In our last article, we discussed the position of the IRS in regards to the issue of "lumping" wins and losses. "Lumping" by the way is the term the IRS uses to describe the practice "netting" various gaming transactions and reporting them as one event. For example, you and your wife come to Las Vegas for on weekend a month. She plays slots and you hang out in the card room. On the flight home, you count your money to verify that which you already knew, together you made a little money, thanks to your wife hitting a progressive poker machine for over $1,600 which covered your rare loss at Omaha. Being a faithful reader of the these articles, you faithfully record a win of $450 in your pocket calendar in the box for today's date in the pocket calendar that you use to keep records of your gaming. You obviously skimmed (no pun intended) our articles. We must advise you that you have just committed the sin of "lumping". m To be technically correct, you must record your wife's jackpot as a win for the amount shown on the IRS form W2-G issued to your wife at the time she collected her winnings. All the amount she spent on each machine she played must be recorded separately along with additional information that is discussed below. The amount you won or lost at each poker session must be recorded separately. The concept of a gaming session was also discussed in our last article..
The point we have been trying to make is that should you unexpectedly win a large amount, (the dream of many), you had better have records, that meet the IRS requirement, of your other gambling activities so that you can claim losses to reduce the tax bite the comes with such a large win.. The burden of proof is on you! It is your responsibility to keep a diary or similar records of your winnings and losses as specified by the IRS in Revenue Procedure 77-29. In order to substantiate a deduction of your gambling losses, you must keep meticulous records of your gambling activities. And in the case where you gamble regularly, but do not usually win, and think "why bother keeping a diary?". But you never know when lightening is going to strike and suddenly you owe a great deal of taxes. If you experience significant losses and you substantiate your activity in an IRS approved manner, you can protect yourself from a large tax bill should you get lucky. Many of you probably say to yourselves, "It's not worth the time and effort to keep a diary, I'll never win big!" But there are others, who have the opposite view. Why gamble if you don't expect to win and if you do expect to win, you should give your self every break, right? And that means keeping adequate records of all your gambling activities, just in case that big win happens today!
Revenue Procedure 77-29 contains the guidelines for gambling activity and as we have seen, the IRS requires, "an accurate diary or similar record must be maintained" and " the diary should contain at least the following information":
A number of the different types of wagering have requirements in addition to the five listed above as to the information to be included in your diary. It is often expressed by the misinformed that a journal is all that is needed to substantiate your winnings and losses. That is a misconception. The IRS lists a number of items that should be used to back up or support the entries in your diary which is reproduced here. " You need to have documentation such as W2-G's, wagering tickets or receipts, canceled checks, credit records, bank withdrawals, and any receipts provided by the gambling establishment".
Incidentally, those undated, unsigned "rebuy" receipts that have been used for years are inadequate as proof of the expenditure. To be considered proof, a receipt must be dated, state the amount received and the names of the parties involved and either be stamped "paid" or signed. To make your journal more creditable, make your entries in ink and maintain it as you go since a journal that is made out years after the fact will be disallowed if discovered. Most such attempts to "paper" your trail" after the trail is long cold, are supposedly "easy to spot". (Normally a review or audit of your return will not occur until several years after you file your return) The I.R.S. states that any documentation must be "highly legible" which means it would be wise to neatly print your journal.
Another reason for maintaining records is that they can be of help to you years latter. The I.R.S. and the courts have routinely recognized the validity of accurately and honestly maintained gambling records. In fact, there was a case in which a taxpayer's diary for a given year was lost when the taxpayer's car was stolen., but was allowed by the court to "reconstruct" the diary because the court considered the gambler to be honest and forthright due to the fact that he had previously filed his tax returns based upon what the court considered to be accurately maintained diaries. So this gambler's diligence over the years paid off, because it enabled him to convince the court to allow his "reconstructed" data.
Record keeping may seem and probably is a pain in the ... you can choose where, but it is part of the tax law, part of reality and something you should start doing immediately if you are not already conforming to these requirements. This is especially true if you are one of the large army of recreational players that love to play tournaments or possibly you pursue the progressive jackpots on poker machines. One lucky day and then one big W2-G and no diary nor receipts, is a situation that results in YOUR PAYING SUBSTANTIALLY MORE in taxes than is necessary.