IRS Cracks Down on Unreported Gambling Income: A $1 Billion Oversight
Posted on: October 7, 2024, 11:15h
Last updated on: October 7, 2024, 01:47h
In a significant move that has sent ripples through the gambling community, the IRS is intensifying its efforts to collect taxes on unreported gambling winnings. This crackdown comes on the heels of a recent audit revealing that Uncle Sam may have overlooked more than $1 billion in income tax from recent casino jackpots. Among those caught in the crosshairs of this enforcement action is one of Las Vegas’ most recognizable casino gamblers.
The Audit Findings
The findings were detailed in a report released by the Treasury Inspector General for Tax Administration (TIGTA) on September 30. The audit uncovered that 148,908 Americans who had gambling winnings exceeding $15,000 failed to file tax returns between 2018 and 2020. Collectively, these winnings amounted to over $13.2 billion, resulting in unpaid taxes exceeding $1.4 billion.
The report specifically analyzed the IRS Form W-2G, which is issued for slot jackpots of $1,200 or more and Keno wins of $1,500 or more. Alarmingly, it noted that 103,000 of these delinquent winners had never received notices or faced any efforts to bring them into compliance with tax regulations.
In response to the findings, the IRS acknowledged the issue, stating, “We agree with the recommendation,” and committed to initiating enforcement actions to rectify the oversight.
Understanding the Tax Implications
Under the Internal Revenue Code, all gambling gains are fully taxable and must be reported as income by individual taxpayers. For those who itemize their deductions, gambling losses can be deducted up to the amount of their winnings. This means that while gamblers may enjoy the thrill of winning, they also bear the responsibility of accurately reporting their earnings to the IRS.
Additional Concerns Raised by TIGTA
The TIGTA report highlighted several other critical issues beyond the unreported winnings. One significant concern was the filing of hundreds of W-2Gs by casinos that lacked the required taxpayer identification numbers. This omission complicates the IRS’s ability to trace winnings back to their recipients, making it challenging to enforce tax compliance.
Moreover, the report pointed out that the IRS has insufficient processes in place to identify noncompliance with excise taxes by gambling operators, particularly in the rapidly expanding online sports betting market. While the IRS agreed with the recommendation to enhance oversight, it disputed the significance of the missing taxpayer IDs, claiming the number was relatively small.
The Need for Code Adjustments
The current Form W-2G does not adequately address the evolving landscape of gambling, particularly with the rise of sports betting and online gaming. As one of the fastest-growing sectors in the U.S. gaming industry, sports betting is regulated in 38 states and Washington, D.C. However, the form only includes nine specific types of gambling activities, excluding a dedicated wager code for sports betting.
TIGTA’s report emphasized that if the IRS had a specific wager code for sports betting, it could better identify potential non-filers and under-reporters. This gap in the system highlights the need for the IRS to adapt its processes to keep pace with the changing gambling environment.
The Broader Tax Landscape
The Treasury Department estimates that U.S. taxpayers underpaid their federal taxes by a staggering $688 billion in 2021, with non-filers accounting for 11% of the uncollected funds. The IRS imposes a Failure to File penalty of 5% of the unpaid taxes for each month a tax return is late, capping at 25% of the unpaid tax amount. While the IRS typically reserves criminal prosecution for cases involving significant fraud and tax evasion, the current crackdown on gambling income suggests a shift in focus.
A Personal Perspective
Scott Roeben, founder of the popular Vital Vegas blog, recently found himself embroiled in this IRS audit frenzy. He received a letter from the IRS regarding taxes on $100,000 in unreported W-2G income for 2022, despite having filed his tax return on time and reported all gambling income accurately. Roeben expressed frustration over what he perceives as “selective persecution of casino patrons” and criticized the IRS for being out of touch with the realities of gambling.
He argued that the audit process forces individuals to navigate complex bureaucratic hurdles, often requiring them to hire tax professionals to assist with audits. This situation not only adds financial strain but also discourages individuals from engaging in activities they enjoy, such as gambling.
The Bigger Picture
As the IRS ramps up its efforts to collect on unreported gambling income, the implications for both casual gamblers and high-stakes players are profound. The agency’s actions serve as a reminder of the importance of compliance in an industry that is rapidly evolving. With the gambling landscape changing and expanding, it remains crucial for both the IRS and taxpayers to adapt to ensure that everyone fulfills their tax obligations while enjoying the thrill of the game.