How to Settle Tax Debts From Gambling Winnings
First Basic: Did You Correctly Calculate Your Gambling Income?
Many casual gamblers overstate their taxable income from gambling. A lot of taxpayers ask, “Are gambling losses deductible?” Part of the calculation for taxes on gambling is the amount of itemized deductions allowed. In many cases, the IRS allows gambling losses to reduce the overall winnings that are taxed. Sometimes, that amount of overall taxable winnings can be reduced to $0.
Be careful; the overall amount of gambling income cannot be reduced below $0. This means that you cannot take an overall net loss from gambling. However, “Professional Gamblers” may actually deduct net business losses for their gambling activity.
Most states also allow gambling expenses to be written off as itemized deductions. In that instance, gamblers only pay state tax on the same reduced “net” amount of the gambling winnings, considering the losses.
Illinois is among several states that do not allow those losses as itemized gambling loss deductions. For these states, the result is significant state taxes from gambling, even when there is no federal tax on gambling income.
How Do I Prove Gambling Losses On My Taxes?
First of all, there is a fine line between calculating losses and proving losses. Usually, “proof” is not required unless there is an audit or official inquiry from the IRS or state. It could be a full-scale, in-person state or IRS tax audit. Also, watch out for the Automated Under-Reporter Exams, which begin with an IRS Notice CP2000.
On the other hand, calculating the losses should come from the same information used to prove the losses.
Use these for your best items to show proof of gambling losses:
- Your casino or host operator’s Statement of Account or rewards account statements, or similar
- Receipts from the casino, gambling service, or facility
- Canceled checks, bank statements, or credit card records
- A diary, log, or notebook (see below)
Also, other documentation to help prove losses might include IRS Form W-2G and Form 5754. All of these items help show where and when funds were used in relation to gambling activities.
It is more difficult to recreate an accurate log of past gambling wins and losses. It is far easier to document contemporaneously as you play.
Along that same thought, the IRS recommends that even casual gamblers keep a diary of their action. Sometimes people keep a notebook. Others use a calendar and make notes on daily entries.
Here’s our Best List of items to include in your gambling diary:
- The date (and time range, if possible) of your gambling session
- The amounts you win, and the amounts you lose
- The type of gambling during that session (for example, slots, online gaming, wagers, poker, etc…)
- The name and location of the casino or gambling facility
- The name and website or application for online gaming
- The people you gambled with or who accompanied you (but only with their consent)
- The sources of funds used (examples: ATM, check, cash advances, accumulated winnings)
Settling Gambling Taxes with Illinois and the IRS
Offer In Compromise (“Offer” or “OIC”) settlements are available for federal and state taxes. This article discusses settlements where it is doubtful the government could collect the full amount of tax debt.
Casual gamblers often try to settle their taxes with the state government by claiming it is doubtful the government could collect. The Illinois Department of Revenue analyzes Players’ attempts to settle state tax by closely examining their Form BOA-4 Financial Information Statement for Individuals. But be careful; this document is tricky and shares more about you than you think. (Take a look.) Then you might consider taking the advice of an Illinois tax attorney who handles tax settlements.
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.
However, for the most effective Offer settlements, showing that the gambling will no longer continue is a common factor. Why? Among other reasons, for habitual gamblers, the debt repeats year after year.
Does gambling affect my Illinois professional license? Find out whether the Illinois Dept. of Professional Regulation will suspend my license if I owe state taxes.
General Factors to Consider for 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. The considerations for “Professional Gamblers” are a bit different.
Different Factors 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.
Just imagine someone who filed an Offer In Compromise settlement claims they cannot pay their tax debt. Then that Player uses an ATM machine located in a casino. (YES, this happens – a lot!) This doesn’t help convince the state that the Player cannot pay the tax or simply no longer gambles! In other words, continued gambling will usually increase settlement offers.
Tax Law Offices handles tax settlements for gamblers and taxes on gambling income.