poker winnings & taxes

[TEKEE]

i read an article that states the IRS takes out 28% taxes for US citizens & 30% for non US residents.all comments welcomed.thanks.

[fishyak]

I think you need to clarify your OP. I suspect you are referring to the withholding rate on payments which has nothing to do with your ultimate tax. Just what info. are you looking for?

[TEKEE]

lets say you win a tourney for 25K how much will you take home after IRS takes its share?just curious.thanks.

[bav]

For US residents:

You will take home 100% of your win. It's up to you to do your taxes and pay what you owe at the end of the year. In some tourneys you will get a formal W2G or 1099G, depending, in which case the IRS is told how much you won. It would GREATLY behoove you to then report at least that much in gambling winnings on your 1040 for the year. Failure to do so will almost certainly result in a letter from the IRS 6 to 18 months later asking you where the W2G/1099G income is and suggesting you owe them taxes on said income.

For non-US residents:

Depends. Treaty vs non-treaty countries, foreign taxpayer US tax ID number or not. Since I ain't a non-US type, I don't pay that much attention. But yeah, they can and do sometimes actually withold 30% from what they give you. Sometimes not.

[psandman]

In light of this and your other post, let me provide you with a link to an interesting interview.

http://www.nevadacasinochips.com/PokerDigestInterview.htm
(not everyone agrees with Jim Perlowski's analysis, here, but I know Jim personally and there is no one I would be more inclined to listen to on this subject then Jim.)

Short version.

IRS takes position that poker tournaments are wagering pools and subject to withholding when winnings exceed $5,000. Binion's entered into an agreement with the IRS which basically allowed them to not have to take witholding on poker tournament wins over $5,000, however they agreed to issue W2Gs on any poker tournament payout of $600 or more.

So short version is that if your local casino never has tournaments with a $5,000 payout they can simply ignore the issue.

But casinos with tournaments with payouts which axceed $5,000 have three choices:

1) Take witholding from those payouts.
2) Follow the Binions's agreement and then don't worry about withholding
3) Do neither and risk a fight with the IRS (there are people who take the positon that the $5,000 threshold only applies if the winnings are at least 300 times the buy-in .. . While perhaps they could win this legal challenge, it seems to me to be more prudent for a casino to choose one of the other two options)

[Bicycles_Biatch]

I'm currently getting audited for this... I'm more of a cash game player so this doesn't really come up and I didn't think about it. However, I played a tournament with my brother in 2005 for fun and won $2200 for 10th place.

I totally FORGOT about this and didn't claim it on my taxes.

However, this raised a red flag and started the audit process. (it also didn't help that I'm a W-2 employee but have close to $50K a year in "business expense" write offs")

Anyways... it started an audit and here's what I found.

The information above is correct. Casinos are suppose to report any tournament wins over $600.00 and you get ALL the cash. It's up to you to track your poker tournament wins for the year and report them under "gambling income". You can offset these wins providing tournament entry slips that may be offseating (i.e., hold on to those ridiculous little slips).

Then, it's up to your tax man to try to get your taxable rate reduced. In my case, I'm in the 28% tax bracket, but with deductions (interest on my house and business expenses).... I'm able to get my TRUE tax rate down around 16%.

Furthermore... something I find out that is VERY disturbing for poker players.

The IRS can INCREASE your taxable income based on their ESTIMATION of how much you earned based on bank deposits.

For example... you have your regular paycheck direct deposited to your checking account. However, throughout the year you deposit an additional $50K in cash to your account. The IRS has the ability to count this as "other" income and just TELL YOU that you have a cash business under the table and/or are a winning poker player. It's rare... but they can charge you taxes on these cash deposits. It's sickening.

My tax man recommended I just claim an odd amount per year in "gambling income"... something like $8,546 "won" per year. Of course, I will have to increase this due to any potential tournament wins. That way, no matter how much I actually win... it will satisfy the IRS and the 14% I pay on that fake amount will save me a ridiculous amount of time and engergy.

[bav]

Jim Perlowski has a vested interest in all this. He's The Man. In fact, the guy who worked out the Binion's Closing Agreement. Of COURSE he's gonna say the casinos have to do this. But the IRS doesn't get to make up its own rules. And I've read an article somewhere by a tax attorney who says most of the "facts" in this specific interview with Perlowski are false--that it is Perlowski and the IRS who are misinterpreting the regs. Reading the regs myself, I sure don't see how the 300:1 rule doesn't apply, but Perlowski claims OBVIOUSLY it doesn't.

For at least 2 years, maybe 3, I've heard a few folks claim "within a year EVERY casino will be doing W2G's!" Hasn't happened yet. I agree, it may yet happen, but not until the IRS starts seriously bullying again, and if that happens it's not at all clear what the result will be. Poker is WAY more popular now than back when the Binion's Agreement was signed, so the IRS would have an even bigger PR nightmare to fight if they pushed this.

[psandman]

[ QUOTE ]

For example... you have your regular paycheck direct deposited to your checking account. However, throughout the year you deposit an additional $50K in cash to your account. The IRS has the ability to count this as "other" income and just TELL YOU that you have a cash business under the table and/or are a winning poker player. It's rare... but they can charge you taxes on these cash deposits. It's sickening.

[/ QUOTE ]

If you think this is sickening you don't really understand how fortunate you are to only eb dealing with having to pay back taxes and interest and penalties. $50K in unexplained money could have attracted attention for a criminal prosecution-- granted they have a higher burden of proof in a criminal trial, but I'll take back taxes, intetest and penalties over federal prison any day.

[gatorch0mp]

I won $6.5K recently in a tourney, but wasn't given a formal W2G or 1099G.... does this mean it's up to me to be honest about the winnings come tax time? Or might this be formally tracked behind the scenes (I don't know... via player's club info)? ... the top two places (both above $10K had to stay behind with their driver's licenses at the ready... presumably for a formal form.

Of course I'll do the honest thing... just curious.

Thanks, -G

[psandman]

[ QUOTE ]
Jim Perlowski has a vested interest in all this. He's The Man.

[/ QUOTE ]

Actually Jim is no longer an IRS employee.

[ QUOTE ]
Reading the regs myself, I sure don't see how the 300:1 rule doesn't apply, but Perlowski claims OBVIOUSLY it doesn't.

[/ QUOTE ]
well lets look at the code Jim argues applies:

I.R.C section 3402(q)(3)

[ QUOTE ]
Winnings which are subject to withholding
For purposes of this subsection, the term "winnings which are subject to withholding" means proceeds from a wager determined in accordance with the following:
(A) In general
Except as provided in subparagraphs (B) and (C), proceeds of more than $5,000 from a wagering transaction, if the amount of such proceeds is at least 300 times as large as the amount wagered.

(B) State-conducted lotteries
Proceeds of more than $5,000 from a wager placed in a lottery conducted by an agency of a State acting under authority of State law, but only if such wager is placed with the State agency conducting such lottery, or with its authorized employees or agents.

(C) Sweepstakes, wagering pools, certain parimutuel pools, jai alai, and lotteries

Proceeds of more than $5,000 from -
(i) a wager placed in a sweepstakes, wagering pool, or lottery (other than a wager described in subparagraph (B)),
or
(ii) a wagering transaction in a parimutuel pool with respect to horse races, dog races, or jai alai if the amount of such proceeds is at least 300 times as large as the amount wagered.

[/ QUOTE ]

Now the argument is that a poker tournament is a wagering pool (problem is we aren't given a definition of a wagering pool).

if it is a wagering pool then what subsection here applies? well it is obviously IRC 3402 (q)(3)(C)(i) which is the section which does not have the 300 times the wager requirement.

The only reading of this section which would not lead you to that conclusion would be the argument that a poker tournament is not a wagering pool. I hold the belief that a poker tournament is a wagering pool (though I offer no opinion on what a court would actually find - I believe i have read that there has been no court decision on the point).

Now, imagine you are a casino executive and you are told that whether you are obligated under this section depends on whether a court will consider a poker tournament a wagering pool. However you can avoid the whole issue simply by following the Binion's agreement. Which seems like the most prudent decision for the casino . . . withhold, follow the binions agreement, or fight with the IRS about it when potentially facing penalties and other problems.

I don't see how a prudent casino executive could possibly find the third choice as the best one.

[ QUOTE ]
For at least 2 years, maybe 3, I've heard a few folks claim "within a year EVERY casino will be doing W2G's!"

[/ QUOTE ]

There is a very good reason why this won't happen. Any casino which doesn't have a big tournament isn't faced with the problem. Since they don't have payouts which exceed $5,000 they don't have to withold anything under the strictest of readings, so why follow Binion's to avoid withholding if their is no withholding to be done.

Harrah's is a high profile target because of the WSOP, therfore they justifiably cautious about this issue. A small casino which runs a single large event very well may get away with not witholding or reporting simply because they slip under the radar.

[fishyak]

1) $600 is the standard 1099 reporting limit. Gamblers are not being singled out. Money is not withheld from 1099 situations.
2) If W2's are required then the withholding burden on employers get scary for them. If a W2 must be filed and the employer does not withhold (enough) and the taxpayer skips or is uncollectable, the IRS holds the "employer" reponsible. What casino would want to "guarantee" the tax payments of its clientele?
3) And yes, cash income is still income. Having gone through a similar audit, the taxpayer gets to explain where those cash deposits came from. If the explaintion is a non-taxable source, gift from parents, brother-in-law finally repaying that loan, etc., no problem. But no explanation = taxable income. If you want in interesting homework assignment, look up the definition of taxable income actually laid out in the Internal Revenue Code. And why should guys who can't hide any income take a tax hit and subsidize a lower tax rate for those that can?
4) Oh, and yes, the hits may keep on coming. If BB lives in a state with an income tax, expect the IRS to report the underreporting to that state's tax agency. They will have the info. from the IRS in hand when they send out their bill.

[bav]

[ QUOTE ]
The IRS can INCREASE your taxable income based on their ESTIMATION of how much you earned based on bank deposits.

For example... you have your regular paycheck direct deposited to your checking account. However, throughout the year you deposit an additional $50K in cash to your account. The IRS has the ability to count this as "other" income and just TELL YOU that you have a cash business under the table and/or are a winning poker player. It's rare... but they can charge you taxes on these cash deposits. It's sickening.

My tax man recommended I just claim an odd amount per year in "gambling income"... something like $8,546 "won" per year. Of course, I will have to increase this due to any potential tournament wins. That way, no matter how much I actually win... it will satisfy the IRS and the 14% I pay on that fake amount will save me a ridiculous amount of time and engergy.

[/ QUOTE ]
You seriously didn't think the IRS had this power? Read some gambling court cases. Folks who don't keep records as required by law, and who do get discovered to have gambling winnings, DO get screwed. Like PS said, being required to pay their estimate of your back taxes+penalty+interest is a good deal compared to what they could do.

Basically you are REQUIRED to keep records of gambling--it's not optional, it's not "if you feel like it". YOU MUST KEEP RECORDS. And in any conflict where they find out you aren't meeting the record keeping requirement, they get to start making assumptions. And if you don't like the assumptions, it's up to you to prove they're wrong. Which you can't do because you didn't keep the required records.

I'm stunned your tax dude gave you the advice to just make up a number. Guess that's why a few accountants go to jail every year. Giving advice on how to cheat on your taxes is not a good career move. Given that you are already being audited, I suspect this increases your chances of another. They may not be inclined to be so friendly next time, so were I you, I'd start keeping really good records of a form the IRS allows and declare your income all nice and proper.

[psandman]

[ QUOTE ]
I won $6.5K recently in a tourney, but wasn't given a formal W2G or 1099G.... does this mean it's up to me to be honest about the winnings come tax time? Or might this be formally tracked behind the scenes (I don't know... via player's club info)? ... the top two places (both above $10K had to stay behind with their driver's licenses at the ready... presumably for a formal form.

Of course I'll do the honest thing... just curious.

Thanks, -G

[/ QUOTE ]

You still could get a form 9assuming they have your info.

I received a 1099 at the end of the year from a casino in which I had won some freeroll money. Of course I knew it was coming because I gave them my address and SS# at the time for just this purpose. If they have that info on you it still may be coming.

[Wake up CALL]

[ QUOTE ]
Now, imagine you are a casino executive and you are told that whether you are obligated under this section depends on whether a court will consider a poker tournament a wagering pool. However you can avoid the whole issue simply by following the Binion's agreement. Which seems like the most prudent decision for the casino . . . withhold, follow the binions agreement, or fight with the IRS about it when potentially facing penalties and other problems.


[/ QUOTE ]

Seems prudent to point out that no one has mentioned that one entity cannot legally rely on another taxpayers IRS closing agreement, so all the relevant discussion is moot.

[psandman]

[ QUOTE ]
Seems prudent to point out that no one has mentioned that one entity cannot legally rely on another taxpayers IRS closing agreement, so all the relevant discussion is moot.


[/ QUOTE ]

Jim addresses this in the interview:

[ QUOTE ]
First of all let me make it clear that the Binion’s Closing Agreement IS NOT binding for any other establishment but Binion’s Horseshoe. However, if other gaming establishments were not allowed to follow it too these establishments would be put at a “competitive disadvantage” within the poker industry. Therefore in my opinion, the Government would be hard pressed not allowing the other establishments the benefits of the closing agreement if they wished to follow it. Now, issuing a W-2G for any pay out of $600.00 WITHOUT ANY WITHHOLDING is a benefit to the casino. The money is not taken out of the tournament and can be put back into action.

[/ QUOTE ]

[Wake up CALL]

I understand that he addresses the issue but the IRS regs clearly state that it cannot be relied upon (under any closing agreement anywhere agreed to at any time, the agreement is private between the IRS and a single party or entity), fair or not until the regulations are changed that is the way it is; not how he wants it to be.

[bav]

I noticed a lot of "how he wants it to be" in Perlowski's claims. He's advocating everybody follow the Binion's Agreement even though doing so means you're probably opening yourself up to much more liability than doing what everybody is doing now. With what they're doing now the casinos can point at the regs they are following and claim they made a good faith effort and this was their understanding. And it's what pretty much EVERYBODY except Binion's and Harrah's has been doing for 15 years. Binion's Agreement is completely contrary to the code if you accept the IRS's opinions on what's actually right. Thus, if you admit the IRS is right that poker tourneys are wagering pools, then you should be following the code from column A. If you're adhering to come other belief, you should be following the code from column B (which they are). If you're following Binion's Agreement, that's neither A nor B, yet you're obviously admitting you don't think it's column B. Therefore, you've proven you should be following column A and you aren't, and it's not legal for you to on your own decide to use someone else's closing agreement. *BAM* Guilty!

If the IRS is so happy with the Binion's Agreement why haven't they gotten congress to codify it? What they spell out in the closing agreement is some home-made mutation that is neither column A nor column B. If it's the right thing to be doing, put it in the codes. If jai-alai can have its own exception in the codes, poker is deserving.

[Russ Fox]

Anyone wishing to take Mr. Perlowski's view as gospel should read Chuck Humphrey's article, W-2G's - Debunking the Big Lie. (http://www.gambling-law-us.com/Articles-Notes/W2Gs-debunking.htm)

The IRS has been attempting to write a regulation requiring withholding from poker tournaments; it's been on their annual Priority Guidance Plan list for the last two years. The problem is (for the IRS) that if you do the research on what a withholding pool is, you will find that it's not a poker tournament (it's a horse-racing pari-mutual pool, or a similar "wagering pool."). Not surprisingly the regulation(s) haven't been written yet.

Of course US taxpayers are required to report all of their income, whether or not you receive a W-2G or a 1099-MISC. And if you don't, and you get audited, the IRS can estimate your income using any reasonable method, including estimations based on your bank deposits.

Withholding of taxes on poker tournaments for Americans is required today only if the prize won is at least 300 times the buy-in and the prize is $600 or more. Most likely withholding will be required (at 25%) from the first prize of the main event of the WSOP, and possibly the first prize at the first $1500 nlhe at the WSOP.

Finally, any casino can sign the Binion's closing agreement (named because Binion's Horseshoe signed the agreement with the IRS) and report all tournament winnings of $600 or more. Additionally, any casino can issue W-2Gs if they wish to. Harrah's does (for all prizes of $600 or more) so people who cash at the WSOP will be getting W-2Gs.

-- Russ Fox