IRS Audited my 2004 return

[broiler]

My only thought is that your cash had better reconcile to the results reported. I don't mean just at the end of the year either. You had better be able to show that the records agree at different times during the year.

[Holden97]

It sounds like you received one of these. If there was a number like "CP 2000" on the notice, that's definitely what you received.

Unless the adjustment was very well thought out and explained the law that the IRS thought applied, I'd consider limiting your repsonse to "In reporting my income on the originally filed 1040, I followed the guidance provided by the IRS in publication 525 and reported my gambling winnings on Form 1040, line 21. Please see the enclosed copy of the 2004 Publication 525, page 29, that includes these instructions." You can get the publication here.

It's up to you what strategy you go with, but it seems like less is more in this case - consider limiting your response to the issues raised by the service center. The people at the service center that will receive your response aren't equipped with the relevant knowledge, case law, etc. to deal with your adjustment, they are just working with ratios fed to them by a supervisor/computer program.

[2ndGoat]

[ QUOTE ]
It sounds like you received one of these. If there was a number like "CP 2000" on the notice, that's definitely what you received.

Unless the adjustment was very well thought out and explained the law that the IRS thought applied, I'd consider limiting your repsonse to "In reporting my income on the originally filed 1040, I followed the guidance provided by the IRS in publication 525 and reported my gambling winnings on Form 1040, line 21. Please see the enclosed copy of the 2004 Publication 525, page 29, that includes these instructions." You can get the publication here.

It's up to you what strategy you go with, but it seems like less is more in this case - consider limiting your response to the issues raised by the service center. The people at the service center that will receive your response aren't equipped with the relevant knowledge, case law, etc. to deal with your adjustment, they are just working with ratios fed to them by a supervisor/computer program.

[/ QUOTE ]

What I received was "Letter 525(SC/CG) (Rev. 2-2005)" with the proposed adjustment, form 4549-EZ (Income Tax Examination Changes), Schedule SE (Computation of Self-Employment Tax), From 6251 (AMT Computation, which comes out to 0), A tax interest computation form (with no form number that I see), and Form 886-A (Explanation of Items).


Holden, your strategy (omitting case law in favor of a more basic explanation) may be best, thank you for the suggestion. If that fails then I suppose I could resort to the more detailed information.

2nd

[Mr.K]

[ QUOTE ]
Actually, a large number in other income is a good way to generate a notice from the IRS. The IRS has certain expectations figured into their scoring system and gambling winnings and losses are expected to go together.

My understanding, from the local IRS agents, is that reporting correctly has a much smaller impact on your return score than reporting a net number in other income. A net gambling number is likely to generate a very large score if it is a large percentage of your total income.

The IRS has been trying to figure out a way to catch gamblers that are incorrectly reporting for a while and they may be trying to catch people by looking for people with large income but no deduction for losses. It has been rumored that net numbers in other income would be part of the attack.

[/ QUOTE ]

Just how large is "large" in this context? Are we talking as a percentage of AGI, or on a raw dollar basis?

By the way, this thread is very enlightening, and a productive discussion of how to be an honest, law-abiding poker player while not giving any unnecessary ground to the IRS. Well done, folks, keep up the good discussion. 2ndGoat, good luck with the rest of the process.

[Mr.K]

[ QUOTE ]
[ QUOTE ]
A pro does not have to pass a 3 year test in order to qualify for a Schedule C. The hobby test applies only in situation where losses occur.

[/ QUOTE ]
To elaborate a bit, a taxpayer's intent when he/she began the business is of paramount importance. If the facts and circumstances sustain the taxpayer's contention that he/she embarked on and/or continued the business with the objective of making a profit, the actual business results may prove to be irrelevant. The courts will not impose their judgment in hindsight where there is a clear fact pattern that demonstrates the intent to earn a profit existed at inception. Thus, the only significant hurdle that has to be crossed is proving the profit motive. If it was present, the taxpayer will prevail. If it was absent, he/she will lose.

The 3 of 5 test provides that if a taxpayer has a profit from a business in at least 3 of 5 consecutive tax years, the business is presumed to have been engaged in for profit. While a business with losses in 3 of 5 years fails that presumptive test, failing that mathematical test does not mean that a business in not engaged in for profit.

[/ QUOTE ]

Does this mean that a small stakes recreational gambler (Recreational poker player? Is there a meaningful distinction here as far as tax law?) who posts a profit three years in a row and pays tax on that profit is instantly no longer an amateur? What if he/she has been fully employed otherwise during this time, and what if the motive for playing poker was initially and remained "fun" during the three year stretch?

[Holden97]

[ QUOTE ]
[ QUOTE ]
It sounds like you received one of these. If there was a number like "CP 2000" on the notice, that's definitely what you received.

Unless the adjustment was very well thought out and explained the law that the IRS thought applied, I'd consider limiting your repsonse to "In reporting my income on the originally filed 1040, I followed the guidance provided by the IRS in publication 525 and reported my gambling winnings on Form 1040, line 21. Please see the enclosed copy of the 2004 Publication 525, page 29, that includes these instructions." You can get the publication here.

It's up to you what strategy you go with, but it seems like less is more in this case - consider limiting your response to the issues raised by the service center. The people at the service center that will receive your response aren't equipped with the relevant knowledge, case law, etc. to deal with your adjustment, they are just working with ratios fed to them by a supervisor/computer program.

[/ QUOTE ]

What I received was "Letter 525(SC/CG) (Rev. 2-2005)" with the proposed adjustment, form 4549-EZ (Income Tax Examination Changes), Schedule SE (Computation of Self-Employment Tax), From 6251 (AMT Computation, which comes out to 0), A tax interest computation form (with no form number that I see), and Form 886-A (Explanation of Items).


Holden, your strategy (omitting case law in favor of a more basic explanation) may be best, thank you for the suggestion. If that fails then I suppose I could resort to the more detailed information.

2nd

[/ QUOTE ]

I revise my comments. A 4549 is issued when an audit is complete. Are you sure there wasn't some earlier correspondence notifying you that you were under audit?

Did the cover letter from the IRS say that you have 30 days to respond?

Also, the IRS exam agent should have given a detailed legal explanation of the changes.

It seems like there are certain facts missing here.

[Holden97]

[ QUOTE ]
what if the motive for playing poker was initially and remained "fun" during the three year stretch?

[/ QUOTE ]
It would certainly bolster the taxpayer's argument that they didn't have a trade or business. There are lots of factors to look at to indicate that it is really recreation... regularity of the activity, undertaken in a businesslike manner, etc. The recent tax court case about the horse bettor included a livelihood standard.

3 consecutive years of profits does not alone make the activity a trade or business, with the earning subject to self-employment tax.

[AAAA]

I agree with holden. Do not volunteer anything, because it can bite you. Especially if you did not use Schedule A, you are in a good position to say that your deductions didn't warrant it.

[2ndGoat]

[ QUOTE ]

I revise my comments. A 4549 is issued when an audit is complete. Are you sure there wasn't some earlier correspondence notifying you that you were under audit?

Did the cover letter from the IRS say that you have 30 days to respond?

Also, the IRS exam agent should have given a detailed legal explanation of the changes.

It seems like there are certain facts missing here.

[/ QUOTE ]

Lots of poker. Forgive the brevity.

No previous letter from IRS.

Was given 30 days.

Dear Taxpayer:

We've enclosed an examination report explaning our proposed changes to your 2004 federal income tax return(s). Please review the examination report and let us know if you agree or disagree with the proposed changes.

etc.


2nd

[broiler]

I mean large in relation to other potential sources of earned income. Anyone can have interest, dividends or capital gains without working. The IRS is looking for potential earned income that has been reported improperly.