As some of you know we filed our 2004 return using "Winning Sessions" for a
total for gambling income and "losing sessions" for losses. Our income was
less than W2G totals so we received a letter audit.
Our first reply was basically ignored, our second was lost. We contacted the
Taxpayer Advocate office to help get our response processed -- they came
back saying essentially:
1. You must list all W2Gs as income. You can't use Sessions. Revenue
Procedure 77-29 (which details how to do a gaming diary among other things) is
used to produce a diary to provide proof of losses - but not of "wins" (despite
the fact that it talks about Gambling Gains) - and we were misinterpreting
77-29 to imply using sessions was okay.
2. All 1099-Misc must go on a separate "other income" line and you cannot
deduct losses against them -- even if they came from gambling-related payouts
such as drawings in which you gambled more to get more entries - and thus the
more you gambled the more likely you were to win.
After over 6 months of stress we've decided to cave into the IRS and just
file their way and have filed an Amended return. For all we know we may still
hear back from them wanting more information, but hopefully this will end
our problem and limit any interest and penalties.
We could appeal - but there is no way to say if we would prevail or not.
The appeal process is long and there is no way to know how they would interpret
the tax code. We have some good points in our favor as to our original way
of reporting, but they could just say we are misinterpreting the code.
Meanwhile we'd have more stress and uncertainty. Hiring a tax professional may or
not help - and would probably cost $150-250 an hour or more -- soon costing
as much as half or more of the extra tax.
For individuals (not filing Sch C as "professional gamblers"):
If your Gambling Income is less than the total of your W2Gs you could be
audited. Once audited you will run into numerous low-level employees and brick
walls. To prove losses whether you use W2G totals, Session totals, or some
other figure for Gambling income: be prepared to have a contemporary
Gambling Diary with information including - where you gambled, date, time, machine
number, amount put in, amount out, names of people with you, and other
information (see IRS publications for information on this). Get win/loss statements
as well.
If you want to use Session totals instead of W2G totals, be prepared that
you probably will have to go through the appeals process to have a chance to
prove this. Be prepared for months of delay and you may have to provide copies
of your Gaming Diary at some point, as well as other documentation. Be
prepared to argue your case and possibly to hire a tax professional with
familiarity in this area - provided you can find one.
If you have 1099-Misc from gambling, if you lump them in with W2Gs you could
be more likely to be audited. They might never be noticed, or they might
be. If you are audited you will have to fight to prove they are from gambling,
and you probably will have to go through the appeals process to try to prove
your case.
It is interesting to note, that from all the private and posted responses I
received, only 1 person appeared to have definitely gone through the audit
process and then in the appeals process was allowed to use Sessions (they did
not go all the way to tax court). Strangely, the Taxpayer Advocate could not
find information about their case, despite the fact that I provided that case
number -- so I don't know what to make of that. Several other VP people had
been audited and allowed to use Sessions by specific auditors, but many
others had not been allowed to use Sessions. Many people caved in at the point
of auditing, as we have now done, and just gone with W2G totals.
I could not (nor could the Taxpayer Advocate office) find any specific tax
court cases, appeal cases, rulings, IRS regulations, etc, which specifically
allowed Sessions to be used or proved anything (one way or the other)
regarding Sessions or how to report 1099-Misc. from gambling -- in the absence of
that the IRS basically interprets the tax code as saying Gambling Income = W2Gs
and all 1099s-Misc, from whatever source, are "other income." Until someone
actually goes all the way through the appeals court and possibly Tax Court
on these issues, there appears to be no basis for an average person to say,
hey, my interpretation is correct versus the "usual" IRS interpretation.
If you want to use Sessions, you might be best off to contact Marissa Chien
or another tax professional with experience in this area who believes Sessions
can be used, and hire them to prepare your initial tax return. Even so,
you easily could be audited and may need go through the appeals process (perhaps
all the way to Tax Court). Note: I don't know whether Marissa or any tax
professional actually has helped a gambler prevail over the IRS regarding
sessions. Marissa did not want to take my case and provided little helpful
information. When I contacted a company called R.B.S. who had published a book
entitled "The Tax Guide for Gamblers" which discusses Sessions and provides a
tax service, I was told they cannot be used.
Generally speaking, it seems that with computer matching of returns to W2Gs,
more people are being audited for such discrepancies nowadays than a few
years ago. More letter audits are being done (versus seeing an actual human who
you can try to discuss things with). So my impression is that people were
more likely to be able to use Sessions a few years ago than now without audits
or with audits coming out in their favor.
Logic says to me that if I go into a casino for half an hour and win $500,
that is income, regardless of whether I got a W2G or not. If I play for half
an hour and got a W2G for $1200 but end up with only $500, logic says I won
$500 and have $500 in income -- not $1200. However, logic does not seem to
sway the IRS on this issue. Perhaps the appeals or Tax Court could be swayed
by logic -- but without someone going through that process, there is no way to
know. And for me, there is too much stress and uncertainty for me to be
willing to continue fighting, even though I believe in the end I might prevail.
Certainly anyone considering how to report Gambling Income as an individual
needs to realize that if you use Sessions and report Gambling Income as less
than the total of W2Gs you could very well be audited. Attaching a list of
W2Gs with your return and an explanation probably or possibly won't stop an
audit, as Jean Scott and Marissa Chien advise in their book "Tax Help for the
Frugal Gambler." It's a good idea to do so, if you are going that route --
but it probably won't stop an audit. Once you get a paper audit, you are in
for writing various responses or phoning to try to talk to someone
knowledgeable. I found it hard/impossible to find anyone knowledgeable in the area of
gambling, even when asking to speak to a supervisor. While you might have a
good experience and run into a supervisor or auditor who would quickly agree
that Sessions can be used because of Procedure 77-29, you are probably more
likely to experience something like we did, where at every turn the IRS people
you talk to say "you can't do it that way - you must list all W2Gs as income."
So in my opinion, if you are going to use Sessions and happen to have
Winning Sessions and thus Gambling Income total less than W2Gs - you should plan on
having to go through the long appeals process to try to justify this method.
Regarding Sch. C filers:
In the process of researching this I found that Video Poker who are using
Sch. C often are audited, but seem to generally be able to justify their
returns. In Tax Court cases, Professional Gamblers were not allowed to Gambling
Losses more than Gains. Sch. C filers have various problems and generally must
prove they have a profit in 3 out of 5 years and that they are working long
hours at their profession. Part-time gamblers will have a hard time proving
they are "businesses." C filers also have to make sure they can prove they
are a business done for profit and not a hobby, or they could end up having
gambling income be on Sch. C while gambling losses go on Sch. A. If you want
to file as Sch. C you probably should go to a tax professional before filing
to make sure you don't run into problems if you are audited (which is pretty
likely for professional gamblers).
I would like to thank all the people who responded to my posts. Also I
would especially like to thank Judy Slatin and Jean Scott who went out of their
way to help me write responses to the IRS letter audits. The unfortunate
thing is that after spending considerable time crafting well-worded responses,
the IRS either ignored them, lost them, or just responded with seemingly stock
answers/replies. At every turn it seemed I came up against brick walls and
delays, all of which made the whole auditing process very long and stressful.
A number of other people on the list have written me privately about
encountering similar problems and audits when they used Session totals, and many of
them have or are in the process of caving into the IRS as we have. The gray
areas of the current gambling regulations are confusing and not helpful to
taxpayers.
I do not currently know if there is any way to ask the IRS for a ruling on
subjects such as Sessions and 1099-Misc from gambling outside of the
auditing/appeal process. Obviously something needs to be done for the sake of
thousands and thousands of gamblers such as ourselves. Gambling has changed
considerably from the time when the IRS regulations were written, and inflation has
made the $1200 W2G commonplace for many gamblers.
Thank you for your patience. I hope this will be helpful to those of you
reporting gambling winnings or facing audits.
One other thing: when considering "positive games" and the profit
possibilities of gambling, one should consider the following "costs" as well:
Increased taxes due to increased adjusted gross income (even if you are
a net loser as we are). Increased taxes due to reduction of your exemptions
and deductions if your adjusted gross income gets high enough. You may also
owe State tax on gambling, depending on where you live.
If you are retired and on Medicare - in 2006 and thereafter, Medicare
costs will be based on your Adjusted Gross Income -- and your Medicare costs
will go up if your AGI reaches certain levels (I believe it is around $160,000
for a married couple). The 2006 cost will be based on your income in 2004
(generally speaking). 2007 based on 2006 income etc.
Even though we are net losers for 2004, our large numbers of W2Gs are
probably going to end up costing us well over $5000 because of taxes and Medicare
increases. As a result from now on I will be gambling far far less to keep my
AGI down. It is bad enough to lose money at gambling, but it is worse to
have to pay for the privilege of losing by paying increased taxes! It just
doesn't make sense.
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From my experience, in my opinion gamblers should be aware of the following:
