In our previous article, we discussed the non-filing syndrome in some detail. We stated that the IRS aware that once someone slips through the cracks, they will continue to not file year after year, due primarily to fear of what will happen when they get caught or the lack of money to pay the back years' taxes, penalties and interest. We also mentioned that the IRS is making deals, forgiving penalties and interest and even are accepting less than payment in full depending upon your circumstances. and why they doing this (because they want you to file this year, next year and the years thereafter) Let us assume you have "fallen" through the cracks and have failed to file for a few years primarily because all your income is unreported income from poker games. Let us further assume that you want to come clean, file your over due tax returns but you have no records. What should you do?
As you may already know, IRS Revenue Procedure 77-29 was issued for the purpose of providing guidelines relating to the responsibility for maintaining adequate records in support of gambling winnings and losses. It is stated therein, " An accurate diary or similar record regularly maintained by the taxpayer, supplemented by verifiable documentation will usually be acceptable evidence for substantiating wagering winnings and losses". Since you did not maintain such records it seems that this regulation prohibits you from claiming any losses. However, this is not necessarily true. The use of estimates for income and expenses in cases where records have been lost or are missing is often allowed by the IRS (or the courts). In fact the American Institute of Certified Public Accountants has issued a Statement of Responsibilities in Tax Practice concerning the use of estimates. This states that a CPA may prepare tax returns that involve the use of the taxpayer's estimates if it is impractical to obtain the exact data and if the estimated amounts appear reasonable to the CPA. It is advised. that although full disclosure to the IRS of the use of estimates is not required, disclosure should be made where failure to do so would result in misleading the IRS regarding the accuracy of the return. There are a number of court cases where the use of estimates for gambling income and losses have been upheld. There are many more, where the lack of records or an obvious attempt to use fabricated records, have been disallowed and often a fraud penalty was assessed.
What is important in using estimates, is to avoid the appearance of deception and thus the appearance of fraud. Be aware, as stated above, there are additional penalties that can be levied for filing fraudulent or frivolous (baseless) returns. Fraud is not defined in either the Internal Revenue Code or in the Income Tax Regulations. An often quoted judicial definition describes fraud as "...actual, intentional wrongdoing..." with the intent "to evade a tax believed to be owing". This definition has been expanded to include acts that were done without a "bad or evil purpose". In another case, the Supreme Court ruled that "willfulness" is present when the taxpayers actions constitute "...a voluntary, intentional violation of a known legal duty". Consequently, a taxpayer's deceptive or misleading conduct distinguishes fraud from mere negligence. Ordinarily, the evidence that convicts a taxpayer of fraud is circumstantial which means that the court must infer the taxpayers state of mind from the evidence. The following circumstances have been ruled to be fraud:
You may have some records that may help you estimate your income and expenses such as bank account or credit card statements or "players bank" records, statements from poker room managers and tournaments directors as to the nature (frequency and size of game) of your play, evidence of your lifestyle (i.e., extravagant, frugal, meager, etc.) that you can obtain to substantiate your estimates will certainly increase your chances of having your withstand examination. Either way, what you are going to do is file a return based upon your good faith estimates of winnings and losses. The use of such estimates should be disclosed to the IRS by attaching a signed statement disclosing what data was estimated. You may have to convince the IRS that your estimates are reasonable and made in good faith and that your failure to file in a timely manner was merely negligence (not fraud). As always we recommend that you seek some professional guidance in developing, justifying and defending your estimates.