IRS Audited my 2004 return

[2ndGoat]

Hello everyone,

I just opened a letter from the IRS regarding my 2004 federal return. Because the relevant issue is one that's been discussed very frequently by the 2+2 community, I thought some of you might like to follow along with my progress.

In 2004 I held a full-time job as a network security analyst, but made about 2/3 as much as my annual salary by playing poker (mostly online). I had very seriously considered omitting poker winnings from my return, but when a 6k windfall hit shortly before tax time (an unresolved insurance claim myteriously resolved), it became that much more feasible to pay out a large chunk of cash, and I reported my poker income in full.

I did so on form 1040 line 21, additional income, rather than filing on schedule C. The IRS has proposed that instead schedule C was the appropriate place for that income, and as a result they believe I owe self-employment tax on the amount won.

I own both RBS' "The Tax Guide for Gamblers" and Scott/Chien's "Tax Help for the Frugal Gambler" and plan to reference some of the included case law in my rebuttal letter. If this generates any interest, I'll continue to update my situation.

2nd

[Ron Burgundy]

That's [censored], you had a full time job and they want you to pay SE tax?

Good luck.

[Niediam]

I had the feeling this sort of thing was going to happen a few years from now... but it's probably best for most of us that it's starting.

Thanks a lot though for letting us know and any future updates would most definately be appreciated.

[Berge20]

Please do keep us updated

[AAAA]

actually, for many this could be a good decision. pm me if you are curious about deductions you might have forgotten.

there are lots of people...especially those who travel who can come out ahead!

[2ndGoat]

<<actually, for many this could be a good decision. pm me if you are curious about deductions you might have forgotten.

there are lots of people...especially those who travel who can come out ahead!>>

I'll always take free advice, since I quit my job in 2005 and and about to file as a 2005 professional tomorrow. I'm pretty sure I squeezed out all the legitimate deductions I could, but it never hurts to get other ideas.

I just whipped up a draft of my reply. Comments are very welcome.

----------------------

I have received the Internal Revenue Service’s proposed adjustment to my 2004 federal income tax return. The IRS’ proposed change is to move $22152 income from “other income” on line 21 of form 1040 to schedule C. I do not agree with this change, and I intend to show you why my original return is correct.

In 2004 I held a full-time job as a network security analyst at the Federal Home Loan Mortgage Corporation (reference 2004 W2). I passed some time on nights, weekends, and vacations as an amateur poker player. I played somewhat sporadically, and over the year played roughly 450 hours of poker. My only play in a physical card room occurred during 2 trips to Las Vegas and 4 to Atlantic City. Only the Las Vegas trips lasted a week; the trips to Atlantic City were all 3 days in duration or shorter. Most trips occurred with friends sharing similar interests, and were undertaken as vacations. All of the other hours were spent playing online as a way of unwinding from my job during nights and weekends.

In order to file on Schedule C, I would have to have been involved in a trade or business in 2004. In the Supreme Court Case of Commissioner v. Groetzinger, KTC 1987-123 (S.Ct. 1987), the Court concluded, “If one’s gambling activity is pursued full-time, in good faith, and with regularity, to the production of income and livlihood, and it is not a mere hobby, it is a trade or a business.” Thus all of these facts must be present to qualify as a professional gambler, rather than a hobbyist. I contend that this clause clarifies my position as a hobbyist on 2 counts:
1) I did not pursue a gambling activity full-time. 450 hours in a year (averaging 9 hours/week) falls well short of the common criteria of spending 2000 hours (40 hours/week) on an activity.
2) I did not purse a gambling activity with regularity. From January 8 to January 30, I did not play poker at all. There are several other occasions where I did not did play poker for a week at a time, and many more still where I played only 2 or 3 hours in a week.

Because of these facts, I believe my original return is correct without amendment.

--------------------------

I assume they're going to want proof, but all my records are in statking, and I have no written diary. I'd rather they didn't know that. I guess I should sent it in (after revisions) without the records attached and see what they reply.

In any case, I have until May 10 to reply, and since 2005 taxes and a downswing have left my bankroll in less-than-comfortable shape, I'll hold off for awhile just to buy time in case they don't see things my way.

2nd

[mmcd]

Some general observations/advise:

1. I'd be willing to bet the trigger for your audit was your high ratio of itemized deductions to AGI. When the IRS gets your tax return, it gets ran through a computer that spits out "suspicious" returns (i.e. those where an audit would be +ev). The major trigger that will get your return flagged by the computer is your deduction to income ratios on various schedules.

2. String this thing out and be as evasive as possible when dealing the IRS (don't lie to them at all obviously, but you want this thing to take as long as possible). Your file might get lost in the shuffle, and the IRS only has until April 15, 2008 to asses additional tax on your 2004 return. Whenever they ask you for something, tell them you'll get back to them with it (even if you already have it ready) and take your time in doing so. Also, make it perfectly clear to the IRS agent that you are fully willing to go to court over this. The IRS generally doesn't want to go to court, especially in cases like this where there is very good chance they will lose.

3. If you haven't already filed your 2005 return, don't!! Instead, file form 4868 which will give you an automatic extension until August 15. You must send a check in with this form the approximate you owe, but you won't have to send in your return until August. If you file for 2005 now, that return will be very likely become involved in the audit as well.

[AAAA]

[ QUOTE ]
“If one’s gambling activity is pursued full-time, in good faith, and with regularity, to the production of income and livlihood, and it is not a mere hobby, it is a trade or a business.”

[/ QUOTE ]

IMO, your description sounds like an amateur, albeit a talented one, likely to become professional. $20,000 per hour for 500 hours, from home in your jammies is a great lifestyle in most parts of the country!

a couple points...your statking records are contemporaneous and exact...don't even think of apologizing for them. they are great! the problem might come if you can't determine sessions for them.

you might want to point out the number of hours you are playing now as a pro if you are.

the big problem with all of this is classing poker as "gambling." gambling by its most common definition is negative ev, and can not be an ongoing business no matter how well you play it.

Stock market, real estate investment, venture capital, sports betting, poker and bridge are all activities where the ones who know what they are doing will outperform amateurs almost all the time...and should not be treated as gambling. However, as long as IRS is treating poker as gambling, and giving it inequitable tax treatment for online players whose session wins and losses do not fit the pattern of live play...when that is happening, you must be allowed to play by the rules they established for recreational gamblers.

at the very least you should be able to get reasonable treatment for deductions you had not itemized. you should get time and latitude for reconstructing your deductions. an allowance as it were, for normal expenses.

you may also want them to be aware of the precedent this will be setting for others who have wanted to use the schedule c.

consider the three year hobby test as an item as well. you might want to claim that until you have three years of profit and another major job, you shouldn't be required to file schedule c. in other words you are being given prejudicial treatment on every front...if you wanted to be a pro, you would likely be disallowed, but since you wanted to be treated as recreational, they should use the reverse of their own test as a litmus test.

sorry if this isn't totally edited, but i am multi tabling

[Zele]

On your 2004 return, did you report your net winnings or your gross winnings (and then your gross losses as a deduction)?

Thanks for sharing your situation.

Good luck,
Zele

[otctrader]

[ QUOTE ]
On your 2004 return, did you report your net winnings or your gross winnings (and then your gross losses as a deduction)?

Thanks for sharing your situation.

Good luck,
Zele

[/ QUOTE ]

I'm curious about this as well - how is the IRS determining that the income qualifies as self-employment? Without logs (all the IRS should see is a figure on Line 21 marked as "gambling income"), who is to say you didn't bang out $20k on some online jackpot or keno game over the course of 5 minutes?