How to Handle IRS Tax Issues Related to Gambling

It’s not uncommon for those who gamble, whether as an occasional hobby or a professional endeavor, to run into tax issues with their winnings. If you win a bet or take home a big jackpot, don’t forget that the IRS will be there to claim their percentage. Your tax obligations may differ depending on what type of winnings you have and if you have losses to report. 

Either way, it is crucial to familiarize yourself with IRS filing requirements to avoid penalties and massive tax bills. You are required to report gambling winnings on your tax return, and if you don’t, the IRS may adjust your return when it receives a report of the earnings from the organization that issued the payment. 

Reporting Gambling Winnings

People often assume that gambling winnings are either non-taxable or that they only have to report winnings over a certain amount. However, these myths aren’t true. You must report all of your winnings, no matter how small or big. The company paying out your win will only file tax paperwork reporting your win if it exceeds certain limits, but even if you win less than the reporting threshold, you are still supposed to report that win on Schedule 1 (Form 1040).

IRS Rules

In addition to reporting the actual cash you win while gambling, don’t forget to report any non-cash earnings you win. For example, if you win a car in a raffle, you have to report its fair market value as income. You’ll then be taxed on that value.

There are circumstances in which you will have to file separate tax forms to report your gambling earnings. You may receive IRS Form W-2G if you win $600 or more and if your payout is 300 times your original wager. There are further limits in place depending on which types of winnings you report.

Which Gambling Winnings Are Taxable?

All gambling winnings are taxable, and even if the IRS does not receive a separate form for what you’ve won throughout the year, they still have ways to track unreported income. Remember that even if you aren’t given a separate tax form for your winnings, you are still legally obligated to report those winnings. This is why it’s so important to track your winnings throughout the year and pay estimated taxes on them to avoid penalties or large tax bills.

Casino Reporting Requirements

Casinos are heavily regulated, and securing a big win can trigger a long list of requirements you’ll have to meet to take home your earnings. 

Reporting Timelines and Thresholds

The payer of your winnings will furnish Form W-2G to you when you reach or exceed the reporting limits. You will need to submit this form with your tax return for the calendar year. If you gamble regularly, it’s entirely possible that you’ll receive multiple forms throughout the year. You will need to file them all with your tax return, add up the winnings, and report them all in box 4 of your Form 1040 or 1040-SR.

For certain types of gambling winnings, it doesn’t matter if your earnings are 300 times higher than your original wager or not. If your winnings hit a certain threshold, the casino or other governing facility paying out your money will need to send a W-2G. If you win $1,200 or more at bingo or on slot machines, you have to file Form W-2G. The limit is $1,500 for keno and $5,000 for poker tournaments. This limit kicks in when you take your winnings and subtract your original wager. For all other casino winnings, the $600 limit and 300x wager limit apply.

Tax Forms

IRS Form W-2G, Certain Gambling Winnings, is the main form you’ll receive if you win at casinos. However, you may need to fill out Form 5754 if another person is entitled to part of your winnings. In that case, you would provide Form 5754 to the payer and they would adjust the amount shown your your W-2G form and provide another Form W-2G to the other person or persons listed on Form 5754.

Note that you may be able to limit the size of your tax bill if most of your winnings are reported on W-2G forms. The payer may be required to withhold a set percentage of your winnings for taxes, which means you won’t have to pay those taxes later on when you file your tax return.

Reporting Gambling Losses

While reporting your gambling winnings can tank your tax refund or significantly increase your tax bill, it’s important to remember that you can reduce the amount you owe by tracking and reporting your gambling losses throughout the year.

Gambling Losses as a Tax Deduction

When you have losses to report for the year, you can report them if you itemize your deductions. Your winnings are reported on line 21 of Form 1040 and gambling losses are reported on line 27.

In order to use your losses as a tax deduction, you must keep records indicating both your wins and your losses. This isn’t an area where you can estimate your losses; if you get audited, you will need to provide documentation to the IRS showing that your numbers are accurate.

Limits and Rules

You can only claim your gambling losses as a deduction if you itemize your deductions. This is not available to you if you use a standard deduction. Additionally, if you have a bad gambling year and lose more than you win, you cannot claim everything you lost as a deduction. Your deduction is limited to the amount that you won for the year. For example, if you won $10,000 for the year but lost $17,000, you can only deduct $10,000 of your losses. The remaining $7,000 cannot be deducted.

It’s also important to note that you must report both your winnings and your losses on your tax forms. You cannot subtract your losses from your winnings and then just report the remaining balance as income on your tax return.

Common Issues With Gambling Winnings and Taxes

This is a fairly common area of concern for taxpayers, as many people are unfamiliar with reporting requirements and gambling winnings as taxable income until they start gambling. Unfortunately, many people don’t learn about those requirements until they receive a surprise bill from the IRS, find out they are getting audited, or receive tax forms for their gambling winnings in the mail. Avoiding these issues can help you prevent heavy penalties.

Failure to Report

Many people get into trouble because they simply do not report their gambling winnings on their tax return. Tthe IRS can take action by adjusting your tax return and sending you a bill. However, in extreme cases, the IRS may consider the failure to report the gambling income as tax evasion.

Consequences of Not Reporting or Underreporting

The consequences you face for failing to report or underreporting your gambling earnings can be substantial. For most people, the IRS does not assume willful failure to report income. In these cases, they will simply adjust your tax return and send you a bill. This is generally more than you would otherwise owe since the IRS will only adjust the return to include your winnings—not any of your losses. Additionally, you will be charged interest and penalties.

If the IRS believes that your failure to report was intentional, they may pursue it more aggressively. In these situations, taxpayers may face criminal charges for tax evasion. It’s important to note that this is a fairly rare outcome, one that’s reserved for those who know of the filing requirements (or could reasonably be expected to know) and still fail to comply.

Being Unable to Pay Tax Bill

Don’t be alarmed if you report your gambling winnings and end up with a tax bill you weren’t expecting. Many people find themselves in this position, and it’s for situations just like this one that the IRS has payment options in place. Depending on how much you owe and your financial situation in general, you may be able to explore various payment options to get caught up.

Filing a Tax Return With Gambling Winnings

If you have gambling winnings from the previous year, having the right paperwork and documentation can make tax preparation much easier. Ideally, you will have maintained this documentation and your records throughout the year. In that case, it’s just a matter of double-checking your calculations and moving the numbers to your tax return.

Necessary Documentation

If you received any W-2G forms from your winnings, have those on hand when you begin working on your tax return. You should also have additional documentation from other winnings that didn’t meet reporting thresholds. Even if you don’t receive a tax form for these winnings, you must report them. Finally, have a detailed log of your gambling losses.

Step-by-Step Instructions

You’ll fill out your tax paperwork as you normally do, reporting your income sources and deductions. You will also need to enter your W-2G forms if you are filing electronically; if you are filing via snail mail, you may need to submit these forms.

When it comes to reporting your losses and income, everything is handled on Form 1040. Report the total value of your winnings on line 21 and the value of your losses on line 27. Both amounts must be reported separately; you cannot subtract your losses from your winnings and then just report the resulting number as your winnings.

Reporting Winnings From Previous Years

What if you’ve received notification of an adjusted tax return and a tax bill? Even though the IRS has already adjusted your tax return to account for your winnings, it’s still likely in your best interest to go back and amend the tax return for that year. Since the IRS likely did not have reports of your losses, they did not report any losses that could have decreased your tax bill. By amending your return and reporting those losses, you may be able to limit your financial losses.

Special Considerations for Professional Gamblers

Those who gamble as a profession have additional tax needs and generally find it helpful to work with tax professionals who can maximize their deductions and properly handle their winnings. Professional gamblers typically make a profit from their work, spend 40 hours or more per week gambling, spend time and effort improving their strategy and performance, and approach their work as a business.

Just like social or hobby gamblers, professional gamblers must keep records of wins and losses. However, this is a much bigger task for professionals, which is why many use professional tax preparation services to avoid missed deductions or winnings.

Those who gamble professionally will report their income on a Schedule C, which is used for sole proprietors and those who are self-employed. They will report their winnings and losses on this form, and those amounts will determine how much they pay each year. Unlike hobby gamblers, professionals can deduct business expenses. For example, if they travel to tournaments, invest in professional training, and attend seminars, those expenses can be reported on their taxes.

Note that because professional gamblers report their income as if it’s a business, they can claim losses and expenses even if they do not itemize their deductions. However, it’s also important to note that professional gamblers, just like other self-employed individuals, do have to pay the self-employment tax. They are also typically required to pay estimated quarterly taxes; failing to do so and simply filing at the end of the tax year can result in penalties for underpayment.

Dealing With Tax Debt From Gambling Winnings

The IRS has numerous payment options for those who find themselves in unexpected tax debt. While paying in full is the best option, as it limits your penalties and interest, they know that this isn’t always an option for taxpayers. Consider the options listed below as you plan to tackle your tax debt.

Options If You Are Unable to Pay

Options that may work for you include:

• Payment plans: This is perhaps the most widely used option, as it allows you to still pay your tax debt off in full without having to drain your savings or otherwise come up with thousands of dollars at once. Depending on how much you owe and how much you can afford to pay each month, you may spread payments out over a period of 180 days or over a period as long as 72 months.
• Offer in compromise: Those who cannot afford to pay their tax debt in full but can afford a partial payment may want to make an offer to the IRS. The IRS accepts less than half of the offer in compromise applications they receive, so you may want to discuss this option with a tax professional first. It’s best for those with limited income and minimal to no assets. If you bring in a steady income or have lots of equity in your assets, the IRS generally expects you to use up those resources before settling for less than you owe.
• Currently not collectible: If you are currently unable to make any payments toward your tax debt and you can provide the financial documentation necessary to prove that, the IRS may consider you currently not collectible. This temporarily halts collection activities until your financial situation changes.

Help from Tax Professionals

If you are overwhelmed by the amount of tax debt you’ve accrued and you can’t fairly assess your options, it’s time to talk to a tax professional. You’re not the first person to end up in this situation, and you won’t be the last. A tax pro can look at your current tax debt and your financial situation to figure out which payment options may best suit your needs.

Penalties Assessed by the IRS

In addition to the amount you owe in unpaid back taxes, the IRS may add penalties to your tax bill. The failure-to-pay penalty is 0.5% of the total amount owed for each month (or part of a month) that you continue to owe taxes. However, the penalty is capped at 25% of the total taxes owed.

IRS Audits and Gambling Winnings

Few things are as anxiety-inducing as an IRS audit, especially if you know you’ve underreported or completely failed to report gambling winnings. These audits are often triggered by payers submitting Form W-2G, only for the recipient not to report that form or its income on their tax return. The IRS may also audit if an individual has suspiciously high gambling losses.

How to Prepare

It’s important to begin preparations as soon as you find out you’re being audited. First, if you aren’t already addressing your tax debt with an attorney, this is the time to talk to one. Audits can result in massive penalties and even criminal charges, and you want to handle your audit correctly to minimize the fallout.

Next, you should gather all of your tax paperwork and your gambling documentation. If you reported winnings and losses, the IRS will want to see how you calculated those numbers. This is where your ongoing documentation of losses comes into play; if you can show when, where, and how you incurred your gambling losses, that documentation will back up what you put on your tax return.

Avoiding Common Pitfalls

First, make sure you take this seriously. People may assume that they were simply randomly selected and that the audit won’t uncover anything problematic. But if you report gambling winnings or losses, there’s a good chance that you weren’t “randomly” selected. Downplaying the severity of an audit can leave you woefully unprepared.

Next, ensure that all of your paperwork is in order. It is your obligation as someone reporting deductions to prove that you can rightfully claim those deductions, so you must be able to prove your gambling losses.

Finally, it’s normal to feel like you’re in over your head while preparing for an audit. It’s worth your time to set up a consultation with a tax attorney to go over your options and figure out what to expect. Avoiding professional help could leave you blindsided by the IRS.

Frequently Asked Questions

Do I have to pay taxes on my gambling winnings?

Yes. All gambling winnings are taxable income in the United States and must be reported.

Can I avoid paying taxes until I hit a certain threshold?

This is a misconception. Even if the payer doesn’t report your winnings unless you meet a certain threshold, you must still report all winnings even if they fall below that limit.

Can I deduct my gambling losses?

Yes. You can deduct your gambling losses up to the value of your gambling winnings for the same year, but only if you itemize rather than claim the standard deduction. Professional gamblers can claim losses and expenses, whether they itemize or not.

Where do I report my gambling winnings?

Gambling winnings and losses are reported on Form 1040.

Will the IRS find out if I hide gambling winnings?

The IRS is good at tracking down unreported income. If a payer submits Form W-2G but the recipient does not report that form or the income listed on it in their tax return, the IRS will likely consider that unreported income and adjust your tax return accordingly.

What can trigger an IRS audit?

Failing to report winnings from a W-2G may trigger an audit. Even if it’s just one unreported gambling win, the IRS may then start a full audit to look for other unreported income. Massive gambling losses may also trigger an audit.

While figuring out your taxes can be challenging if you gamble occasionally or as a regular hobby, it’s fairly easy to keep up with the filing requirements once you’ve learned them. There are different reporting requirements for different forms of gambling, but in general, keeping thorough records can help you avoid unpleasant surprises come tax time. 

Don’t be afraid to ask for help if you forget to report income or find yourself in serious tax debt because of your gambling winnings. The team at W Tax Group has helped many people in situations just like yours, and we know we can help you too. Call us at 877-500-4930 or contact us online to set up a free consultation.