Taxes Poll!

[LuvDemNutz]

I am trying to get a feel for how most people handle their taxes and how many people actaully wind up getting audited.

Please answer truthfully.

The assumptiuon is that if you don't report poker income at all, you have some sort of other income.

[DING-DONG YO]

To the 14% who don't report and have never been audited. You are playing with fire.

Look at it from the IRS's standpoint. Let's say it costs the IRS a blended hourly rate of $40 per hour (a reasonable assumption, keep in mind this includes people at all levels, benefits, overhead, etc.) to audit you. Now, assume you made 20K from poker in 2005 that you are not reporting (conservate estimate, think about how much worse this example gets with the more you don't report).

So, let's say this income is on top of what you already make and you're in the lowest bracket of 15% (another conservative estimate), so you owe $3,000 on your 10K of winnings. It would cost the IRS at least 80 hours of time (contacting you, requesting and examine your bank statements, credit card bills, etc) to audit you. 80*40 = $3,200. $3,200 > $3,000 so cost> benefit. It would cost them more money to audit you then they would collect from you.

Now, keep doing this for another four years and YES, they can go back that far. I think it is at least 5, could be 7.

Now you have underrported 80K and the IRS decides to come audit you. It will now take them at most 120 hours. So cost to them = $4,800. If they have been losing 5% APR interest (also conservative, they'll probably calculate more than that) on what you have not paid them for four years, that is something they will add onto your bill. So, now you owe them $13,253.72 total (12K principal and 1,253.72 interest) and that's just with the 5% interest. That doesn't even include penalties which they will assess as well. So, now 4,200<13,253.72 so it's an easy audit.

I hope this illustrates that the longer you go without reporting this income, the worse shape you'll be in. Feel free to blow holes through my very broad example but remember, this example is extremely conservative.

I would like to know how the 14% handle this. Is the poker additional income? If so, how significant is it compared to your real job? For those that are playing full time in this 14%, do you still file a tax return?

[Python49]

I'm 19 and in college.... I talked to my accountant about reporting and was laughed at. He said he wouldn't even worry about it since the chance of an audit is alot less than 1%. His words, not mine. I will be reporting anyway however.

[Wayfare]

[ QUOTE ]
To the 14% who don't report and have never been audited. You are playing with fire.

Look at it from the IRS's standpoint. Let's say it costs the IRS a blended hourly rate of $40 per hour (a reasonable assumption, keep in mind this includes people at all levels, benefits, overhead, etc.) to audit you. Now, assume you made 20K from poker in 2005 that you are not reporting (conservate estimate, think about how much worse this example gets with the more you don't report).

So, let's say this income is on top of what you already make and you're in the lowest bracket of 15% (another conservative estimate), so you owe $3,000 on your 10K of winnings. It would cost the IRS at least 80 hours of time (contacting you, requesting and examine your bank statements, credit card bills, etc) to audit you. 80*40 = $3,200. $3,200 > $3,000 so cost> benefit. It would cost them more money to audit you then they would collect from you.

Now, keep doing this for another four years and YES, they can go back that far. I think it is at least 5, could be 7.

Now you have underrported 80K and the IRS decides to come audit you. It will now take them at most 120 hours. So cost to them = $4,800. If they have been losing 5% APR interest (also conservative, they'll probably calculate more than that) on what you have not paid them for four years, that is something they will add onto your bill. So, now you owe them $13,253.72 total (12K principal and 1,253.72 interest) and that's just with the 5% interest. That doesn't even include penalties which they will assess as well. So, now 4,200<13,253.72 so it's an easy audit.

I hope this illustrates that the longer you go without reporting this income, the worse shape you'll be in. Feel free to blow holes through my very broad example but remember, this example is extremely conservative.

I would like to know how the 14% handle this. Is the poker additional income? If so, how significant is it compared to your real job? For those that are playing full time in this 14%, do you still file a tax return?

[/ QUOTE ]

IF ($ of having to repay with interest) * (% of having to repay at all) > Paying, then pay. Add in whatever hassle or legal costs also associated.

If not, then don't.

Btw, there is a fatal logical flaw in your argument. You are presupposing that their auditors can accurately calculate how much you owe and make a cost-benefit analysis before calculating how much you owe (if anything at all).

I don't see how they could do this. The more likely scenerio is this: they look over your tax return, and they potentially see "red flags." Such a red flag would be a big house purchase with no income. Based on the numbers of red flags they see, the more likely they will audit you.

I think that for the "average" recreational poker player who does not make a significant percentage of his income from poker, the "absence of poker winnings being reported" will not itself raise a red flag (this is a joke). In other words, the IRS has no additional reason to "suspect" you of not paying taxes.

[James282]

[ QUOTE ]
I'm 19 and in college.... I talked to my accountant about reporting and was laughed at. He said he wouldn't even worry about it since the chance of an audit is alot less than 1%. His words, not mine. I will be reporting anyway however.

[/ QUOTE ]

Get a new accountant dude. This guy could seriously [censored] you with that attitude.
-James

[DING-DONG YO]

[ QUOTE ]
IF ($ of having to repay with interest) * (% of having to repay at all) > Paying, then pay. Add in whatever hassle or legal costs also associated.

If not, then don't.

Btw, there is a fatal logical flaw in your argument. You are presupposing that their auditors can accurately calculate how much you owe and make a cost-benefit analysis before calculating how much you owe (if anything at all).

I don't see how they could do this. The more likely scenerio is this: they look over your tax return, and they potentially see "red flags." Such a red flag would be a big house purchase with no income. Based on the numbers of red flags they see, the more likely they will audit you.

I think that for the "average" recreational poker player who does not make a significant percentage of his income from poker, the "absence of poker winnings being reported" will not itself raise a red flag (this is a joke). In other words, the IRS has no additional reason to "suspect" you of not paying taxes.

[/ QUOTE ]

Two things. On your first point, you are very much incorrect. Granted, the IRS can't make this calculation accurately before they audit you. What they can do is make a very accurate <u>estimate</u> about how much you are underreporting before they audit you. Think about how much information is out there. Not hard to make a program that scans the activity in your credit report to your tax return and come up with a rough estimate of how much you are spending.

Then the IRS would very accurattely be able to determine how much you owe IF they audit you. Don't assume they wouldn't be able to. They know alot more about hiding income than you do and with online poker winnings (as opposed to B&amp;M), there is a trail for everything.

For the second point, everything depends on how much you are making from poker in relation to total income. The more you are making (as a percentage), the more you have to worry about.

[KaneKungFu123]

python: how much did you make? 10K or less?

[DING-DONG YO]

[ QUOTE ]
I'm 19 and in college.... I talked to my accountant about reporting and was laughed at. He said he wouldn't even worry about it since the chance of an audit is alot less than 1%. His words, not mine. I will be reporting anyway however.

[/ QUOTE ]

Smart, esp if you make a large amount. Remember, you don't want them coming back to you in 4-5 years and asking for all the taxes you didn't pay plus interest plus penalties. It happens, trust me.

[Python49]

[ QUOTE ]
python: how much did you make? 10K or less?


[/ QUOTE ]
More.

[LuvDemNutz]

I am kind of surprised at the results so far. I had read that the IRS frowns on individuals that file as "pros" but also have day jobs. I thought that that group would have the most audits.

Can those people who have been audited please elaborate on their situations?

I am curious as to what "red flags" led to the audit.

What information were you asked for?

[LA_Price]

I live in the UK but i'm american so i still have to pay. I've procratinated on filing but i do get an extension till June 15 for living outside the us. I've talked to a few accountants as well. One of them said this to me "the pigs get fat and the hogs get slaugtered". I plan on reporting all that i earned but he as well as a former irs auditor he brought in said the IRS would have no way about knowing about any of the money you earn online.

[jrbick]

[ QUOTE ]
[ QUOTE ]
I'm 19 and in college.... I talked to my accountant about reporting and was laughed at. He said he wouldn't even worry about it since the chance of an audit is alot less than 1%. His words, not mine. I will be reporting anyway however.

[/ QUOTE ]

Get a new accountant dude. This guy could seriously [censored] you with that attitude.
-James

[/ QUOTE ]

Find a new one.

My accountant didn't laugh. He said, "Ok, looks like I'll file a schedule C for the poker stuff." Then we sat around and talked about poker. I'm pretty sure that I'm the first person to come to him w/ poker income.

[jrbick]

Obviously a lot of people around here are afraid of being audited. Maybe I'm naive about this, but if you've got nothing to hide, what's the big deal about getting audited other than that it's a slight hassle?

plug (http://www.fairtax.org)

[Vern]

For those with day jobs or those that want day jobs, the failure to pay taxes on even what appears to be a trivial amount could be potentially career threatening. Nothing like a background check revealing you filed false tax returns to ruin your chances at any company that does business in finance or contracts with the government. I think for those just doing this as a hobby, it is even more important to file. I just wish it was legal to net the result instead of losing my other deductions. Filing correctly I got raped on the extra income my hobby brought in. I would have been better off financially to get a second job as a greeter at WalMart once taxes were taken into consideration.

[DING-DONG YO]

I would love to hear from a tax expert on this, but I'm leaning towards filing my poker hobby as a small business. I'm not about to push myself into a much higher tax bracket and be subject to AMT just to report a measly 10-20K extra. I read in a post that they frown on that, but tough doo-doo. I'll pay taxes on the net winnings and that's it. That gross method crap is nonsense.

Has anyone with a full-time job filed this way and gotten feedback from the IRS or a tax pro?

[Lucena]

Tax court ruling on a schedule C for horse racing.

http://www.ustaxcourt.gov/InOpHistoric/Castagnetta.SUM.WPD.pdf

[DING-DONG YO]

[ QUOTE ]
Tax court ruling on a schedule C for horse racing.

http://www.ustaxcourt.gov/InOpHistoric/Castagnetta.SUM.WPD.pdf

[/ QUOTE ]

WOW. I think this pretty much sums it up. Now I know what my argument will be for filing as a business. I can't use this case as a precedent (see big disclaimer at the top) but a poker player could basically use the EXACT same argument as the petitioner in this case.

My favorite part is: "Respondent (IRS) argues, in part, that petitioner’s gambling activity does not constitute a trade or business because he did not engage in that activity with the requisite intent to profit."

Why TF did he engage in it then?

THANKYOU for this post.

[Lucena]

Yeah, I thought it was a very enjoyable read.

[octop]

You can net and then pay the 15 prercent se tax. Lovely.
In NY I cant even deduct losses for my state return.

[mpslg]

[ QUOTE ]
[ QUOTE ]
Tax court ruling on a schedule C for horse racing.

http://www.ustaxcourt.gov/InOpHistoric/Castagnetta.SUM.WPD.pdf

[/ QUOTE ]

WOW. I think this pretty much sums it up. Now I know what my argument will be for filing as a business. I can't use this case as a precedent (see big disclaimer at the top) but a poker player could basically use the EXACT same argument as the petitioner in this case.

My favorite part is: "Respondent (IRS) argues, in part, that petitioner’s gambling activity does not constitute a trade or business because he did not engage in that activity with the requisite intent to profit."

Why TF did he engage in it then?

THANKYOU for this post.

[/ QUOTE ]

I'm not a CPA, but don't you have to pay self-employment tax (7.5%) if you file as a business? Depending on how much you make playing poker, you could end up paying more by filing as a business.

[broiler]

What else is going on with your tax return that you don't get to deduct your gambling losses. NY allows gambling losses as a state itemized deduction (item G of the itemized worksheet on your IT-201). However, the NY standard deduction is very high and that could be the reason that you do not get to itemize your losses.

[DING-DONG YO]

[ QUOTE ]
[ QUOTE ]
[ QUOTE ]
Tax court ruling on a schedule C for horse racing.

http://www.ustaxcourt.gov/InOpHistoric/Castagnetta.SUM.WPD.pdf

[/ QUOTE ]

WOW. I think this pretty much sums it up. Now I know what my argument will be for filing as a business. I can't use this case as a precedent (see big disclaimer at the top) but a poker player could basically use the EXACT same argument as the petitioner in this case.

My favorite part is: "Respondent (IRS) argues, in part, that petitioner’s gambling activity does not constitute a trade or business because he did not engage in that activity with the requisite intent to profit."

Why TF did he engage in it then?

THANKYOU for this post.

[/ QUOTE ]

I'm not a CPA, but don't you have to pay self-employment tax (7.5%) if you file as a business? Depending on how much you make playing poker, you could end up paying more by filing as a business.

[/ QUOTE ]

Possibly, someone in another post said that you should figure it both ways. Probably the best approach.

And SE tax is 15%. It's 7.5% when you work for someone else as they pay the extra 7.5%. You have to pay the whole 15% when you are self-employed.

God I love this country.

[Russ Fox]

Fair warning about the Castagnetta case: It cannot be used as a precedent in Tax Court. (It's a summary opinion, and under the rules that govern those, it's nonprecental.) But it does illustrate how the Tax Court would likely rule in a similar case.

But there's a problem that all gamblers face with filing a Schedule C, and it's noted in the Castagnetta decision: You must be using gambling as your livelihood. If you have a full-time job it's hard to argue that (not impossible, but hard). I strongly urge anyone who is going to file as a professional to seek a competent professional who can advise them of the pros and cons.

I blogged on the decision here. (http://www.taxabletalk.com/posts/1139867710.shtml)


-- Russ Fox (EA)

[LuvDemNutz]

[ QUOTE ]

But there's a problem that all gamblers face with filing a Schedule C, and it's noted in the Castagnetta decision: You must be using gambling as your livelihood. If you have a full-time job it's hard to argue that (not impossible, but hard). I strongly urge anyone who is going to file as a professional to seek a competent professional who can advise them of the pros and cons.

I blogged on the decision here. (http://www.taxabletalk.com/posts/1139867710.shtml)


-- Russ Fox (EA)

[/ QUOTE ]

This is exactly my concern but from the looks of the poll results so far only 1/14 of the people who filed as pros and also had day jobs were audited.

Anyone who has been audited care to share their experience?