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Gambling Winnings


Yardley CPA

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I met with a client today who had very good luck at the casino slot machine and won in excess of $100,000. They contacted me in November 2010, the day after the winnings, as the casino did not withhold any tax. I calculated the proper estimated payment and provided them with the coupon to send in the estimate. While meeting with them today, I asked if they made the estimated payment and they told me they had not. They informed me that after we spoke in November, they had enough gambling losses to offset the gambling winnings. I informed them that if we were to show gambling winnings of $100,000+ and gambling losses of the same amount, someone from the IRS may knock at their door. I told them that the IRS would expect proof of the loss, such as a statement from the casinos they gamble at. I know that, as a member of the casino preffered program, you are given a casino card that you can input into the slot machine or hand to the dealer and they are able to track (within some approximate reason) your losses as well as your winnings. They tell me that is not a problem and they have enough losses to offset the winnings.

My question is this, as their preparer am I required to see the statements that reflect the losses...or can I simply take their word? I know what I feel is appropriate, and I would prefer to actually see proof of their losses...but am I required to see the proof?

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Gambling winnings go on the 1040. Gambling losses go on the sch A.

There was a very interesting case that we discussed on this board last year that had to do with netting the winnings and losses. It basically came down to this reasoning. How much did you get when you cashed in at the end of your gambling session. If you were a net winner, that was the amount you had to claim on the front of the 1040. If you lost, that was the amount to go on the sch A. No mixing gambling sessions to net one day's winning against a different day's losses.

Your clients are going down a very risky path. Guide them well.

Tom

Lodi, cA

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Tom, that wasn't the gist of the case. The netting for each 'session' determined whether there was a net win or loss for the day. I would guess that this couple has more 'wins' than they are claiming. You can still claim another session's losses against the wins, but a gambling log is required to verify wins vs. losses.

Again, good luck on them having any verification.

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Tom, that wasn't the gist of the case. The netting for each 'session' determined whether there was a net win or loss for the day. I would guess that this couple has more 'wins' than they are claiming. You can still claim another session's losses against the wins, but a gambling log is required to verify wins vs. losses.

Again, good luck on them having any verification.

Are you sure. I thought the judge clearly stated that each session, (and I think he said when you cash in your chips, that was a session) was an individual event and if it was a win it went to the 1040 and the losses went to the sch A.

KC, you were in that discussion. Do you remember the case? I would like to read that thread again.

Tom

Lodi, CA

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I met with a client today who had very good luck at the casino slot machine and won in excess of $100,000. They contacted me in November 2010, the day after the winnings, as the casino did not withhold any tax. I calculated the proper estimated payment and provided them with the coupon to send in the estimate. While meeting with them today, I asked if they made the estimated payment and they told me they had not. They informed me that after we spoke in November, they had enough gambling losses to offset the gambling winnings. I informed them that if we were to show gambling winnings of $100,000+ and gambling losses of the same amount, someone from the IRS may knock at their door. I told them that the IRS would expect proof of the loss, such as a statement from the casinos they gamble at. I know that, as a member of the casino preffered program, you are given a casino card that you can input into the slot machine or hand to the dealer and they are able to track (within some approximate reason) your losses as well as your winnings. They tell me that is not a problem and they have enough losses to offset the winnings.

My question is this, as their preparer am I required to see the statements that reflect the losses...or can I simply take their word? I know what I feel is appropriate, and I would prefer to actually see proof of their losses...but am I required to see the proof?

First, to your question about documentation, I don't think you have to see the statements, but I would require them to sign a statement to you that they do, in fact, have support for the losses they are claiming.

Proof of losses from casinos is getting easier with the systems the casinos use these days, but it still requires the t/p to support how much, and when. It is often the case that after a big win a client keeps better records because they know they will need them. Ask to see them if that is what you need to be comfortable, just keep in mind that a big win commonly does lead to big losses after that, as they try to 'do it again'. Human nature being what it is.

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Are you sure. I thought the judge clearly stated that each session, (and I think he said when you cash in your chips, that was a session) was an individual event and if it was a win it went to the 1040 and the losses went to the sch A.

KC, you were in that discussion. Do you remember the case? I would like to read that thread again.

Tom

Lodi, CA

Tom, that was exactly what I was getting at. Each day's wins go on the 1040, & the losses on the Sch A. I think we were misunderstanding each other.

There were several definitions of a 'session'. For example, if you go to another casino, even if not cashing out, it's another session. A different game, like going from slots to craps, is a session. etc, etc.

The coin-in, coin-out statements, which is what I've seen from casinos, aren't proof. The gambler's log is what is accepted.

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Client' answer to the question from the IRS auditor when asked, "do you have a contemporaneous daily log of your gambling activities, and when did you prepare it?"

"well,I never kept a daily log until I got that big win. But then I started keeping a log all the way back to the beginning of the year. So yeah, it was contemporaneous after I started keeping it."

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Tax Preparers are not auditors of tax returns prepared; that is the job of the IRS. Only when there is GOOD reason to believe the figures are incorrect might further documention be asked for. In this case, most gamblers are big losers over the year (yearly session summary) so you figure it out CPA !

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"I informed them that if we were to show gambling winnings of $100,000+ and gambling losses of the same amount, someone from the IRS may knock at their door. I told them that the IRS would expect proof of the loss, such as a statement from the casinos they gamble at. I know that, as a member of the casino preffered program, you are given a casino card that you can input into the slot machine or hand to the dealer and they are able to track (within some approximate reason) your losses as well as your winnings. They tell me that is not a problem and they have enough losses to offset the winnings."

if they are claiming they have a casino statement of a yearly net win/loss, i would want to see it. it is better than nothing. nobody has a daily win/loss record to substantiate "gambling losses to extent of winnings". also, i don't understand why there was no fed/state withholding by the casino unless the gambler claimed, under oath, no expected tax liability (i don't know if that is even possible)...that makes me suspect.

i would wish them well and shown the door to become another preparer's potential legal problem.

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Ladies and gentlemen, please allow me to introduce myself.

I am a tax attorney/CPA from Oklahoma. In Oklahoma, the Indian tribes operate 20% of the all the casinos in the USA. One of the casinos, just north of Dallas, TX, is one of the 5 largest casinos in the world. Because of the needs of our clients, I wrote the Lady Luck Gambling Diary.

The IRS has a very good summary of their current position on Gambling Winnings and Gambling Losses - It is IRS Chief Counsel Advice Memorandum 2008-011. You can find it here: http://www.ladyluckdiary.com/irs-info/irs-chief-counsel-advice-memorandum-2008-011/

I would also suggest that you refer to IRS Revenue Procedure 77-29. You can find it here: http://www.ladyluckdiary.com/irs-info/irs-revenue-procedure-77-29/

I also have PowerPoint presentation which discusses "gambling sessions." If you will contact me, I would be glad to email a PDF version of it to you.

The Courts have frequently asked, does a taxpayer have to record every pull of a slot machine, every roll of the dice, every card drawn? The answer has always been "no." But, you just can't net everything for the entire year either. That is why the IRS dislikes/disallows reports based on Player's cards and win/loss statements - because these reports just net everything together.

So, the courts, tax preparers and the IRS have devised a method that uses a "gambling session." Let me give some examples. You play slots at one casino in the morning and play slots at another casino in the afternoon - 2 gambling sessions. If you play slots, poker and blackjack at the same casino - a minimum of 3 gambling sessions. If you go to the race track, each horse/dog race is a separate gambling session.

So that is why you need to use a gambling diary or gambling log to track your gambling sessions. Or write a spreadsheet that breaks it down by "gambling session."

Remember, the gambling winnings (I chose not to call it gambling income) is reported on Page 1, Line 21 as "Other Income." Your gambling losses are reported on Schedule A (if the taxpayer itemizes). This bifurcation increases your Adjusted Gross Income (AGI), and results in what I call the "Gambler's AGI Penalty." A lot of adjustments, deductions, credits, etc. are based upon your AGI. So, the higher your AGI, the fewer adjustments, deductions and credits your can take.

There have been several court cases where the only change the IRS made was to "un-net" the gambling winnings and gambling losses - which then resulted in a higher tax liability for the taxpayers due to the Gambler's AGI Penalty.

One other quick observation, given the small number of returns that the IRS actually audits this days, the IRS is relying more on the "matching" capability of their computers. So for example, if the casinos have reported gambling winnings of $100,000 on W-2G's for the taxpayer, and the taxpayer has reported $100,000 on Page 1, Line 21 "Other Income - Gambling Winnings", the taxpayer return will not be "flagged" for audit. But, if the taxpayer "nets" together the $100,000 of gambling winnings and gambling losses and doesn't report anything, then the IRS will have $100,000 of W-2G's that don't match anything. I would venture to guess the taxpayer has just won a free audit.

Also, the above discussion is for casual/recreational gamblers. Professional gamblers reported their wins AND losses on Schedule C - but that is a whole other thread.

Hope this helps!

For a limited time and while supplies last, for tax-return preparers that are reading this thread - if you will fax your name and mailing address on your letterhead to me, Reece B. Morrel, Jr., @ 918-663-1383, I would be glad to mail a Lady Luck Gambling Diary to you free of charge. Thank-you.

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