Got a letter from the IRS
 

It looks like I'm in the same boat as 2ndgoat was in a few months ago. link

The IRS disagrees with my 2004 tax return, claiming I owe self employment tax (plus interest).

In 2004 I was a full time graduate student. I was not employed. All my income came from poker and cello teaching/playing. The majority of this was from poker, but I pursued neither activity on a full time basis due to being a graduate student.

I used turbotax to do my return, and I merely plugged in the gambling wins and gambling losses when prompted. The result was that my gambling wins were filed as additional income, 1040 line 21

The IRS has given me no reason, but propose that i pay a very significant chunk in self employment tax, plus interest within 30 days.

I'm planning on fighting this, but I only got the letter last night so I haven't really formulated a plan yet. Needless to say I am distraught.

As for now I'm hoping that my status as a full time student will allow me to claim amateur status.

Re: Got a letter from the IRS
 

It's not about whether you are a pro or an amateur.

Self-employment tax is designed to make sure that people who are self-employed pay their fair share for medicare and social security.

People who work for companies get these "payroll taxes" deducted from their pay checks.

So, if you earned money in 2004 and weren't on anybody's payroll, you are likely going to owe self-employment tax.

I don't know if or how being a full-time student changes the equation.

Re: Got a letter from the IRS
 

It seems that more people are getting this letter. But it does matter whether you are a pro or amateur. As a pro files schedule C and has to pay self-employment tax and also many deductions. But an amateur doesn't file any schedule C and therefore doesn't have any self-employment or deductions related to gambling. And it seems like you actually reported your wins and losses separately, but how accurately did you do this?

Re: Got a letter from the IRS
 

I had planned on filing as a pro last year, but didn't on the advice of my CPA (I filed as unemployed). I have yet to hear from the IRS, but figure I'm even money to get a letter.

It seems to me that this is a rather gray area now, and will probably remain so until someone goes to Tax Court. However, as 2ndGoat's experience shows, it certainly doesn't need to get that far for you to beat it.

All this is rather ironic given than the right to file as a professional gambler had to be won in court, with the IRS on the other side.

Re: Got a letter from the IRS
 

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It's not about whether you are a pro or an amateur.

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I disagree. It has everything to do with this. If a guy working at McDonald's wins the lottery, he rightfully only owes SS/Medicare on his W-2 income, not his lottery winnings.

Re: Got a letter from the IRS
 

All this tax stuff would be irrelevant if the poker sites used western union as an option like the sports books do.

Re: Got a letter from the IRS
 

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All this tax stuff would be irrelevant if the poker sites used western union as an option like the sports books do.

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Why?

Re: Got a letter from the IRS
 

Ok,
1st - take 2 Valium
2nd - all is not despair

I haven’t practiced in a very long time, but in order to have self employment income you must meet one or more of this criteria:

In determining whether you are carrying on an activity for profit, several factors are taken into account. No one factor alone is decisive. Among the factors to consider are whether:

You carry on the activity in a businesslike manner,
The time and effort you put into the activity indicate you intend to make it profitable,
You depend on the income for your livelihood,
Your losses are due to circumstances beyond your control (or are normal in the start-up phase of your type of business),
You change your methods of operation in an attempt to improve profitability,
You (or your advisors) have the knowledge needed to carry on the activity as a successful business,
You were successful in making a profit in similar activities in the past,
The activity makes a profit in some years, and
You can expect to make a future profit from the appreciation of the assets used in the activity


You are a cellist, a teacher, you are graduate student studying what? Are you a poker player? Are you playing poker for profit? Did you just happen to fluke into a winning year and were honest enough to report it?
You need to talk to a CPA, but it is my understanding ( from a long ago memory ), that a not - for profit activity is not subject to self- employment tax, although certain hobbies may be subject to self - employment tax ( see above). The question is not whether you are an amateur but whether you engage in the activity for profit. If this is a one time thing, and you’re not expecting to make a profit in the future, then talk to a CPA and get your problem resolved.
And remember, free advice is worth exactly what you pay for it.

Re: Got a letter from the IRS
 

I was under the impression that your primary source of income is the deciding factor. Otherwise you could make $400,000 playing poker part time and then work a couple shifts at K-mart to exempt yourself from SE tax.

Re: Got a letter from the IRS
 

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I was under the impression that your primary source of income is the deciding factor. Otherwise you could make $400,000 playing poker part time and then work a couple shifts at K-mart to exempt yourself from SE tax.


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If you won $400, 000 in a lottery, you would not have to pay SE tax. Likewise, if you win a big poker tournament but claim you are a recreational player with no future expectation to make a profit, then you ought to be exempt from SE tax. Also, being an amateur has nothing to do with it, profit expectation is the key. There is a difference between an amateur and recreational player. (IMO)

Re: Got a letter from the IRS
 

Thanks for the advice thus far.

I'm in the bay area. What would be a good way to seek out a CPA?

How much would I expect to pay for services, and what could the CPA do to help me? The only records I have from 2004 really are pokertracker and pokercharts.com (similar to statking).

I could use these to show a number of hours played well below full time, but I don't know what else.

Re: Got a letter from the IRS
 

CPA’s may be expensive. An accountant designated as an, “Enrolled Agent” will most likely be cheaper ( I’m not entirely sure on this ) and just as effective.
Hopefully, you could just make some phone calls and get an estimate over the phone when you explain your situation.

As far as what they could do for you - a simple letter may be all it takes to solve your problem, stating something like this: The changes you propose are incorrect. I do not owe self-employment tax. I am a recreational gambler, with no expertise on the subject. I do not engage in the business or occupation of gambling. I do it for fun and do not expect to make a profit in the future. Please correct your records and respond back to me. ( I just made this letter up incidently, someone else could do a better job )

Otherwise, if the above is false, and you do intend to make money ( even if doing it only part time ), then you may have to do some negotiation (maybe not), but you would need to file an amended return. This would be time consuming and would end up costing you some money. I don’t know how much. But at least you could add in some additional expenses other than just poker losses.

Or you could accept the IRS’s changes and just pay them.

P.S. It’s been a very long time since I’ve done any of this. So my advice may only be worth what I’m charging. Zero.

Re: Got a letter from the IRS
 

Got this same letter a month ago. Talked to several CPAs and they all said the same thing. I am also a full time student. They all said the following

1)IRS is correct you owe SE Tax and most likely will have to pay
2)They recommended refiling as a pro and taking all the deductions i could.

I mean the IRS isnt stupid as i found out. If you have filed several years returns in this manner you are even more screwed most likely as its obvious its a pattern of income.

In the end i did the math. Figured out how many additional deductions i could claim. Found out how much it would cost to have a CPA redo my tax return (depends on the CPA but at least 300-500$) and figured out approx how much time it would take me to find all my paperwork and get it to a cpa etc. After doing this i decided at best it was close and most likely a losing proposition to either fight it or refile and just paid it.

It really sucks honestly but dont forget that the longer you delay taking care of it the higher the penalties and fees are. I have yet to hear a single case of fighting this type of battle and winning. If you do let me know. PM me if you want to know more.

Re: Got a letter from the IRS
 

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I have yet to hear a single case of fighting this type of battle and winning. If you do let me know. PM me if you want to know more.

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Here's one.

Re: Got a letter from the IRS
 

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I have yet to hear a single case of fighting this type of battle and winning. If you do let me know. PM me if you want to know more.

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Here's one.

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Wrong this guy had a job and poker was not his sole source of income. For a number of reasons this is not even close to being the same situation. If you have no job and have been playing poker for a few years as your sole source of income its a lot different from playing 9 hrs a week and having a job that pays most of the bills...

Re: Got a letter from the IRS
 

You make a good point, but I'm still going to try to fight it.

The way I see it, in 2004 I was playing for enjoyment and not in a professional manner. I didn't depend on poker for my livelihood, because I had student loans. I played for 15 hours a week on average, with extended periods of no playing. I had other income from teaching and cello playing, and most of my time was taken up by being a student.

If I had played poker one time during the year and won a tournament for the same amount, would I then have to pay SE tax? I'm pretty sure I wouldn't.

What if I had played 5 tournaments to get to that income? What about 10 hours a week of cash games? It seems it is a gray area and I think it's still worth my time to argue it.


If I do wind up having to pay SE tax I will go ahead and take all the deductions I can. Netting my wins and losses for one, as well as computer equipment and trips to las vegas.

If hiring a CPA and making these deductions comes out to the same amount as not refiling, then I will do it anyway. For one, I will at least learn how to save money in the future, and two, [censored] the irs.

Re: Got a letter from the IRS
 

According to "the gambler's guide to taxes" by Walter L. Lewis:

some of the qualifications to be a professional gambler:

"
-There must be a profit motive. The expectation of making a profit to be able to support enoeslf must be evident. A profit must be shown in at least three of the last five years.

- A considerable amount of time must be spent gambling. Gambling must be done with regularity.

-A business operation must be evident. The IRS requires all businesses to maintain a set of books and records that document the activity. OTher items that would indicate business intentions include business cards, letterhead or stationery, all required buiness lincenses and registrations, a business telephone listing, and an office address or post office box."

Re: Got a letter from the IRS
 

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[ QUOTE ]

It's not about whether you are a pro or an amateur.

[/ QUOTE ]

I disagree. It has everything to do with this. If a guy working at McDonald's wins the lottery, he rightfully only owes SS/Medicare on his W-2 income, not his lottery winnings.

[/ QUOTE ]
What if he spent 30 hours a week playing the lottery and bought lottery tickets totaling 100 times his McDonald's salary over the course of the year?

Re: Got a letter from the IRS
 

[ QUOTE ]
According to "the gambler's guide to taxes" by Walter L. Lewis:

some of the qualifications to be a professional gambler:

"
-There must be a profit motive. The expectation of making a profit to be able to support enoeslf must be evident. A profit must be shown in at least three of the last five years.

- A considerable amount of time must be spent gambling. Gambling must be done with regularity.

-A business operation must be evident. The IRS requires all businesses to maintain a set of books and records that document the activity. OTher items that would indicate business intentions include business cards, letterhead or stationery, all required buiness lincenses and registrations, a business telephone listing, and an office address or post office box."

[/ QUOTE ]

I only really scanned through that case (comissioner v groezner or something like that?), but it was sort of tricky... since it was for a pro that was actually petitioning to be called one, rather than someone trying to prove his ameteurness, and our situations are trying to establish the opposite, the wording didn't seem fully applicable to our situation throughout. But I don't remember specifics; it's been a couple months since I dealt with it.

Regardless, I did quote it in my letter to the IRS, and they did let me off the hook.

Now I'm waiting for them to tell me that in 2005 when I did NOT have a full-time job that I was not a pro and I can't claim deductions and should have filed as misc income, heh.

2nd

Re: Got a letter from the IRS
 

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What if he spent 30 hours a week playing the lottery and bought lottery tickets totaling 100 times his McDonald's salary over the course of the year?



[/ QUOTE ]


He would be a sick gambler.
Spending a great deal of time at something doesn’t necessarily make that something a trade or business. You may spend 50 hours a week working on your rental units, but the money you collect as rents is not subject to self-employment tax.

As far as does being an amateur have anything to do with it: That depends. The word “amateur” in my mind, implies a degree of skill. Maybe I’m just caught up in the nuance of the word, but if I won a poker tournament after having never played poker and never read a book on the subject and never talked to anyone about a strategy and the IRS wanted to classify my earnings as subject to Self-employment tax, then:
I would use the word “recreational" gambler in my letter. I wouldn’t describe myself as an amateur poker player. But this is just my preference and the only reason I mentioned above that being an amateur has nothing to do with it.

Re: Got a letter from the IRS
 

[ QUOTE ]
Thanks for the advice thus far.

I'm in the bay area. What would be a good way to seek out a CPA?

How much would I expect to pay for services, and what could the CPA do to help me? The only records I have from 2004 really are pokertracker and pokercharts.com (similar to statking).

I could use these to show a number of hours played well below full time, but I don't know what else.

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My CPA, based in Chicago, is now knowledgeable on poker issues as i file as pro. PM me for contact info if interested.

-g