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Dear Mark,
A few years ago we were audited for gambling losses for '93 and '94. We went three times to the examination (supervisors, everybody) level and lost each time. We had excellent records proving that we truly had lost more than we had won (over and above W2Gs and smaller jackpots). We gamble pretty exclusively at Caesars Tahoe Casino and had their computer printout of total coin in (loss) and coin out (wins). Anyway, $4,000 later in attorney and accountant fees, we won in appeals.
Now we are being audited for '96 and '97. We went into the examination with again perfect records and again the computer printout from Caesars. This time they said that even though we lost more then we won, we would have to claim the total "wins" ($650,000) as income. That's every 25¢ and $1 that we supposedly won. We could claim the total loss ($670,000) as losses but our gross income went from approximently 80K to $730,000. Quite a jump in tax bracket! We lost all our exemptions and various credits from schedule A. Bottom line, they say we owe $9,000 for 1996 alone even though we really did prove we lost more then we won. Needless to say, we have again hired our lawyer for another $4,000 and will go to appeals.
Have you heard if this is a new strategy by the IRS? In 93 and 94 the computer printout helped us prove our case. So far in '96 and '97 it has hurt us tremendously. Norma L.
First and foremost, Norma, I empathize with you and your tale of tax troubles. This is the first time I have heard of such a problem. I wanted to publish your letter to both inform the readership of this column of some tax consequences that may be lurking for them and allow readers to join the conversation if they too have had the same difficulties with the IRS.
So what does the IRS constitute as a gaming win or loss? Most gamblers believe, erroneously I might add, that you couple your gambling wins and losses together for that year, and that minimizes the amount of winnings reported. Not so, says Uncle Sam. They require that you report ALL your winnings as income. Additionally, you technically cannot offset your losses against your winnings. You must report the full amount of your winnings on line 21 and claim your losses as an itemized deduction on Schedule A. In addition, you cannot deduct more than the winnings you report. This is where I'm a bit confused by your letter, as $650,000 in income cannot be offset by $670,000 in losses. Only $650,000 can be used. You are $20,000 over the deductible limit.
Correspondingly, if gambling wins and losses are claimed, the IRS will require compliance with Revenue Procedures 77-29 and IRS Publication 529 "miscellaneous deduction," which includes a section on substantiating losses.
Your protestation seems to be the "exact" definition of a gambling win and have you adhered to Revenue Procedures 77-29? Does the IRS imply that every time you get two pair on a video poker machine, you have to declare that as a win? Or, how about a pair of jacks when your initial money is returned? Silly as it sounds, is that a recordable win? If so, have your tax lawyer check Szkirczak v. Commissioner. It was here that the Tax Court noted it was nonrealistic to record every toss of the dice, pull of the handle and spin on the roulette wheel. It might not be the blueprint solution, but it could help.
Nevertheless, Revenue Procedures 77-29 does require that the taxpayer maintain, on a regular basis, an accurate diary or similar record that supports appropriate evidence of both winnings and losses. Your diary should include the type of gambling activity, location, and statement of amount won and lost. Additionally, with slot machine play, the IRS requires date, time, plus slot machine number. Which leads to this question. Did being over-compliant when using a computer printout from the casino possibly penalize you? On face value, you would think it still would help as the amount you stated you cycled through machines must have included numerous W2Gs (jackpots over $1,200). That left unchecked, without gambling loss deductions, would have put you in a much higher tax bracket anyway.
Egads, all of these technical tax questions are starting to get way over my pay scale. I'll yield to and will always recommend competent tax help. When resolved, Norma has promised to keep us abreast, $4,000 later, of her appellate verdict.
Gambling thought of the week: "I hope to break even this week. I need the money." -VETERAN LAS VEGAS GAMBLER For more gambling strategy tips by Mark, check out the Deal Me In index page
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Reader shares gambling tax horror story