2005 self-employment tax letter

[scoobylee]

Hello all,

In 2005 I won a net of $20k in poker winnings. As I was fully employed with a $60k salary, I claimed the winnings and losses as a hobby gambler would claim and as expected, I received a letter from the IRS stating that I need to pay self-employment taxes on the income in the amount of $2600 plus interest.

I then submitted a letter similar to the one in this post.


Rough Draft #2 to the IRS

The response I got from the IRS today basically stated, "Thanks for the letter, please submit your check for $2900 (which includes interest) within 15 days."

My questions are, 1) Should I try and get an accountant and fight this or 2) should I just pay it off or 3) Should I refile as a professional (even though I'm not, since 2005 I have barely made a net of $1k)

Any advice would be appreciated.

[Nick Rivers]

Getting an accountant probably isn't a bad idea. Some will even assess your situation for free and see if they can do anything for you.

[Merkle]

All professional have to pay the Self Employment Tax. The self employment tax is the self employeed's version of FICA and Medicare. So filing as a professional will not get you out of paying self employment tax.

[TheEngineer]

If you can't get out of it, refile as a pro (that's what the IRS classified you as when they billed you for SE taxes). At least you'll be able to write off expenses. I recommend you get a competent accountant to help with all this.

[MINETZ]

just get an accountant that sees your point of view.

[DING-DONG YO]

OP, have you tried calling the IRS and talking to an agent about your case? Sometimes that will do the trick.

[scoobylee]

I have called the IRS this morning and left a message.

The letter itself is interesting. Here is the contents of the first paragraph (poor language use is in the letter and is not a typo) [img]/images/graemlins/smile.gif[/img]

"Thank you for your response dated August 8, 2007 about the examination of your 2005 Federal Income Tax Return(s). After carefully considering the information you sent us, We apologize for the inconvenience this may have caused you. We receive your information we need verification of the amount on line 21 of the 1040 and the amount on Schedule C. ."

It almost seems like they were going to agree with my letter, and then copied and pasted the standard letter which I had received previously. I guess I will have to see what the IRS says and go from there.

[4_2_it]

[ QUOTE ]
OP, have you tried calling the IRS and talking to an agent about your case? Sometimes that will do the trick.

[/ QUOTE ]

This is the best approach. I wouldn't get an accountant involved (yet). OP seems to understand the filing requirements and followed them. It sounds like the IRS is treating OP as a professional gambler.

The only thing I will add is that after OP talks to the IRS agent he should document the conversation. He should also ask for a letter clarifying everything once this matter is resolved.

[molawn2mo]

[ QUOTE ]
I have called the IRS this morning and left a message.

The letter itself is interesting. Here is the contents of the first paragraph (poor language use is in the letter and is not a typo) [img]/images/graemlins/smile.gif[/img]

"Thank you for your response dated August 8, 2007 about the examination of your 2005 Federal Income Tax Return(s). After carefully considering the information you sent us, We apologize for the inconvenience this may have caused you. We receive your information we need verification of the amount on line 21 of the 1040 and the amount on Schedule C. ."

It almost seems like they were going to agree with my letter, and then copied and pasted the standard letter which I had received previously. I guess I will have to see what the IRS says and go from there.

[/ QUOTE ]

Are you saying you filed your poker winnings and losses on Schedule C (as a hobbyist?); that is, without calculating the self employment tax?

Are you saying that you filed your poker winnings on line 21 and your losses on Schedule C?

Both of the above approaches are wrong.

As such, you will need to amend the tax return, as filed, to reflect Gambling winnings on line 21 page 1 and Gambling losses on Schedule A. This will certainly affect your tax.

On the face of it, you should not be subject to self employment tax but the fact that you filed Schedule C would clearly lead IRS to believe that you owe SE tax.