Contrary to the belief of many, gambling winnings, like almost all other “accessions to wealth,” are considered income under the Internal Revenue Code and are taxable. There is no exception to this rule simply because a casino, racetrack, or other gaming facility does not issue a Form W-2G or require you to fill out paperwork. (These items merely make it easier for the IRS to identify income and/or a reporting error.) Like many other forms of income, gross winnings are reportable on Line 21 of the Form 1040. Fortunately for those taxpayers who itemize deductions on their tax return, they can claim deductions for gambling losses to the extent of their gambling winnings on Line 28 of Schedule A. In effect, if a taxpayer does not have net winnings in a given year, there will be little or no tax consequence. On the other hand, for those lucky enough to have net winnings during the year, Uncle Sam expects tax to be paid.
Many taxpayers wrongly assume that they are not required to report gambling winnings if there are sufficient offsetting losses or if the winnings are not reported directly to the IRS (e.g., when the winnings do not exceed a certain threshold and are subject to information reporting). For those who received a Form W-2G, this incorrect assumption will often result in the issuance of an underreporting adjustment or notice by the IRS through its automated underreporting system. For example, if the IRS received a Form W-2G indicating that a taxpayer received a $25,000 payout from the casino and no amount is reported on Line 21 of the Form 1040 of that taxpayer, the IRS will automatically adjust the taxpayer’s return and will not give credit for any potential offsetting losses – even if they may exist. With interest and penalties, this error can easily result in a notice requesting payment of more than $10,000.
However, all is not lost. Taxpayers can frequently contest these adjustments (and succeed) if they are able to produce documentation showing that there were offsetting losses. This documentation may take the form of a contemporaneous log, receipts, tickets, or, frequently, a summary provided by the casino listing all of the taxpayer’s gambling activity. (This summary is usually available if a taxpayer consistently uses a rewards card at a gaming facility.) Moreover, if a taxpayer receives a late notice from a casino, which reports winnings that exceed what is reported on their return, they can frequently amend their return, include additional losses incurred, and avoid tax, interest, and penalties.
Finally, it is important to remember that the failure to properly report gambling winnings (and losses) can increase the risk for an audit and other collateral consequences. Aside from the burden of producing substantiation for gambling winnings and losses, taxpayers will often need to incur the additional cost of professional assistance as the scope of an audit frequently is expanded to include other aspects of a taxpayer’s financial life. That is, when an IRS agent determines that an individual frequently wins or loses in excess of thousands of dollars at the casino, he or she may begin to question the accuracy of other items reported on the return. It is not uncommon (or perhaps unreasonable) for an agent to question how an individual can support a significant gambling habit when income reported elsewhere on the return is not substantial. And for others, these questions can lead to IRS assertions that the underreporting of gambling income (and perhaps other income) was negligent or fraudulent – leading to potentially significant civil and criminal penalties. See, e.g., “Ten-Percenter” Sentenced to One Year…, available at:https://www.justice.gov/usao-ndtx/pr/ten-percenter-sentenced-one-year-and-one-day-federal-prison-tax-and-tax-fraud; Hom v. Commissioner, T.C. Memo 2013-163.
If you have questions about reporting gambling winnings, have received a notice of adjustment or audit from the IRS, or are currently under civil examination or criminal investigation, you should contact competent counsel. For a free consultation, please contact Brandon N. Mourges at firstname.lastname@example.org or 410.951.1149.