What happens when frequent gamblers receive huge tax debts from their winnings? Learn more with Business Tax Settlement below.
Why Are Gambling Taxes So High?
Part of the reason why taxes on gambling is so high is that some states do not allow gambling expenses to be written off as itemized deductions. In that instance, Players pay state tax on the full amount of the gambling winnings, without considering the losses. Illinois is one of those states, leading to high taxes on winnings.
Casino goers often try to settle their taxes with the state government. Here, we discuss how the Illinois Department of Revenue analyzes Players’ attempts to settle state tax.
This article only discusses settlements where it is doubtful the government could collect the full amount of tax debt. The Offer-in-Compromise (Offer or OIC) settlements apply to both federal and state taxes.
It is important to note that there is some special treatment for casino goers, OTB players, and most other habitual gamblers. Illinois has a program by which gamblers can be placed on the Illinois Gaming Board Self-Exclusion List. We address that program as it relates to reducing tax penalties in this related article on a Reasonable Cause for Removing Gamblers’ Tax Penalties.
Quick Explanation Of Offer In Compromise
In short summary, the gambler’s “Offer” is based on four main factors:
- Net Assets – The fair value of the Player’s assets, minus the associated debt (mortgages, etc).
- Net Disposable Income – The gamer’s monthly income, minus current taxes and reasonable living expenses.
- Collection Statute Expiration – The last date the government can collect this tax debt.
- Term Period of Repayment – The Player’s proposed length of time to repay the settlement offer.
This 4-point list is only a high-level overview. For regular gamblers making a tax settlement, this article focuses on the Net Disposable Income factor.
What Is Different For Gamblers?
Illinois considers the Player’s Net Disposable Income. The Department of Revenue Board of Appeals (BOA) looks at the Player’s current cash flow. In particular, the BOA must determine whether:
- Part of that Player’s successful winnings can be used to pay Illinois income tax. If you continue to play while seeking an OIC settlement, the state intends to capitalize on 100% of the gambler’s net winnings income (after current taxes, of course). Basically, Illinois would collect all of the available winnings, if any.
- Part of that gambler’s net cash loss represents funds that could be used to pay tax. This applies to most Players. Illinois treats gambling losses as an unreasonable living expense. The Board of Appeals calculates that if the Player eliminates his gambling expense, there will be more cash flow available to pay Illinois back taxes.
In either situation, an Illinois Appeals Officer can obtain records from venues the Player frequents the most. Illinois can even obtain bank records, credit card statements, Player Loyalty Account statements, and more to monitor ongoing gambling activity.
Some see this Illinois-established procedure as simply holding that gambler responsible for continuing to play. Others see this as punitive — as Illinois punishing the gambler — whether they win or lose. Either way, continued gambling will usually increase settlement Offers.
Get Help With Gambling Taxes Today
Just imagine someone who filed an offer that claims they cannot pay their tax debt. Then that Player uses an ATM machine located in a casino. This doesn’t help convince the state that the Player cannot pay the tax, or simply no longer gambles! Using bankruptcy can help eliminate tax debt under the correct conditions. But bankruptcy does not work for habitual gamblers because the debt repeats, year after year. Players must rely on a solution that is more flexible, to accommodate more current tax debt on gambling income. For further information and assistance in understanding debt and taxes for gamblers, reach out to Business Tax Settlement today!