The IRS wants its cut of your
you're betting that Funny Cide will be the first horse across the
Belmont Stakes finish line on June 7, you have lots of company.
With the gelding poised to become only the 12th
Triple Crown winner, and the first in 25 years, interest in the
race is running high. More than 100,000 race enthusiasts are expected
to jam the Long Island, N.Y., track to personally cheer for the
home-state favorite; Belmont Park has even enlarged its grandstands
to accommodate more spectators. Millions more worldwide will watch
the spectacle on television.
Many of these racing fans have more than just
horse racing history on their minds. They've handed over a couple
of dollars or more to bookmakers, legal and not-so-legal, hoping
to cash in on a pony's performance. These wagers spotlight a persistent
Internal Revenue Service problem: tracking and taxing gambling winnings.
It's a challenge the agency faces daily because many
people don't realize that gambling winnings are taxable. Of those
who do, a good portion simply choose to ignore the law.
Gambling has been around at least since man was able to record
his activities. Dice almost identical to those used on today's gaming
tables have been recovered from Egyptian tombs and Chinese excavations
dating to 600 B.C.
In addition to the well-publicized offerings of Las
Vegas and Atlantic City, betting is commonplace throughout the United
States. The choices range from off-track betting parlors to charitable
bingo games to riverboat casinos to state-operated lotteries.
Then there are the online gambling opportunities.
A check of any Internet search engine will turn up thousands of
gambling sites that are expected to generate $5 billion in 2003
for their operators, according to a General Accounting Office study.
These Web sites typically are foreign headquartered
to avoid running afoul of U.S. and state laws against the practice.
But thanks to the Internet's boundary-busting capability, you can
place a bet by credit card or other electronic payment method. Some
card issuers, however, now deny gambling-related transactions, citing
risk factors if the cardholder disputes or refuses to pay the charges.
Couple all these gambling options with Americans'
love of athletics, and betting on sporting events has arguably become
the true national pastime.
||Colorado, Illinois, Indiana, Iowa, Louisiana,
Michigan, Mississippi, Missouri, Nevada, New Jersey, South Dakota
||Delaware, Iowa, Louisiana, New Mexico, Rhode
Island, West Virginia
|Tribal gaming (casinos, bingo, pulltabs,
||40 states plus the District of Columbia
||47 states plus the District of Columbia
So many events,
so many bets
In the United States, legal betting on sports is allowed
only in Nevada, and Las Vegas draws millions of visitors each year
expressly for that purpose. Silver State casino operators report
more than $2 billion is bet annually on athletic events, including
racing (horse and auto) and professional and collegiate sports.
The dollars add up because there are countless ways
to get a piece of the action. Wagers aren't just placed on the eventual
In football, you can bet on who will catch the first
pass, who will rush for the most yardage (team and individual),
who will get the first sack. In horse racing, wager on which steed
will lead at each turn or halfway. If it happens in a game, the
sports book operation will take a bet on it.
But casino bets aren't a real concern for the IRS.
The tax man has a way to track Nevada's legal athletic wagering.
However, those dollars, according to the American Gaming Association,
represent less than one percent of all sports betting nationwide.
It's a dicier tax proposition when it comes to pursuing
bets placed at increasingly popular offshore sports-betting operations,
dollars dropped into friendly office pools and illegal wagers handled
by bookies. In fact, the National Gambling Impact Study Commission
estimates that illegal wagers run as much as $380 billion annually.
the bells go off
Legal betting operations -- state lotteries, casinos and horse racing
tracks -- are regulated. One of the government agencies that has
a say in these operations is the IRS.
When a patron hits the long-shot
trifecta, picks the six lucky lotto numbers or lines up all the
cherries on the slot machine, the establishment paying off the bet
makes sure that it gets the gambler's personal details to pass along
to the tax collector. "That's why the bells go off when you hit
the slots," says John Shelk of the American
Gaming Association. "So we can get someone there to get
your tax information."
In some cases, Uncle Sam
even gets his cut (27 percent in 2002, but recent tax law changes
are likely to drop the bite to 25 percent) before you get your payout.
That's the case for winnings of more than $5,000 from any sweepstakes,
wagering pool or lottery.
Withholding also is collected on proceeds that are
300 times or more the the amount of the bet (for example, a $600
payoff of a $2 track bet). Gambling winnings from bingo, keno and
the slots are not generally subject to withholding, but you're still
required to provide your tax ID. If you refuse, the casino can assess
backup withholding of your jackpot at a 30-percent rate
Come tax-filing time, you'll hear from the casino
(or horse track or lottery agency) again. The payer will then send
you -- and the IRS -- a Form
W-2G showing how much you won and how much was withheld for
federal taxes. But, Shelk notes, there's a distinction between what's
reportable and what's taxable.
All gambling winnings -- regardless of the amount
-- are taxable. But it's ultimately the winner's responsibility
to let the IRS know how much was won, even if the casino doesn't
have to file a W-2G. This reliance on the gambler's tax-law compliance
is where the IRS frequently gets shortchanged.
How tempting is it to assume the IRS won't miss a
small jackpot? Apparently pretty darn tempting.
"On a trip to Vegas, I won $146 at a slot machine,"
admits a chagrined economics professor at a church-financed university,
"and I didn't report it on my tax return."
A bad day at the track can
The professor's tax reporting inclination is one shared by many
gaming winners, but not all.
IRS analysis of 2000 returns, the latest year
for which data are complete, shows more than 1.4 million taxpayers
reported gambling income of almost $17 billion. This includes winnings
from casinos and horse tracks, lottery and raffle jackpots, as well
as the fair market value of cars, houses and other noncash prizes.
As for how many taxpayers didn't bare all about
their betting at tax time, the IRS won't even venture a guess. "We
can't tell you what we don't know," says Don Roberts of IRS headquarters
in Washington, D.C.
But the IRS has a tax break for conscientious
taxpayers who report gambling income on line 21 of their Form 1040s.
Tax law allows you to subtract any gambling losses from your winnings
if you itemize. For many, that's a good deal. One million gamblers
in 2000 made their good luck less taxing by claiming $10.6 billion
in bad bets.
Losses to reduce gambling winnings don't have
to be from the same game. If you go to the race track every weekend
and drop $1,000 but then win $3,000 on the World Series, those losing
horse-betting slips can reduce the amount of baseball winnings on
which you'll be taxed.
There are a couple of ground rules to keep in
mind here. First, you can't claim more in losses than you won. And,
as with any tax deduction, you need to keep records of your losses
that will satisfy the IRS if you're ever audited.
Good records are the best
Roberts recommends keeping track of gambling losses as you go through
the year so you're not scrambling to reconstruct them if you do
hit it big.
Such reconstruction efforts not only are difficult,
they aren't likely to pass IRS scrutiny. Tax professionals recall
a horse race fanatic who went to tax court with bags full of losing
betting slips to support his large deduction against his winnings.
It didn't work; almost every ticket was covered with
footsteps of the other bettors who tossed the tickets when their
horses didn't win. He ended up paying the extra tax -- and penalties.
"It's not a tax myth, but it is an old story,"
Roberts said, who saw similar actions when he was an agent in Saratoga,
"And if you don't have a big win to offset,"
he adds, "then the receipts can be your ticket to Gamblers
-- Updated: June 5, 2003