back taxes - worst case scenario?

[Shanemex]

I know that in the past two years I did not file my taxes correctly. I have no job, so poker has been my only source of income. When I filed I just added up my withdrawals from neteller for the year and put that number down under other income for gambling. I didn't put down anything for gambling losses, and didn't really keep any record of the day to day winnings and losses over these years. All of the money that I've withdrawn has been through neteller, and I haven't had to make any deposits.

I know that I'm supposed to report the income as I make it, and not as I withdraw it, but all of the money that I have in neteller and poker accounts has not ever been reported as income. Now it's not a lot of money, but it would make up a pretty significant part of my income for this period. The total amount that I didn't report is somewhere between $15000 and $20000, and I'd probably owe taxes of about 20% of that. My concern is that even if I pay taxes on all my income for this year, plus the amount I didn't pay for in previous years, I'd still be [censored] if I get audited because if the IRS got access to my neteller records then they'd see I lied on previous years' taxes.

My biggest concern is what kind of penalties I could incur, because I certainly don't want to get convicted of fraud for a few thousand in back taxes. I'm also concerned that even if I talk to an accountant and try to arrange to pay back taxes, then this process will make me more likely to get audited which I probably wouldn't be able to pass. Basically, I guess what I'm wondering is if I know I lied on my taxes in the past, but decide to make good on what I owe before getting caught, then can I still get in trouble? And, if I do get audited before trying to make good, what kind of penalities could I get, considering the amount is relatively small?

[BigBiceps]

Just file amendments (1040X for example) to your previous year's tax returns doing it in the correct manner.

You have up to 3-4 years for fed/state.

[RoundGuy]

Seems to me you are in a lot better position than those who have never paid any tax on poker winnings. You've made an effort, albeit in error, to pay your taxes. That effort minimizes your risk of being accused of fraud (but there will still be penalties).

That said, you are correct that you owe taxes on the money that is still on poker sites and Netteller.

A good tax accountant will tell you to file amended returns rather than try to "fix" it on your next return. In this case you will be paying your penalties up front, rather than having them forced on you as a result of an audit.

Will amended returns increase your chance for an audit? Maybe. But I believe it's less likely than the flags thrown up by what you've already done -- showing only winnings, and no losses, as "other income" on your prior returns.

Talk to an accountant.

[vinyard]

[ QUOTE ]
My biggest concern is what kind of penalties I could incur, because I certainly don't want to get convicted of fraud for a few thousand in back taxes. I'm also concerned that even if I talk to an accountant and try to arrange to pay back taxes, then this process will make me more likely to get audited which I probably wouldn't be able to pass. Basically, I guess what I'm wondering is if I know I lied on my taxes in the past, but decide to make good on what I owe before getting caught, then can I still get in trouble? And, if I do get audited before trying to make good, what kind of penalities could I get, considering the amount is relatively small?

[/ QUOTE ] If you get audited and show you were making good faith attempts to file honestly but were ignorant of how to do so you will likely have to pay the difference and a nominal fine (if at all).

What you should do, however, is long before you are audited go to a tax professional at a repiutable firm (not necessarily a huge accounting house) and explain the situation. Pay them their fees and they all have very good relationships with the IRS. They contact the IRS tell how much back money you owe and the great majority of the time its just cutting a check to the IRS for the difference (plus itnerest of course) and to the tax professional or accountant for their services. If you can find a tax professional who used to work for IRS or a state tax division even better. When I traded there were tax specialists for traders who messed up like this and I suspect there are specialists for poker as well. Just be responsible and get it taken care of.

I have heard of some people missing their taxes by mid five figures or more and as long as they contracted the IRS first they were no worse for the wear. No convictions or mark on your record or what have you. Just the difference in dollars owed at a nominal interest rate.

[amulet]

all of the above is good advice. if you file ammended returns you will pay penalties but face no criminal charges. get a good accountant or tax lawyer, they will work through the process with you.

[myself]

If you don't have any records other than the amounts withdrawn from your Neteller account how can you (or your accountant, or the IRS) figure the difference you owe ?

[Poker CPA]

The penalties are a function of how much you did report. So if you reported 100K the penalities would be lower, as a %, then if you only reported 20K. So how much did you report?

From the facts, it appears you subject to Social Security taxes.

Fraud? NEVER, not on a yearly deferral of 20K. Lied? No way, simply an honest mistake. Stop worring about this angle.

With an amended return, only interest is calculated.

In addition, be thinking about retirement plans.

[Poker_Ace]

I would not amend your return -- this will draw much more scrutiny. Your chances of an audit are tiny, your fraud risk is close to zero, and your income is so low that any taxes owed, even with penalties and interest, would be de minimis. In short, don't worry about it.

On a going forward basis, you should try to comply with the rules, but as others on these forums have observed, if one literally complied with the rules, it would be impossible to be a professional poker player. For example, if you had 50k in net winnings, but $1M in gross winnings and 950k in gross losses, the IRS wants you to report AGI of $1M, which would put you in the 35% bracket and cause you to lose exemptions and deductions to phaseouts.

[broiler]

Poker Ace,
AGI does not determine your tax bracket, taxable income does. Taxable income is after your itemized deductions and gambling losses are not subject to phaseout with a high AGI. Your example has $50k of taxable income, which is nowhere near a marginial tax rate of 35%.

[HeavilyArmed]

[ QUOTE ]
Your chances of an audit are tiny, your fraud risk is close to zero...

[/ QUOTE ]

The IRS is unbelievably incompetent. Really, they are staffed by a bunch of affirmative action hires that are not worth a lick.

They have done a good PR job to spread fear, Richard Hatch as an example, but they do little else right, just like every other arm of the state. If you do somehow get into a shooting war with them do not expect a reasoned response. Get help. But overall the chances of that are tiny.

[jlkrusty]

This is how I understand things: If you were audited on back returns, you only get in real trouble for fraud. If you simply didn't know the best way to report it and you made a mistake, you will simply have to pay some back taxes and nominal interest.

Even the foregoing only happens if one of your past returns is audited. The chance of a current return being audited is very low (1%?). The chance of a past return being audited is even lower. So, I suspect your accountant might lean towards not worrying about it.

However, you need to verify things yourself. Consult with your accountant and/or tax attorney.

[amulet]

the 1% depends on what you make. for example of people who make $1 million plus it is almost 1 in 5.

with the irs using more and more computers, and simultaneously stepping up enforcement why chance it. we are not talking $ penalties but criminal charges if you don't file or commit fraud.

[StellarWind]

If you refile you should consider filing as a pro. This may save you money and it will give you some social security credit. It will also simplify the lack-of-records issue because wins and losses fully offset. Unlike amateur gamblers, for a pro $30K wins and $10K losses is the same tax bill as $100K wins and $80K losses.

[jlkrusty]

[ QUOTE ]
the 1% depends on what you make. for example of people who make $1 million plus it is almost 1 in 5.

with the irs using more and more computers, and simultaneously stepping up enforcement why chance it. we are not talking $ penalties but criminal charges if you don't file or commit fraud.

[/ QUOTE ]

Right, but OP did file, and I don't think he committed fraud when he originally filed. The key here is one's honest, good-faith effort. If it is later discovered that he made a couple honest mistakes on his tax return, he is not going to get hit with criminal charges--he'll just have to pay the back taxes and some small interest.

[PartySNGer]

[ QUOTE ]
If you refile you should consider filing as a pro. This may save you money and it will give you some social security credit. It will also simplify the lack-of-records issue because wins and losses fully offset. Unlike amateur gamblers, for a pro $30K wins and $10K losses is the same tax bill as $100K wins and $80K losses.

[/ QUOTE ]

What exactly are the rules for filing as a pro? I have never filed taxes b/c I've never shown any profit. However in 2006, I took up poker and over the first few months I lost my shirt and tried moving up to fast so I was down about $10k, but over the last 2 months I have won 3k and then 5k and have learned a ton about BR management. In 2007, there is pretty much a 100% I will make money, but can I file as a pro? I've heard you have to show winnings for 2 of the last 3 years or something, but is there a loophole for a poker player who is almost certain to profit?

[lala]

[ QUOTE ]
[ QUOTE ]
If you refile you should consider filing as a pro. This may save you money and it will give you some social security credit. It will also simplify the lack-of-records issue because wins and losses fully offset. Unlike amateur gamblers, for a pro $30K wins and $10K losses is the same tax bill as $100K wins and $80K losses.

[/ QUOTE ]

What exactly are the rules for filing as a pro? I have never filed taxes b/c I've never shown any profit. However in 2006, I took up poker and over the first few months I lost my shirt and tried moving up to fast so I was down about $10k, but over the last 2 months I have won 3k and then 5k and have learned a ton about BR management. In 2007, there is pretty much a 100% I will make money, but can I file as a pro? I've heard you have to show winnings for 2 of the last 3 years or something, but is there a loophole for a poker player who is almost certain to profit?

[/ QUOTE ]

I don't think you need to worry about filing as pro. It seems as the IRS wants people to file as pro as many non-pros have posted that they were sent a letter to file schedule C and pay self-employment tax.

[genesisgkh1]

Funny how everyone always says "contact an accountant or tax professional". Here's the truth, they don't have any magic answers any more than the rest of us. The IRS is huge and inefficient and their answers to questions can change each time you call them.

File and pay your taxes even if you compute what you owe incorrectly. Refile and pay if you didn't in past years. It's the right thing to do and it takes fraud off the table. That means likely no jail time and the 3 year statutory rule stays in effect (there is no 3 year time limit if they prove tax fraud).

I have heard you cannot net wins and loses, yet when you tell turbo tax you made some internet poker winnings, it tells you just to put them on line 21 (other income) as gambling winnings. I have heard if you file as a pro, you have to pay double FICA and medicare taxes in addition to Fed withholdings but can write off expenses on a schedule C. But schedule C's and home businesses raise many red flags at the IRS. If you keep track of wins and losses per poker session, you still have a problem. The IRS has still not defined a "poker session". Is it one hour, 1 day, 1 week? Does each internet session begin after each time you sleep, or each time you go to eat, or each time you get up to pee? Is it each bet, each hand? Is it each neteller withdrawal? What if you play on multiple tables and multiple sites at the same time? Is it each table? I don't know, you don't know, a tax professional doesn't know, the IRS may not even know.

As for an audit, the IRS really doesnt want to audit you over taxes on $20,000. They pay their people so much per hour, so coming after you over "small potatos" is a huge waste for them as long as you are filing and paying something. They are much happier going after Wesley Snipes, where the payoff is worth all the trouble.

I actually have talked to 2 tax professionals. The IRS wants it's money. If Capone had filed taxes and reported his income on line 21 and paid the IRS, he likely would never have seen the inside of a jail cell. Of course this is just my opinion, I could be wrong. You should contact a tax professional. /images/graemlins/smile.gif

[RoundGuy]

[ QUOTE ]
Funny how everyone always says "contact an accountant or tax professional". Here's the truth, they don't have any magic answers any more than the rest of us.

[/ QUOTE ]
They certainly know more than me, and I assume, you as well. Ever seen a CPA exam? Frightening. If they don't have the answer on the top of their head, which is likely, they do know where to find it quickly. Unlike me, and I assume, you as well.

[ QUOTE ]
File and pay your taxes even if you compute what you owe incorrectly. Refile and pay if you didn't in past years. It's the right thing to do and it takes fraud off the table.

[/ QUOTE ]
Excellent advice. But I would add -- see a tax accountant first.

[ QUOTE ]
I have heard you cannot net wins and loses,

[/ QUOTE ]
You have heard correctly.

[ QUOTE ]
yet when you tell turbo tax you made some internet poker winnings, it tells you just to put them on line 21 (other income) as gambling winnings

[/ QUOTE ]

Turbo Tax is correct. You put your gambling "winnings" on line 21. It should also give you the opportunity to put your gambling "losses" on your itemized deductions schedule.

[ QUOTE ]
Of course this is just my opinion, I could be wrong. You should contact a tax professional. /images/graemlins/smile.gif

[/ QUOTE ]
Excellent advice.

[Poker CPA]

Frightening? it was esay

[Poker CPA]

Thank God spelling wasn't a part of it.

[RoundGuy]

[ QUOTE ]
Frightening? it was esay

[/ QUOTE ]
Well, there you go. That might be why you have "CPA" after your name and the rest of us don't.

[RoundGuy]

[ QUOTE ]
Thank God spelling wasn't a part of it.

[/ QUOTE ]
That's rite. At leest I cun spill betern yu.... /images/graemlins/laugh.gif

[autobet]

The worst case senerio is you would owe penalties and interest.

You are not guilty of fraud. Fraud is for those who intentially avoid paying taxes.

You are paying your taxes, just behind a year. This is known as a timing difference.

I would do nothing if I were you. You are basically paying your taxes as you take in the money, which will look fine to the IRS if they ever check you out which is less than 1%.

If you ammend your returns you are basically looking at a 100% chance of facing the worst case senerio, while doing nothing leaves you less than 1%. Even if you are audited you may be fine since your reported income matches what is hitting your bank accounts.