In my recent tax audit the IRS people I spoke with said 100% that slot
tournaments (for which you dont pay a fee) don't qualify as gambling winnings -
but must be reported separately as 1099-Misc - Misc. income for which you cannot
deduct gambling losses against.
One person suggested I try to get the casinos to change what I received as a
1099 Misc into a W2G. When I contacted several casinos I found it nearly
impossible to contact anyone who knew anything about when one is issued versuses
the other, or more importantly, why. The answer seemed to be "it is our
casino policy" - or "probably because it is an IRS rule" (a rule they could not
quote to me!).
Some casinos have issued W2Gs to winners of tournaments, if some people paid
entry fees in the tournament - even if not everyone did! For example, a
blackjack tournament where some people paid a rebuy fee to play a 2nd time.
Everyone (whether they paid or not) got a W2G, not a 1099.
Meanwhile, in drawings or tournaments, where you got more entries due to
playing more -- i.e., the more you gambled, the more likely you were to win, the
casinos normally issue 1099-Misc. I tried to make the case that this was
"gambling income" directly related to gambling, and the more I gambled the more
likely I would have been to win.
But the IRS people I spoke with adamantly said that no, if it was a
1099-Misc., it was not gambling income, no matter what.
It seemed that the only way to argue would have been for us to Appeal.
After 6 months, and numerous problems (such as IRS ignoring or losing our
responses), we decided to give up and pay the taxes, even though we felt this was
incorrect. We had plenty of documentation on wins/losses - including
contemporary gambling diary, but still it seemed to us an uphill battle. We also
became concerned that with the closed-minded people we were dealing with, there
was no way to determine what the final result might be during the appeals
process. What if they continued to lose our responses? What if they began
inquiring about comps?
And of course, while we appealed, interest would continue to mount until a
final verdict.
After the stress, we just settled.
So if you do get 1099s and get audited, you could very well run into the
same mindset from IRS personnel we did. At that point, you probably would have
to go the appeals route to have 1099s considered as Gambling Income, no
matter what source.
This is not to say that many people do just lump gambling-related 1099s in
with W2gs, list them on the return, and deduct losses against them. They do.
And most are never audited.
If your Gambling Income total is less than your W2G/1099 total you are far
more likely to be audited. At this point you may end up either having to
agree with the IRS or fight up to the appeals or Tax Court level.
Also, the more W2G income you have, the more likely you are to be audited.
We had over $200,000 in reported W2Gs. Interestingly, we actually had
received more W2Gs than ever were reported to the IRS.
Finally, we were net losers for the year 2004 where we were audited, but due
to the large number of W2Gs and 1099s pushing up our Adjusted Gross Income,
we lost our exemptions and had a our deductions reduced, causing us to end up
owing over $4000 in extra taxes. Taxes paid for losing money!!!
Totally unfair you are thinking -- yep -- but that is the way the tax code
is written. Fortunately we live in Las Vegas, NV, so don't have to worry
about state income taxes.
We've also learned that our adjusted gross income is now used to determine
Medicare cost per month. So we will have to pay extra for Medicare this year
and next!
As a result of all this, we have vastly cut back on our gambling.
Anyone getting a lot of W2Gs (or perhaps anyone getting any!) should
definitely keep an accurate gambling diary, buy Jean Scott's Tax book, and play
attention to their taxes, to make sure they are deducting enough to cover taxes.
If audited, you will have to decide whether to give in or fight through the
appeals process for subjects such as using "gaming session wins/losses", 1099s
for Gambling Income, and so on. Unfortunately gambling IRS laws were
written many years ago, before so many people got W2Gs, before gambling was so
widespread, before inflation and changes in the tax code. The many grey areas
of gambling are not covered by tax law or even tax court cases. The major
weapon you have is keeping excellent records and being willing to suffer through
the stress and hassle of any audits.
Whenever sending documents to the IRS, by the way, make sure you keep
copies!! As I said, the IRS lost some responses (and ignored some stuff too). Be
vigilent!
Best regards!
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