1f. Re: IRS news for the Casual Gambler
Date: Mon Jan 26, 2009 5:59 am ((PST))
I might be in the minority here, but I personally DO want to report
more wins if that means reducing my chances of an audit. If I have a
session (and let's assume for simplicity that this is the only gambling
I do throughout the year) where I get $10K in w2-gs but only walk away
with a $500 profit, I am inclined to count this as a $10K win and a
$9500 loss instead of just counting it as a $500 win. Even if it is
correct to just count this as a $500 win, odds are you are going to be
called in to explain why your gambling winnings don't appear to include
all of the $10K that they have on w2-gs. If I lived in a state that
taxed gross gambling winnings, I would be more inclined to do this
differently, but thankfully that is not the case.
Avoiding audits is certainly a legitimate reason for over-reporting income and under-reporting deductions -- but it's pretty expensive.
I becomes a question of degree, I guess, and perhaps a question of "approach".
If you really want to completely avoid an audit, report all income on W2's, W2G's, and anything else you can think of, and don't take any deductions or losses, pay the most tax you can, and the IRS is pretty unlikely to contact you for an audit. I can virtually promise you that the IRS will never contact you asking if you took all the deductions you should have, or whether you missed this or that one -- that's not their job.
There is, of course, a great chance they'll "contact you" if you take deductions you shouldn't have taken, and if you fail to report income, then you're definitely on the line for some serious discussions 
One way to compromise this is to report the "sesssion" you described as a $500 profit, with a note attached to your return indicating that this session lasted from 8am to 6pm, and included the W2G win dated nn/nn/nn, and that you had lost $xxx prior to the W2G event and another $xxx afterwards.
I'm not sure how you would "divide" the session with a $500 profit into a $10,000 win and a $9,500 loss, except perhaps to define one session as the loss prior to the W2G, another as the loss after the W2G, and the W2G itself as a single intervening session.
The point is, you are obliged to report winnings, whether they generate a W2G or not, and you are allowed to take losses up to the amount of winnings -- and HOW you report that on the federal return MAY impact how the winnings are treated in some states. Reporting a $500 win in your example will result in $500 taxable income in some states, while reporting a $10,000 win and a $9,500 loss (or combination of losses) will result in $10,000 taxable income in some states, where losses are not allowed to offset gambling winnings.
That can add up to serious money, and I think the real impact of any federal reporting rules ends up at the state level for that reason. Not everyone lives in a state with a "gross income tax" against which many deductions are not allowed, and those who don't need not worry so much. At the federal level, in the end, it's your net win that's taxable, a net loss is worthless to you, and credible record-keeping will be your best defense no matter how you report it.
I've had an audit, and they aren't as unpleasant as most people think, if you have your ducks in a row and your documentation in order, and are prepared to take it up a level from the initial people you meet with, who usually have little power to negotiate or to make a decision that favors the taxpayer. Most of us, of course, are not interested in pursuing our cases in tax court, unless we have lots of money for lawyers, lots of money at stake, and a pretty good case.
--BG
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