Ed Miller's Tax Article

[DespotInExile]

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IF you want to be an Internet pro-gambler that badly, move to Canada. [img]/images/graemlins/grin.gif[/img]

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Income for US citizens is taxable worldwide.

[DespotInExile]

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Does 1/3 of what I make this year rightfully belong to the U.S. government?

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Yes. Unless you go through the steps of renouncing your citizenship, you are subject to the tax laws. Deal with it.

[Shakes]

Ed Miller's article mentions raised eyebrows from the IRS over a young person having $200K in their bank account with nearly no reported income.

Here's what I'm curious about...

I completely understand why the IRS would be curious about that kind of bank account balance (or even a quarter that much) when nearly no income is reported. What I am curious about is how the IRS comes across that information to begin with. As far as I know, they don't have constant visibility into banking accounts. Yes, they can subpoena records in order to get that visibility, but then the question is what would prompt that subpoena in the first place.

This is not at all my personal situation, let me make this clear. However, let's say that I do have $200K in a bank account. As long as I'm not doing anything that is widely visible with that money, such as buying a car or house with cash, how is the IRS going to know that I have that much money in the bank?

[tipperdog]

Banks are required to report suspicious activity to the Treasury Department. Some "suspicious activity" threshholds are known (for example, banks report cash transactions of over $20,000--edit: I'm not 100% sure the threshhold remains 20K). Some activity is secret [think: wire transfers from the mid-east], and other threshholds are discretionary [If your local bank manager thinks something weird is going on, he may contact authorities].

So, it is possible that the IRS could find out about your bank balance. However, it's highly, highly unlikely that a 200K account with normal-sized deposits coming in would raise any suspicion at all. That's (relatively) small potatoes.

OTOH, if, after returning from Party Million Cruise, you visit your local BofA branch with $400,000 cash stuffed in your duffel bag, I think you can expect a visit from some kind IRS representatives.

[LittleOldLady]

Financial institutions also report things like interest paid.

BTW, you poker-playing guys with large amounts of unreported income, all it takes is one pissed-off dumped girlfriend or anyone else who has a grudge to drop a dime to the IRS (in return for a percentage of your back taxes, penalties, and interest), and you will have the inquisition at your door.

If the IRS finds you with substantial unreported gambling income, no amount of playing Mickey the Dunce will save your ass. Tax avoidance is legal. Overly enthusiastic tax avoidance gets you penalties and interest. Tax evasion (and failure to report substantial income is tax evasion) can get you the federal slammer and penalties and interest.

If you have unreported gambling income, you better be nice to your girlfriend and anyone else who knows or suspects you are in the chips and not sharing with your uncle.

[Mr.K]

I busted my ass last spring working to comply with IRS guidelines that gambling income be reported on all winning sessions (as opposed to in aggregate). PokerTracker does NOT make this easy for anyone who multitables, moves tables, or takes very short breaks during a given session. In fact, the term 'session' does not have a tried and true definition for these purposes as far as I can tell, though Russ Fox has a good discussion of the matter on his web page.

Here's my question: for those of us careful enough to make a good faith effort to comply, is there an easier means of culling through PT data to aggregate our winning sessions (which we'll add to our AGI when filing) and losing sessions (which we may or may not be able to utilize as a deduction depending on how much the total is and whether we prefer to take the standard deduction). I gather that those users with a better understanding of database queries might be able to come up with a means of doing this in an automated fashion.

The way I did it in March was to print out my sessions from 2004 and go through them by hand linking the table entries that were from the same "session." I defined "session" as any poker playing that was immediately continuous with other poker play (e.g. I started at one table at 2pm and then added another at 2:15 while still playing the first table), or any poker play within 10 minutes of prior poker play (e.g. I started at 2pm, played one table until 2:45, took a 10 minute break to go to the john, and then resumed play at 2:55). Once I'd linked the sessions, I used a calculator to add up the total for each session. I aggregated all the winning sessions and all the losing sessions separately, and had my numbers. Then I did it all again to make sure it was right. This process SUCKED and was very time consuming.

The aggregate of the winning sessions was almost 200% of my net win if I recall correctly. High variance play will do that to you -- you often have big winning sessions and big losing sessions, so the delta between the two will be large. A player with lower variance might have aggregate winning sessions of maybe only 150% of his actual net win. So a high variance player who has a net win of $10,000 might actually owe more taxes than a low variance player who has won $12,000. Yuck! Lesson: if there are ways to maintain EV while lowering variance (and I know usually trying to lower variance is a folly), you may actually profit by doing so because your tax liability is reduced. Keep that in mind.

So, has someone come up with a better approach for adding up winning and losing sessions? As an aside, I'm a small fry in terms of the amount of money involved in my poker play -- I didn't have more than 2K hands at any level above 3/6 in 2004, and my overall winnings/aggregate session winnings were fairly deminimus relative to the salary from my real job... less than 10%. I gather this is a much bigger problem for online pros who make the big bucks.

[Xhad]

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Banks are required to report suspicious activity to the Treasury Department. Some "suspicious activity" threshholds are known (for example, banks report cash transactions of over $20,000--edit: I'm not 100% sure the threshhold remains 20K).

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I worked for a bank about 6 months ago and IIRC the threshold was smaller but I'm not positive and it may have changed since then. Also, I'd like to add that the paperwork involved with reporting large transactions includes requesting information from the accountholder, including your occupation which will result in a hammering if you're not reporting gambling income and don't have a day job.

[grapabo]

For what it's worth, this article talks about the nature of reporting income in poker tournaments (I guess cash game players are still on their own):

http://www.gambling-law-us.com/Artic...-debunking.htm

I lurked around the IRS web site, and one of their documents listing priority issues in 2005-2006 is to create a Revenue Procedure on withholding at source requirements for poker tournaments.

[mmcd]

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Does 1/3 of what I make this year rightfully belong to the U.S. government?

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Yes. Unless you go through the steps of renouncing your citizenship, you are subject to the tax laws. Deal with it.

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Legal/illegal doesn't equate to right/wrong.

[DespotInExile]

[ QUOTE ]
[ QUOTE ]
[ QUOTE ]
Does 1/3 of what I make this year rightfully belong to the U.S. government?

[/ QUOTE ]

Yes. Unless you go through the steps of renouncing your citizenship, you are subject to the tax laws. Deal with it.

[/ QUOTE ]

Legal/illegal doesn't equate to right/wrong.

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Im not sure why paying taxes on gambling winnings is a question of right/wrong, unless you're challenging the entire legitimacy of the tax system. Taxes are a part of life. We all agree implicitly to pay them. Sales, income, property, estate, etc.