Poker, the IRS, Law, and Self Emp Tax

[jeff329]

I was under the impression that legal precedent (as well as some old threads here) has shown that NO PERSON is REQUIRED to file as a professional even if the IRS asks them to in order to receive more money for the self-employment tax. Hasn't precedent only stated that a person must prove he/she is a PRO if the IRS questions it, but never the other way around? If someone wants to file as a hobby, the IRS has to just accept it, they can't force someone to call themselves a pro? In the cases where they have tried, those that fight it have be successful, no? Has anyone been forced to call themselves a pro who has done everything they could to fight it?

[oldbookguy]

Though I am not a taxman, I have done many returns.

Yes, the IRS can dictate how taxes are filed.

It really hinges on how a 'hobby'is ran.

Is it ran as a hobby or is it ran in a business manner designed to make money is the 'test'.

Read the brief explanation at IRS.gov

IRS Hobby or Business (http://www.irs.gov/newsroom/article/0,,id=172833,00.html)

obg

[Merkle]

I prepared 4 sample tax returns using certain assumptions. One return with no poker income, poker income netted (which we are not supposed to do, poker income reported properly as a hobby and poker income reported as a pro.

http://www.softwarecitytn.com/files/Taxes%20on%20Poker%20In.pdf

The link above worked for me. If others have trouble let me know. If the explanation is not clear or if you have questions please ask.

PS
Please note that in the examples used about 60% of your poker income goes to taxes if filing properly as a hobbyiest

[jeff329]

The link is appreciated but it doesn't really answer the question. Precedent has only shown that the IRS has demanded proof of a player calling themselves a professional so that they can deduct expenses etc...but have they ever forced someone who argued it wasn't their profession to file as a professional? I have never heard of a case where someone was forced into it, faught it, and lost..

[oldbookguy]

I do not know. You can, however, read the general IRS guidelines as linked above.

I would guess that yes, at some point, the IRS has made a hobbyist file as a business, akin to a pro.

obg

[Merkle]

True, my link above is not directed at answering the exact question of this thread. It was something I prepared several weeks ago to demonstrate how unfairly poker income is treated for tax purposes and the ramifications of said treatment.

This just happened to be the forum it seemed best suited for based on other comments here.

BTW the Self Employemnt Tax that was due from filing as a pro is illustrated in the pro example.

[Zele]

Most of the people who have posted about a SE letter on this forum have reportedly fought it successfully. At least one has paid without fighting, and the most recent poster looks like he's losing but might keep fighting.

As for what the IRS can or can't do: no one knows for sure because AFAIK there are no real precedents - people have either paid up or the IRS has dropped it; no one has gone to court.

[Merkle]

I want to thank broiler for catching an error on the return that was itemized. Somehow the program picked up standard deductions instead of the itemized deductions. I have corrected that and re-linked the document. The damage is not much worse for itemizing than for filig as a pro now. But neither is as good (or in my opinion as accurate) as netting.

Broiler also asked about state returns. I am in TN and we do not have a state income tax therefore I did not address that or take it into account.

If anybody else catches errors please let me know. I do apologize for letting that one slip in.

[grapabo]

I seem to remember a post in this forum several months back, where he was a college student, reported a chunk of gambling winnings as "other income", i.e., not as self-employment income, and subsequently received a notice from the IRS proposing to change that to self-employment income and requesting that they pay the SE tax on this amount.

The disproportionate amount of gambling winnings to total income probably triggered the IRS letter, and I assume that an explanation that this income was earned while he was a student was sufficient to convince them that he was not a pro. But the point is, this would be a situation where the IRS may be looking for non-pros to explain their gambling winnings.

[ilikeaces86_]

I am a full time student and the last 2 years I have filed my poker income as other income since my profession is being a student. I haven't had any trouble with the IRS over it.

[Russ Fox]

[ QUOTE ]
I was under the impression that legal precedent (as well as some old threads here) has shown that NO PERSON is REQUIRED to file as a professional even if the IRS asks them to in order to receive more money for the self-employment tax.

[/ QUOTE ]

A couple of years ago the IRS began cracking down on individuals who reported most of their income as "other income" without filing a Schedule C. The IRS believed (rightly) that many individuals were trying to get out of paying the self-employment tax.

The rule for being a professional gambler comes from the Groetzinger decision (http://supreme.justia.com/us/480/23/) : "...if one's gambling activity is pursued full time, in good faith, and with regularity, to the production of income for a livelihood, and is not a mere hobby..." you're a professional.

The IRS has been successful in making gamblers who have no other source of income and who are not full-time students file as professionals. Since the Groetzinger decision specifies that you be "full-time" in order to be a professional gambler there's a clear conflict.

So you can be forced to file as a professional if your primary source of income is gambling and you're not a full-time student.

None of what I'm writing here is meant as tax advice; see your own tax professional.

-- Russ Fox

[chesterboy]

I've called the IRS and asked them a couple times, and none of them really know. But they did say that if it was ruled that i filed incorrectly i would potentially owe SE tax for the previous 3 years, with interest and possible penalties.

Since I am definitely a pro and had a big jump in poker income 2 years ago I decided to just start paying it. I still think it was the right decision but I really hate that tax. It kills me every quarter.

Up until then I only made like 35-45k a year from poker and like 20k working. I filed it as other income and never had a problem for about 3 years i think.

I started making 75k poker and 10k working and that seemed pretty obvious and my accountant agreed.

[mo42nyy]

The real [censored] up thing is if they make you retroactivly file as a pro (a few years after the fact) you cant then go back and make sep ira/solo 401k contributions for those years.

I made a post earlier about not being sure whether or no I should file as a pro this last. Last year i did ( iplayed poker for about 310 days of the year) but this year Im not sure if I want to as I have almost no deductions, barely played after neteller went to [censored], yet made about 4-5 times
more than what I made in all of last year.
if I max out a solo 401k Ill pay almost the same exact ammount of taxes either way, but
1) Im not sure if I wanna sock all of that money away for 30 years
2)I may want to file as a pro again in the future as I will be playing live a lot more and consequently have more deductions.and Im not sure how not filing as a pro this year would affect that

What would affect that greatly is the following set of questions:
Are you even allowed to deduct a mortgage on a co-op?
If I buy a coop studio aprtment on which I take out a mortgage (payment would be about 400 a month) can I deduct
the mortgage and monthly maintaiance fees (about 300 dollars a month) on schedule c (proportionatly for a home office of course-say 40%) instead of my schedule A?
The reason I would want to do this is that the standard deduction is 5300 (and climbing while the mortgage payments stay the same) so taking it as a normal deduction would be worthless. However deducting it the payments on the sced C would save me a great deal in taxes. Do you have to take your mortgage deduction on the Sced A?

As for deprecation- would I be allowed to dedcuct depreciation on the co-op (i think over 27.5 years-proprtionally to the size of the home office) on the sced c as well?