The IRS has been keying in on gambling income for audit purposes over the past couple of years. Since the advent of online gambling, during the Covid-19 pandemic, online gambling has become more prevalent, further increasing IRS scrutiny. Its extremely common for a taxpayer to think that if they lost money gambling they don’t need to declare any gambling income on their tax return. That said the IRS requires a taxpayer to report the total amount of their gambling income on their tax return. If however you lose money gambling you are able to write off those losses up to the extent of gambling winnings. When a taxpayer hits a jackpot at the casino, if the winnings are in excess of $1200 the casino is required to issue an IRS form W2-G. After the tax return is submitted the IRS compares and contrasts the taxpayers return against data received by the IRS on a wage and income transcript. In the event that the tax return does not reflect the taxpayers gambling winnings the IRS will oftentimes subject them to an audit.
That is what happened in this particular instance a taxpayer had won over $3 million in gambling winnings however they had lost more than they had won. The IRS subjected the taxpayer to an audit and discerned that they owed over $1.7 million in tax penalties and interest. After hiring our firm we were able to review the taxpayers records and challenged the IRS assessment. In this instance as the taxpayer had lost more than they had won we were able to reduce the proposed tax increase from $1.3 million down to $0.00.
In the event that you receive and audit letter from the IRS regarding gambling winnings it is important 2 challenge that proposed assessment if you do not believe that you will owe.