Do not include your win/loss statements or W2Gs with your return (unless the
W2G shows tax being withheld - if it does, then include that one W2G to
support the withheld taxes). These will only confuse matters.
If you feel you need some sort of explanation, attach a short note. For
example, since I had a large amount of W2s (over $100,000) and much larger
losses (losses are deductible only up to amount of wins by the way on your
itemized list of deductions) -- I added a little note saying something like "My
gambling losses exceeded the $100,000 listed on line 25 of schedule A - but since
gambling losses can only be deducted up to the amount of gambling income,
only $100,000 was listed"
Such an explanation probably isn't even necessary, but since my wins and
losses were so high, I wanted to mention it. Personal preference here.
Some people may want to include a list of all their W2Gs (especially those
filing as professional gamblers). But this probably is not necessary for the
average casual gambler (even one with a lot of W2Gs).
The people going over the returns are not necessarily the brightest or most
educated on gambling, so if you show a bunch of win/loss statements, they
could decide that your "gambling income" is actually coin out rather than W2Gs
plus other actual winning amounts, so you could be hit up with a whopping
amount of coin in. Even during an audit, you don't want to bring in win/loss
statements unless absolutely necessary. Also they are notoriously inaccurate.
Everyone getting W2Gs should keep a Contemporary Gaming Diary showing
amounts of $ put in, $ taken out of a machine, machine numbers if possible, casino
name, time in and time out, and probably bonus cash/cashback/free play
(amounts actually received after playing the "free play" would be income). This is
what the IRS wants as support of your losses (and wins). You may also want
to note down the names of anyone who is playing with you (witnesses), keep
markers, and keep any other supporting documentation of your gambling.
Again - do not send this in with your tax return!
And if you ever are audited, always keep a copy of any returns, letters,
gaming diary, or other information you send to the IRS - they lose stuff!!
I've only been audited once so far (knock on wood), despite large amounts of
W2Gs and large losses (I've been a loser every year despite a lot of
so-called-positive VP play!) That was when I tried to use the "session" method of
reporting income versus losses (as outlined in Jean Scott & Marissa Chien's
first book 'Tax Help for the Frugal Gambler' - this may have been revised in
their latest book which has been revised - I haven't read it). I had a lot of
losses even during days when I won W2Gs. As a result, my "income" using
winning sessions was lower than the total of W2Gs.
Thus I received a letter audit, and tried in several letters to explain
"winning sessions" versus "losing sessions" using Rev. Procedure 77-29 and other
sources as justification. I found my replies were lost and/or ignored, and
the dunning letters continued. I contacted a IRS Taxpayer Advocate for
assistance, as well as made several phone calls to the IRS, and was repeatedly told
"you can't do that." And that you must report all W2Gs to get your total
"Gambling Income". (surprisingly they didn't seem concerned with money that
was won outside of W2Gs). The only way to fight this after 6 months of stress
was to go further along in the process by getting into the "Appeals" process.
There was no firm way to know if my Appeal would be found in my favor, if I
might end up in Tax Court, or where this would end or how long it would take.
I also found it difficult to find a tax professional knowledgeable in
gambling tax law willing to represent me. Since the penalties and interest for
underpaid tax were continuing to accrue, and the stress was slowly killing me,
I decided to submit an amended return and do it the "IRS way," even though
perhaps the appeals court would rule in my favor (eventually) that sessions
make sense.
I have submitted all further returns the IRS standard way, listing W2Gs
(plus other winning sessions if any) as Gambling Income.
Apparently as long as your Gambling Income is as great or greater than W2G
totals, you are probably not going to be audited on this aspect (assuming you
correctly put Gambling Losses on Sch. B that are no larger than Gambling
Income).
I personally know of only 1 person who was audited using "winning sessions"
who did prevail, after undergoing the appeals process (he was almost at the
point of reaching the Tax Court when he prevailed). Jean Scott has said that
many people have used the session method, but in my posts and questions, I
personally did not find anyone except this one guy who has done this
successfully in recent years. It may be that people dealing directly with the Las
Vegas tax office may find more knowledgeable people than in other IRS offices,
but even though I filed from Vegas, I ended up dealing with the Fresno office!
(In previous years there may have been fewer audits, but do to
computerization, the IRS is now able to check on exactly how many W2Gs you have and
apparently automatically does a crosscheck to see if your Gambling Income is at
least equal to the W2G total. Computer crosschecking by the IRS means that any
1099s, W2s, W2Gs, and so on are all tabulated and checked by the IRS to catch
errors).
The general advice I've seen on dealing with the IRS is to provide only the
information they ask of you, file as honestly as possible, and if you are
audited answer questions honestly but do not provide extra information not asked
of you.
In my opinion anyone who wants to try using the "session method" of
wins/losses when filing as an individual or who wants to file as a Professional
Gambler using Sch. C should contact a tax professional such as Marissa Chien from
the get-go with help preparing their return. Tax professionals are not
cheap, and help can cost $150 or more an hour, so be aware that if you need to go
the appeals route and hire a professional to help you, you might end up
spending more for their aid than the extra costs of "doing it the IRS way." Of
course, if the first audit or appeals case were found in your favor, then in
further years you might be able to avoid the problem by attaching copies of
your rulings.
Filing as a Professional Gambler sounds good on the face of it, but there
are a number of hurdles, such as proving that you really want to make a living
from it, that it isn't just a hobby, that you have a profit in 3 of 5 years,
that you play enough (IRS seems to want a 40-hour work week for a business
versus a hobby), that you have proper records, etc. Of course a number of
people do file this way and have succeeded, but some have not.
I hope that the above helps. April 15 approaches....and thank goodness I've
already sent in this year's return!
···
---------------------------------------
By the way, don't forget, if you paid State Tax to Louisiana (or other
states perhaps) on W2Gs, you can file as a non-resident and collect most of your
money back.
--------------------------------------
Also you should note, if you file Electronically, the best way is one of the
tax programs such as Turbo Tax or H&R Block's Tax Cut (or using a tax
professional), but you will need to fill out all the information on ALL your W2Gs,
and you can't add any extra notes or attachments. Electronic filing may or
may not lower the chance of being audited.
-------------------------------------
The U.S. tax system for gamblers is totally unfair, because putting Gambling
Income onto Line 21 of your 1040 pushes up your Adjusted Gross Income, even
if you are an overall loser (like me!!!). As a result, the amount of your
deductions and exemptions may be reduced (though thankfully Congress is phasing
out this disastrous dopiness). Higher Adjusted Gross Income (AGI) can also
have other bad consequences. For example, Medicare Cost is now based on AGI
rather than a flat amount. As a result, my husband will have to pay a lot
extra for his Medicare this year (and last) (and maybe next year).
And of course, you can't list Gambling Losses unless you Itemize Deductions
- so that means if your losses are big, you lose any advantages of a Standard
Deduction (because you will want to itemize at that point).
As a result, having Gambling Income may have an unexpected consequence of
increasing your TAXES .... even if you are actually a LOSER! You can talk
about positive VP all you want, but if your taxes get increased because you win
(or even if you don't) that should be added into your overall evaluation of EV
and profit!
Keeping a Gaming Diary and accurate records is also time-consuming and a
pain in the neck! As is the added complexity of doing the taxes. Not to
mention the extra work if you have to recover taxes taken away from you by
Louisiana or another state!
Many people also will find their AGI increases will result in increased
STATE TAXES! yuck! Fortunately I live in Nevada as my primary residence which
has no state tax!
Also the Gambling Tax laws for the IRS were set up many many years ago, when
$1200 (the level of slot win that triggers a W2G) was a LOT of money. With
inflation, that now hits a lot more gamblers. Also gambling is everywhere
now, and everyone is gambling, so more and more people are subject to having to
deal with W2Gs and Gambling Income. The people who wrote the tax laws never
envisioned the wide spread of gaming or the hyper inflation scenario. Nor
did they envision the many areas of gambling which are totally ignored by the
tax code, such as Free Play, CashBack, Comps, Tournaments, Bonus coupons,
Drawings of prizes based on amount you play, etc. etc! Gamblers just have to do
their best to try to figure out what is taxable and what isn't and what to
include in income or not. Some Tax Court cases (and most knowledgeable
people) seem to indicate comps are not taxable. But no one knows about Cashback,
which could be looked on as a sort of non-taxable "rebate" or just as
"winnings." Personally I assume any sort of cash I get needs to be recorded in my
Gambling Diary and included in my computations of Gambling Income/Loss. But
it is anyone's guess!
---------------------------------------------
So good luck to all of you in your time of woe (tax filing time that is!)
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