Got a letter from the IRS

[geormiet]

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.

[binions]

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.

[lala]

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?

[Zele]

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.

[Zele]

[ 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.

[Jussurreal]

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

[THAY3R]

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

[/ QUOTE ]

Why?

[yukoncpa]

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.

[Zarathustra]

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.

[yukoncpa]

[ QUOTE ]
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.


[/ QUOTE ]
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)