I was recently audited and was told 1099s, even if they come because you won
a drawing where you earned more entries by gambling, have to be reported as
separate Misc-1099s, which cannot be offset by gambling losses. This goes on
a different line than W2G/gambling winnings.
The IRS requirements for gambling are a gray area. If you are audited and
claim anything other than total of W2gs for Gambling Income and 1099-Misc. as
additional miscellaneous income, you probably will have to go to the appeals
process - where you may or may not win.
On the other hand, many people do lump W2Gs/other gambling
income/gambling-related-1099s together into Gambling Income, and offset this with gambling
losses. And most are never audited.
If the amount of your Gambling Income is low, you may never be audited. If
your gambling income is higher, so is the chance of being audited, and if
your W2G total is different from your listed Gambling Income, you are also more
likely to be audited.
Should you be audited and end up agreeing with IRS or losing an appeals, you
will have to pay interest on the extra taxes you owe, and this can add up.
You may possibly also be due to pay penalties.
We didn't receive a letter audit for 2004 until April or so 2006. As of
Jan. 2007 we have finally settled with the IRS after several mishaps including
them pretty much ignoring or not receiving replies. We ended up agreeing with
the IRS, rather than go through a even more lengthy appeals process which we
may or may not have won, and possibly hiring a tax expert to help at rates
of $150-250 or more per hour. In the end we paid $4500 more in taxes and
about $500 more in interest! As you can see, interest adds up. We had used
Gambling Session methods for our taxes, rather than W2Gs, which resulted in a
lower total for Gambling Income than W2Gs. We also had a very large amount of
W2Gs. We also lumped gambling-related-1099-Misc. with W2Gs.
While it may seem that $5000 more in taxes is a lot to pay, if we had hired
someone to help prepare an appeals, that could have cost quite a bit of that
amount. Also we had no way of knowing whether in the end we would have lost
or not, and thus interest would have continued to mount. And the stress
level was already very high.
As a result of this, I am now gambling far far less, and hoping to avoid
W2Gs and tax problems in the future.
As inflation has pushed more people into getting W2Gs, and as gambling has
spread, it is more and more clear that tax laws need to be rewritten.
Unfortunately there doesn't seem to be anyone really advocating for this for
gamblers. You'd think casinos would be pushing for changes, but so far I don't see
any evidence of this.
Meanwhile more average gamblers may find themselves audited by an IRS system
that provides pat answers and doesn't really understand gambling activities.
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