Facing an IRS Tax Bill for Gambling Winnings?
Whether you got lucky on a rare night out or you gamble regularly and happened to strike gold, the excitement from a big win can stay with you for a long time. But if you don’t plan ahead for the tax consequences of gambling winnings, you could be hit with unexpected tax bills.
It’s essential to plan ahead for your tax winnings and address any tax bills promptly because interest and penalties can snowball quickly.
The team at Wiggam Law can help. Our tax specialists have worked with many clients who received an unexpected gambling-related tax bill, and we know how stressful this situation can be. We’ll help you determine your next steps—call us at 404-609-1300.
Why Your IRS Tax Bill May Be Wrong
Seeing a massive tax bill related to a big gambling win can be tough to stomach, but it’s important to realize that what you’re looking at may not be what you actually owe. The inaccuracy can occur for a couple of different reasons.
Incorrect Tax Assessment
If you didn’t file a tax return at all, but the IRS received a Form W-2G in your name, the agency may use that information to assess taxes against you. In particular, the agency may generate a substitute for return on your behalf, including the reportable winnings reflected on the Form W-2G. Generally, those substitutes for returns are prepared unfavorably and generally don’t include any deductions or credits.
In these cases, the IRS will send you a 90-day deficiency notice. To correct the issue, you can file an original return with the help of a tax professional.
Unclaimed Losses
Say you filed a return but didn’t report your gambling winnings. If the IRS has received a Form W-2G, the IRS can propose to update your return to include the gambling winnings and send you a notice related to the potential adjustments.
However, the IRS has no context about the winnings or information on whether you have any offsetting losses for the year. For example, they may see that you received winnings totaling $20,000, but they will not know that you lost $30,000 on gambling throughout the same year, which more than cancels out that one big win.
You can claim your gambling losses if you itemize your deductions. There is a catch, though, as you can only deduct your losses up to the amount you won. Using the example given above, even though you lost $30,000 gambling, you would only be able to deduct $20,000, the value of your winnings. The excess loss of $10,000 would not benefit you come tax time.
It will be important to document your gambling losses in order to deduct them properly. Keeping detailed records of your losses will also allow you to substantiate the amounts claimed in the event you need to prove to the IRS the amounts reported are accurate.
Immediate Steps to Take
It’s normal to be alarmed and overwhelmed when you receive an unexpected tax bill from the IRS. Taking the proper steps can help you prevent more aggressive collection actions from the IRS and get the situation under control before interest and penalties start piling up.
1. Respond Immediately
First, the most important thing to do is take action when you receive a notice or bill from the IRS. It’s all too easy to ignore these notices and plan on dealing with them later—but the longer you wait to respond, the more interest and penalties add up.
Furthermore, if you wait too long to take action, the IRS may move on to more aggressive collection actions, such as levies and liens. If you have received a notice or bill, you can either reach out to the IRS directly or contact Wiggam Law to explore your options so that we can advise you on the most strategic approach to handle the balance.
2. Prepare Documentation
Use this time to get your gambling records in order. If you have losses, you may be able to claim them as a deduction on your tax return, and it will be important to have your records to substantiate the loss amount. A helpful tool when documenting your gambling history is your player card, which will show the games you played and how much you won and lost.
If you don’t have a player card, use other documentation that may be available to you—wager tickets, canceled checks, payment slips from gambling establishments, and bank withdrawals can all help.
3. Contact Wiggam Law
Depending on how you found out about your tax bill—through your own W-2G, a gambling establishment sending a W-2G to the government and your return getting adjusted, or the government receiving a W-2G and filing a substitute for return—you could have a substantial amount of money to save on your taxes. Reach out to Wiggam Law to explore your options and develop a plan.
How to Reduce Your IRS Tax Bill
Before letting your tax bill send you into a panic, remember that what you owe may not be accurate. By taking action right away and addressing your tax bill, you can get a more realistic understanding of what you owe and figure out a payment plan. Here are some points to consider.
Amending Your Tax Return
If the IRS adjusted your tax return for you in response to a W-2G from a gambling establishment, you can prepare an amended return to claim deductions and credits that would drive down your tax bill.
You must file Form 1040-X, Amended U.S. Individual Income Tax Return, to do so. Ensure you have all of the documentation of your gambling losses because if the IRS audits your return, you must prove your losses.
Accurate Reporting of Losses
When reporting losses, take protective measures to calculate your losses accurately and thoroughly. All losses that you claim on your tax return must be for the same calendar year in which your winnings were received.
The more documentation you have to prove your losses, the more prepared you will be if the IRS audits your return. Remember that you can only deduct losses up to the amount that you won. Any losses above and beyond that have no bearing on your taxes.
The Role of Professional Assistance
Working with the team at Wiggam Law can make this entire process much easier for you. You may end up with a surprise gambling-related bill in multiple ways, and the approach you take to address the balance depends largely on your circumstances. Because our team has worked with so many taxpayers in different gambling-related tax situations, we can look at the details of your bill and help you find the most efficient way to tackle your tax debt.
Prevent Future Tax Issues
Once you’ve gone through this experience once, you’ll want to do whatever it takes to avoid going through it again. Luckily, with a little bit of planning and organization, you can stay compliant with IRS requirements, keep thorough records of your gambling expenditures, and make every tax season smooth and stress-free.
Detailed Records
Maintaining thorough records of your gambling wins and losses is the most important way to avoid surprise tax bills. Even if a gambling win falls below the threshold that requires the facility to report it, it is still reportable income, and you should document it as such. The IRS recommends keeping an accurate diary or equivalent record of your gambling wins and losses. This diary should include:
- The date and type of your wager or gambling activity
- The name and address where you gambled
- The names of anyone else present with you at the facility
- The amount you won or lost
Winnings are reported on W-2G, which the gambling facility sends to you and the IRS, and Form 5754, Statement by Persons Receiving Gambling Winnings. Other useful forms of documentation include wagering tickets, substitute checks, credit records, canceled checks, payment slips and winnings statements from gambling establishments, and bank withdrawals.
IRS Reporting Requirements
If you win $600 or more, accounting for an elected wager deduction, the establishment will likely be required to issue a Form W-2G. Certain games have specific reporting limits that trigger a W-2G filing requirement. They include:
- $1,200 threshold for bingo and slot machines (not reducted by the wager);
- $5,000 or more from poker tournaments (reduced by the wager or buy-in);
- $1,500 or more from keno (reduced by the wager).
If your win is over $5,000, accounting for the wager, they will also likely withhold 24% from certain games to cover federal taxes. Whether or not that withholding fully covers what you owe depends on your income level and tax rate. If the payer doesn’t withhold taxes, you may want to set aside between 10 and 30% of your winnings to cover your bill come tax time.
When you keep an in-depth log of your wins and losses, nothing will surprise you when it comes time to file your tax return. You’ll already know how much you won, how much you lost, how much has already been withheld for taxes, and how much you have yet to pay in taxes.
If you gamble regularly and have complicated logs of losses and wins, you may find it helpful to work with a CPA throughout the year to keep your tax records in order. This way, you can figure out throughout the year if you owe more than you’re comfortable with and if you need to set more aside.
Options to Pay Your Gambling Tax Bill
If you’re faced with a correct tax liability that you cannot afford to pay upfront, consider the following resolution options:
- Installment agreement – Make monthly payments against your balance. Penalties and interest may continue to accrue. e.
- Offer in compromise – Settle for less than you owe if you prove that you don’t have the assets or income to cover the full bill.
- Currently not collectible – Get relief from collection actions if you show the IRS you cannot afford to pay anything.
You will also incur penalties if the IRS assesses tax against you for unreported gambling winnings. Consider asking for penalty abatement if you have a good history of compliance.
Why Choose Wiggam Law?
Tax matters are essential to your financial well-being. Failure to comply with the IRS can lead to wage garnishment, levies, liens, loss of passport, and more. Choosing the right tax professionals can help you stay compliant and avoid unnecessary expenses and penalties.
Our team is comprised of tax attorneys with a laser focus on tax resolution. No matter how complex or simple your tax matter is, we’ve handled it before and helped taxpayers like you find peace of mind while limiting stress. In particular, we believe in a personalized, targeted approach when it comes to gambling-related tax concerns.
These problems often seem to come out of nowhere, leaving you in debt and panicking about what to do. With our expertise and track record of success, we can find the solution that works for you and help you get caught up.
We also understand how overwhelming it can be to work with the IRS directly. With Wiggam Law, you can rely on our tax professionals to handle communication with the IRS on your behalf. We’ll help you avoid common mistakes taxpayers make and guide negotiations in a way that suits your best interests.
Ready to tackle your gambling tax debt head-on? The team at Wiggam Law is here to help. Call us at (404) 233-9800 or fill out our online consultation form to schedule a meeting with us today.