence, etc. However, my
experience in other matters that have had similar consequence is that
after escalating my rationale 2 or 3 times, the penalties were fully
abated. (As I suggest, a modestly strong stomach and dose of patience
is required, so I would bother with an "aggressive" filing position
for a $100 or $200 savings.)
-- although this idea of a "pool" (which I don't understand, and
about which I didn't want to request an education from someone who
was letting me walk without a W2G) may apply and create a distinction
between some tournaments and others.
Reference to awarded moneys as a "pool", in this respect, again
suggests a prize fund that is entirely player funded. However, that's
little better than a stab in the dark. But I would suggest that would
be a reasonable basis for a reporting distinction.
If so, the same may apply to slot tournaments. I think it has
something to do with how many competitors there are, or how large a
return (600 to 1?) you get on your entry.
While I don't have specific recollection, I believe it may indeed be
the case that a slot tournament for which there is no casino
contribution ("equity") indeed qualifies for similar treatment.
As it turns out, I needed my receipted tournament entry losses to
offset my video poker W2Gs in part that year, so I did a complete
accounting of my gambling, like you're supposed to do all the time.
Quite honestly, I don't report every detail of my gambling when I
have plenty of losses to offset my winnings and then some -- I figure
the IRS has better things to do than audit me when it's not going to
result in any additional tax, and I have better things to do than
take my 3 by 5 cards, and transcribe them into a suitable format for
tax documentation (maybe I should just submit the bottom line and
then hand them a stack of 3 by 5's when I get audited -- haha).
I assume that if I can document that all my winnings are exceeded by
losses in an audit, they wouldn't care if I didn't have a "full
accounting" on my return. For example, if I won $4,000 that year
with a $1 royal and a W2G, and had records documenting $10,000 in
losses, they shouldn't care if my records also show another $4,000 in
winnings that year that didn't generate W2Gs, since it won't get them
any money.
When my wins are greater than my losses, then everything gets
transcribed and submitted.
My comments here may be a little unwieldy, but let me take a run at
this. Let me say that, in practice, the IRS has a much easier time
digesting reporting in which the reported wins matches the aggregate
W-2G's, with itemized losses forced to net things out to your actual
gaming win.
Where practical, that's what I would strive for even if, in principal,
there are other reporting splits that would more accurately represent
the facts. However, the biggest issue with this is when you have
W-2G's that are quite sizable and inflate your adjusted gross income.
This can have the undesirable effect of inflicting deduction phase
out and/or reduction of some tax credits, as well as other unfortunate
consquences, vs. the case where your gambling income was simply
reported net of some losses (e.g. "session reporting", where activity
is reported based upon net session wins or losses, often reducing
reported gross income vs. use of W-2G totals).
However, the minute your reported gambling income is less than your
reported wins, your return becomes to draw scrutiny (though not
necessarily an audit, and a backup schedule may preclude further
review - particularly in the case where discrepancy involved is
somewhat modest. misscraps reports her recent ordeal where the
difference was quite large and ultimately her "session" based filing
was rejected). It may well be a good idea to have an "enrolled agent"
(a preparer with some type of IRS certification) prepare a return that
involves issues that are likely to fall under review. The number of
ones who possess the gaming knowledge from which to file such a return
are few and far between. (Marissa Chien, EA, an occasional
participant here, has been cited by Jean Scott as an excellent resource.)
In short, if you're in the position to show income on your return that
equals or exceeds your total W-2G's, without incurrent undue
consequences as noted, that's certainly the way I would suggest
filing. In any case, adequately prepare to defend your filing in a
way that, ideally, you can present other authoritative statements (and
not simply anecdotal info such as this).
On the other hand...
I'm not sure how vigorous an audit investigator would get if they
thought they could generate additional tax - probably pretty vigorous
-- but the real fear is that not reporting income is not only
subject to penalty and interest, but criminal penalties if you can't
prove it was an unintentional omission -- an important caution for
those who think that the only income they need to report is that on
the W2Gs!!
I don't think "vigorousness" is necessarily a concern (if intended to
mean that they put your filing through the grinder). The concern is
that they will take 30 seconds in applying a very simplistic
interpretation of your activity and hold you to that. You then bear
all the onus in convincing them that an alternate treatment is
appropriate. I'll suggest that their most direct focus is simply
whether you've fairly reported sufficient income. The amount of tax
any revised reporting might generate is only a subordinate concern,
when they subsequently determine whether the amount is sufficient to
warrant the collection effort. (And I have little doubt this is why
my inclusion of modest tournament income with gaming income,
offsetting additional losses, has slipped by their radar -- the
difference in reported income wasn't sufficient to trigger review, but
was noticed.)
As I've indicated, I think, in certain circumstances, an "aggressive"
filing stance can be warranted -- provided it can be well defended,
even if not ultimately successfully. Penalties should be relatively
unlikely.
However, when the potential increase in tax is quite large, should
your filing position be rejected ... no matter how strong your
rationale be for your stance, the simple fact that a large additional
tax assessment resulted is almost certainly going to subject you to a
sizable underreporting penalty, as well as potential negligence or
fraud penalties. Again, because of the penalties at risk, advising a
qualified and experience gambling tax advisor is very prudent before
filing in this circumstance.
The simple costs of such consultations again give cause for weighing
the probable benefits against the guaranteed costs.
Again, I'm taking my risk based on the concept that the IRS wouldn't
audit me, or wouldn't audit that aspect of my return, if there's no
tax to be gained, but I'm not taking it when I owe money, as that's
when I think my submission needs to be very complete. If I got
audited for something else, or randomly, and they also looked at my
gambling and decided I wasn't reporting all my income there, even if
I didn't owe tax, they could come after me with criminal charges.
Could - don't know if that means "would".
There's another element at work here. Almost all penalties, and
definitely interest, is calculated against underpayment of taxes. In
that case, the whole issue is moot and you simply file in the most
expedient manner that is friendliest to cursory examination by computer.
(Well, I should qualify that. I might see where if a reporting method
came under question for a future year, it might be modestly helpful if
prior year returns were filed in a consistent manner ... rather than
there being an appearance that you revised your reporting because it
was merely tax advantageou -- something that would undermine
conviction in your reasoning for the reporting. However, expect that
this is likely a very, very minor consideration that might come into
play.)
Concerning an audit: If you've been audited because the reporting of
a particular line item triggered questions, it's my understanding that
generally they can't use a finding that results in adjustment of that
line item as cause to then place your entire return under a
microscope. (I'll welcome correction on that, if appropriate.)
The prospect of criminal charges is an extreme case. I have to think
that this would apply only when there is gross evidence of fraud.
(Were it otherwise, I can name rather a large number of corporate tax
executives that would be imprisoned simply because of adopting an
"aggressive" reporting stance 
Bear in mind, when I refer to "aggressive" reporting, I'm talking
about reporting that is well within the general letter of the code.
The simple fact is that the code doesn't explicitly lay out the
precise tax treatment of many transactions and there is a broad
latitude of positions, all of which can be reasonably deemed to be in
compliance. As an agent of the shareholder's, it's the responsibity
of a corporate officer to act in their best interests, within the law.
- Harry