Gambling Winings

[MLINDER42]

New client is being audited for 2006 & 2007 had gambling winnings of &182,000 2006 152000 2007 175000 2008.Previous preparer took losses equal to winnings in 2006 and 2007 2008 not filed yet.Client did not use card so there is no way to determine losses.She says she lost it all back.I can not understand how she won all this money since I am not a slot player.The winnings are taken form copies of W-2G'S she must have won other money under $600 not reported.Any ideas?

[solomon]

It is not so simple as saying she lost it all. This CCA might be helpful.

http://www.irs.gov/pub/irs-utl/am2008011.pdf

[MLINDER42]

Gambling Winings

Thank you for the post.One of my problems is I can not understand how she won such huge amounts in the last three years and how she lost it all back It seems there are not enough hours in the day.Plus she claims she left at the end of each time broke.

[solomon]

If her only defense is she lost it all, I think the outlook would be bleak. I would want to see the dates and the amount of money (her basis) for wagering each time.

[taxmom34]

it is truly surprising that your client did not use card, she obviously goes to casinos often, and with this amount of winnings knows the perks with the card. It would depend on how much she won each time, i've known some people who won $1200 and left it. But to give you my experience, when i go to casinos i make a withdrawal on the day of or the day before i go and if i were to win (which i don't) i would have a record of at least the money i brought with me, not sure if IRS would accept this or not. Guess i'll have to win in order to see if it works. but i even know people who cash checks at the casino. as a last resort i would have her check her withdrawals on days of winnings.

[MLINDER42]

Gambling Winings

Thanks for the responses the thing that I find hard to follow is how she won over $500,000 in three years.I keep thinking they must have had some type of scam.

[Jiggers]

Have you checked....

Thanks for the responses the thing that I find hard to follow is how she won over $500,000 in three years.I keep thinking they must have had some type of scam.

her bank account for deposits and withdrawals during that time?

Look for checks to the casinos.

The IRS will want to see her bank accounts for unreported income.

[AuditorTurnedGood]

Thanks for the responses the thing that I find hard to follow is how she won over $500,000 in three years.I keep thinking they must have had some type of scam.

It actually is easier than you think. Once you "Win" money, many people end up gambling the winnings right back into the same machine. I have known a few people who have won thousands of dollars and left the casino with nothing. Once audited the typical "Little old lady" for her gambling losses - won and lost 750K in three years. As for the W2G amounts, it would depend on how often, and for how long, she was there. It's relatively easy to win big if you gamble enough (law of large numbers), and if you're winning that much, you're probably going to gamble even more. My grandmother once accidentially spent all night in a casino without realizing it.

[Jesse]

Also check credit cards.

It's a sad addiction for some people.

I have a semi-retired couple that averaged over $100,000 in winnings for 2005-06-07. They have incredible cash advances on their credit cards and every year they have lost more than they have won. They explained that when they start gambling in the casino they begin hearing Ka-Ching-Ka-Ching and think, hmm...I could be next and they dump more money in. Win a teaser jackpot now and then and dump it all back in plus more.

They left me last year as they found someone to prepare their tax returns as professional gamblers on Schedule C, making very little of their Social Security taxable(versus 85%) and also saving on State Income taxes as none of the gambling loss can be deducted in WI to offset winnings.

I thought it too aggressive and wished them well. I miss the people but not the tax return.

[PIGLEE]

Please, Please let us know how it goes. I live in fear of a gambling audit. I have trouble getting business people to keep auto logs. I know gamblers never keep a gambling log, because they don't want spouse to know what they are doing. Please let us learn from your experience. I know cashing a check at a casino does not prove where you really spent the money, but better than nothing.

[MLINDER42]

Gambling Winings

At this point there is very little proof.Client has no checking account no credit cards and job pays in cash.Has W-2 for the years but no other paper trail.Trying to reconstruct trips to casino using easy pass she had with cash deposit.

[OtisMozzetti]

the odds

She says she lost it all back.

In truth, the odds are at least 99.9% that she lost more than she won during each one of the years 2006, 2007, 2008.

A way to demonstrate those odds would be to conduct a computer simulation of the slot machine using whatever favoritism toward the casino house(s) that is generally recognized to be there. Run the random history of her activities about 100,000 times through the computer, and one would see that only about 10 times out of 100,000 would her winnings exceed her losses.

I would call that an overwhelming preponderance of evidence that she had losses up to the amount of winnings.

The rules of the IRS, however, are that a log book or diary must be kept to substantiate the gambling winnings and losses. I am convinced that the U.S. Tax Court would agree with that requirement.

[Bees Knees]

Regulation Section 1.274-5T(c)(3)(i) states that if the taxpayer cannot produce adequate written records, his or her own written or verbal statement may be sufficient evidence to establish the validity of an expenditure.

If there are no cancelled checks or cash withdrawals from a bank account, I would have the client re-construct written records from memory as best as can be remembered. Obviously it won’t be as accurate, but it will be better than nothing. Then have the client also write down the general routine: Client gets cash from work every Friday (reported on the 1040 via a W-2 or Sch C), then heads to the casino. Then proceeds to spend 75% of every paycheck on gambling. Anytime there are winnings, that money is immediately re-gambled until gone. Never walked away without losing everything.

Support this written statement with an accounting of assets owned. If the client is not living in a fancy house with fancy clothes, jewelry, new cars, boats, etc. beyond what could be purchased with the little amount of cash left from work (after gambling losses), the statement is thus verified to be an accurate account of how all gambling winnings are lost.

If the auditor says it is not good enough, explain that you will go to appeals and argue that the Regulations clearly state oral testimony can substantiate the deduction. If your client is good at making a clear convincing oral argument, then it should be enough to convince the auditor not to waste anymore time with the audit.

[Jiggers]

Something doesn't sound right.........

At this point there is very little proof.Client has no checking account no credit cards and job pays in cash.Has W-2 for the years but no other paper trail.Trying to reconstruct trips to casino using easy pass she had with cash deposit.

How many W-2G's did she have each year?

Did she carry the cash around that she won? Or did she pump it back into the slots at the same time?

I can't believe that she didn't have a casino card.

And taxpayers that deal with only cash are ones that are usually trying to hide something, especially with the amount of cash that is mentioned.

I agree that she can put something together to substantiate her gambling. As a start, can her employer give her a statement that shows the days that she was on the job. How far did she live from the casino(s)? Does the casino/hotel have records showing when she stayed there?

[erchess]

What would we do

without Bees?