How Many W-2Gs and Losses Before the IRS Wants Proof?

With all of the years you've spent in Vegas, have you ever known someone who had a high amount of W-2Gs and offset it with losses actually get audited and have to prove the losses? I'm assuming it has happened, but I wonder at what amount does the IRS finally take notice and ask for proof?

[Editor's Note: Tax season is upon us, so questions like these are starting to arrive, as they do on scheduled every year. Luckily, we have one of the world's foremost experts on gambling and taxes on call to assist with her personal experience -- and you all know who that is. You can check out her book, Tax Help for Gamblers, if your question doesn't get answered -- or asked. Take it, Jean.]

I can answer the first part of your question easily. I've known many gamblers who've had to tangle with the IRS in this situation and, in fact, I've been there myself -- several times. It's not a fun place to be. It's paperwork hell!

For the answer to the second part of your question, at what amount, I think it would be easier to learn the code for the "nuclear-football" briefcase that a military aide carries next to the president 24/7.

If the amount that the IRS takes notice was ever known, even as a general guess, it was a long time ago, well before computers. Once algorithm science became common, even guesses were a waste of time. Nowadays, artificial intelligence is rendering the IRS system even more enigmatic than ever before.

Here are just a few of the factors that the IRS has been known to consider when it determines whether or not to audit -- and are probably included in the millions more AI considers now. (The parentheticals cite where the topics are covered in my tax book.)

• How much money Congress allots them – bigger amounts mean more audits
• The number of random audits, which varies from year to year
• Whether gambling is an area that they're targeting in a certain year
• Cash businesses and home offices
• Taxpayers who file as professional gamblers (Chapter 4)
• Taxpayers who report a lot of W-2Gs
• Taxpayers who don't report all of their W-2Gs
• Taxpayers who report all their W-2Gs, from one to many, but have no records to prove their total gambling action for the year.(Chapter 2)

In Chapter 7 ("Audits and Other Scary Tax Problems for the Gambler"), I discuss the various kinds of audits – from letters that are often fairly easy to take care of up to serious court cases.

And if the feds don’t come for you, but your state tax people do, the book's comprehensive Part II provides a state-by-state guide for that unfortunate situation.

At the very end are sample tax forms that perhaps can help you reduce your risk of incurring the wrath of the IRS.

No part of this answer may be reproduced or utilized in any form or by any means, electronic or mechanical, without the written permission of the publisher.

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Comments

Kevin Lewis Jan-22-2024

The problem is...

If you want to "offset" your wins with recorded losses:
1. You have to itemize your deductions.
2. That means that you can't take your standard deduction. And thanks to the 2018 Trump tax "cuts" (har, har), that would mean a loss of $14,600.
3. Thus, unless you have proven losses of at least $14,600 AND wins of that much or higher to offset, you're in too bad so sad territory. Win? Pay up. Lose? Don't come crying to us. Itemizing would be worse than pointless.
4. The above also presumes that the IRS will take your loss statements to be valid. You win 10 grand, you get a W2-G for that amount. But you ultimately lose that much and more, and your win/loss statement (same casino) shows minus $2,000. The IRS, believe it or not, will not necessarily concede that the statement reflects that big win AND concurrent losses--they may only let you deduct $2,000.
5. Whether your return is accepted, or you get audited, depends on the number of earthquakes in China and duck farts in Ireland.

Derick Jan-22-2024

IRS

Ive deducted well over $20,000 few times and other losses probably over 20 years and never had a problem....So far!

Sandra Ritter Jan-22-2024

It depends

I had a client who had lots of W-2Gs one year many years ago totaling over $134,000 and another client totaling over $240,000, both taking the win amount in loses, neither got audited. The second client missed a couple of W-2Gs one year and he received an automated collection notice assessing tax on those winnings. An amended return showing the income, and loss on the Schedule A, eliminated the assessed tax. 

Kevin is correct in this regard: it's been much harder to itemize deductions and therefore deduct losses since the tax law change in 2018 (it's supposed to revert back to the old law in 2026 when it will be easier to itemize deductions, we'll see). But with other deductions: state and local taxes, medical expense, mortgage interest and qualified charitable deductions, some folks can take a good portion of their loses. It just depends.

IPA Noah Jan-22-2024

tax scam 0f 2017

Tax Scam of 2017 made it A LOT harder for us freelancers to itemize and deduct expenses.

sunny78 Jan-22-2024

90%

ipa, 90% of tax filers use the standard deduction, don't itemize.
The "Tax Scam of 2017"??? If you're referring to tax brackets making it favorable to much more favorable for the vast majority of people that resulted in people paying less to much less taxes? And the standard deduction almost doubled as a "scam" that benefits the vast majority 90% of people? Ok then. Impressive "scam"!

Perhaps those who gamble who are the tiny part of the 10% of people who used to itemize their gambling losses against winning and can't anymore and concerned about it might be gambling just a bit too much?

Kevin Rough Jan-22-2024

There's no easy rhyme or reason

As a tax preparer, I had one client who hundreds of Forms W-2G which totalled over $3 Million who could show a net loss and the IRS never questioned it.  I had another client with 1 Form W-2G just over $2,000 who also showed a net loss and he had to jump through hoops to prove the deduction.  Keep the records the IRS requires and you won't have a problem in case they ask.

David Miller Jan-22-2024

Records

 Kevin would you please list the records that you refer to required by the IRS. I am not being flippant, I am just uncertain which and how many different records are required. Thanks

Raymond Jan-22-2024

Records

Tax preparer and gambler here.  SOME years, I've kept a log on my computer, and every trip to Las Vegas, I keep a handwritten list of the following--date, location, game, cash in, cash out, net gain/loss, daily totals.  Very simple Excel sheet.  I'll grant that if you get the wrong IRS agent, that will prove to be "insufficient proof", but that can happen no matter how detailed your records are.

I've only needed the records once, the one time I hit a royal on a $1 VP machine (while taking a break from my primary game, craps).  I was able to itemize by bunching two years' worth of "irritable contributions" into one year, but I was out the state taxes to the state where I hit the royal and the state where I live.  That's a small price to pay, roughly $175 on a $4,000 jackpot.

Question of the Day - 22 January 2024

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