Some of you may remember we used "session wins/losses" a few years ago, such
as where you got a W2G for $4000 but actually came home with $2000, it was
listed as a "win" of $2000.....only to end up with letter audits from the IRS
for under-reporting "wins.' (Since our W2G total was less than the total of
all session wins -- in fact we were net losers for the year). We spent over 6
months of back and forth with the IRS that included the IRS losing and
ignoring replies, totally ignoring any responses and explanations, and help from a
Taxpayer Audit (who apparently checked with IRS auditors and said basically,
"you can't do it that way, you must report all W2Gs as wins"). So in the
end we gave in to the IRS way of doing things.
We could have gone to further appeals, right up to the Tax court, but with
the stress of seeing massive penalties possible, not knowing what the appeals
would do, and being unable to find any Tax Professional with enough knowledge
of gambling who was willing to represent us in the appeal process, we just
felt it was better to cave and pay the difference in tax.
For those using the Session method, who may want to go to the appeal route,
be aware that if you can find a Tax Pro to help you, they can charge $100-200
or more per hour for assistance. Figuring this into the equation, it might
be cheaper to just pay the extra taxes than to have to hire a professional
(assuming you have more luck than we did in finding one who was willing to
represent your point of view).
Also there is no way to know how long the appeal process would take, or if
you would be successful. No way to know what sort of gambling gray areas
might pop up in an appeal (such as reporting of bounceback cash, free play, etc
-- note, we always included that, but some people don't). Also - we had kept
(and do) contemporary gaming diaries of all play - do you? (you should)
Of course, on the other hand, that recent Tax case seems to support using
some sort of "sessions." You definitely should site it if you are audited.
But that case was an opinion only, not an actual precendent, and might not
be enough to help you. Also audits depend on which auditor is doing them.
You might do better than we did with an auditor in Las Vegas (we were forced to
deal with Fresno auditors and FresnoTaxpayer auditor), or with an in-person
audit verses a letter audit.
Some years ago, computers did not accurately check all W2Gs against returns,
and people were able to use "sessions", but in recent years, we've heard
from other people like ourselves who used "sessions" and ran into IRS letter
audits when automated comparisons turned up "descrepancies" between "Gambling
Income" and W2G totals, triggering automatic letter audits. I do know of one
person who successfully appealed, but I also know of other people, who like us,
gave up when faced with trying to explain "sessions" to IRS personnel who
had no real experience with gambling and kept saying "you can't do that" and
"you owe penalites," etc. It can be daunting to try to prevail in an audit
when things drag on for months and you find your well-written (and reasoned)
responses are totally ignored!
Admittedly, doing it the IRS way of making sure your "Gambling Income"
(wins) is at least as large as W2Gs is annoying, unfair, and costly, especially
when you discover your "Adjusted Gross Income" is unfairly pushed up, which ends
up decreasing your exemption amounts and deductions -- all when you are
actually a net loser for the year! (at least in our case). On the other hand,
we find it less stressful than going through the IRS audit process, and
possibly less costly than having to hire a professional to help with an appeal
process that could easily end up against us anyway in the end.
Please note, all the above refers only to people filing normal 1040s with
gambling income, not to anyone filing Schedule C as a professional gambler.
For those people, "sessions" might be more viable. However, filing as a
professional has its own set of problems.
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