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Penalties For Not Reporting Gambling Winnings

The legality of gambling has a somewhat unsteady history in the United States. We are currently in the third wave of legal gambling, but each state has its own specific laws. More than half of the country has either legalized sports betting or started the process. 

Before you start placing wagers and raking in the winnings, there are a few things you should know. The IRS considers any money won via gambling to be taxable income. You’ll be required to report money that you’ve won while gambling on your tax return. 

Failure to do so will mean that you haven’t paid enough in taxes and will most likely owe the IRS some money. There can be serious consequences to owing the IRS back taxes, and you might need to consult with a tax expert for advice.   

Why Do You Have To Report Gambling Winnings On Your Taxes?

The IRS considers gambling winnings to be taxable income. The money that you win while gambling joins the list of bizarre items that are treated as income. Tips, alimony, large gifts, stock gains, and forgiven loans are a few of the other items that are also taxed, like income. 

The IRS views all winnings from lotteries, raffles, horse races, and casinos as taxable. That includes cash prizes as well as vehicles and trips. Depending on how much you win, the payer will be required to issue a Form W-2G that will need to be included on your tax return. Any winnings included on Form W-2G would need to be included as “Other Income” on Form 1040. It wouldn’t be fair for the IRS to only tax winnings and not consolidate losses. 

You are free to itemize and deduct gambling losses on Form 1040 schedule A as long as you’ve kept a record of winnings and losses. You can’t deduct losses that are more than the winnings that you reported. Gambling losses are claimed in your tax return’s Schedule A “Other Itemized Deductions” portion. 

How Much Is The Tax For Gambling Winnings?

Most tax percentage rates will fluctuate depending on a few factors, but not with gambling winnings. You will generally be required to pay a fixed flat tax of 24% for your gambling winnings. A large majority of reputable casinos will remove this total from your winnings and give you the Form W-G2 mentioned above. 

The exact rules may differ depending on the casino, but they generally take out the taxes on the following amounts:

  • More than $1,200 in winnings from slot machines or bingo 
  • More than $1,500 in winnings from keno
  • More than $5,000 in winnings from sweepstakes, pools, tournaments, or lotteries 

Taxes on winnings from games such as blackjack, carps, roulette, or poker are not immediately withheld by casinos. You will be required to individually report the winnings and pay taxes on them when you file your return. 

Another important distinction is that you will need to pay taxes on any non-cash prizes that you win. The 24% tax will be applied to the item’s overall value. So winning a new car in a sweepstake valued at $20,000 would require a tax payment of $4,800. Some casinos require these tax payments before handing over the prize. 

What Happens If You Don’t Report Gambling Winnings?

A few factors in play will influence the potential consequences of failing to report gambling winnings. 

The most important factor is how much money you have won gambling. You are legally required to report every dime that you win while gambling. The IRS might not notice if you win $100 while playing a slot machine and don’t report it. However, they will notice if you win a $750,000 jackpot and don’t report it. 

Another key factor is your tax history in regards to gambling. A one-time win that isn’t reported might be noticed, but several years in a row is likely to stand out. Failure to report gambling winnings could trigger an audit depending on the circumstances. 

The IRS might request a closer look at your financial records to determine why you’ve neglected to pay your due share of income taxes. The audit process can be quite a headache. If audited, you should probably consult with a tax professional. A tax professional can offer advice on how to proceed without incriminating yourself and winding up in even deeper trouble. 

What Does It Mean To Get Audited?

The IRS processes the tax returns of every American adult that files one. They already have a copy of most of your financial information and have an idea of your overall tax obligation. If your numbers are substantially different from theirs, they might want to take a closer look. This process is known as an audit and can be highly stressful for the IRS. 

The IRS will request a copy of all relevant financial records, documents, and files. An agent will review this information and determine whether or not your return is accurate. The overall audit process usually takes between three to six months to complete. The agent will make their ruling, and you will be responsible for any tax that the IRS claims that you owe. 

You can dispute the determination and appeal the results of the audit if you disagree. The Office of Appeals would hear your case and review the information. It’s pretty rare for them to overturn the findings of an audit, but it’s a free option and can be worth a try. 

How Can You Pay Off Back Tax?

The most likely outcome of an audit is that the IRS will determine that you owe them money in the form of back taxes. The total amount will be whatever you failed to pay on your return, plus additional late fees, interest, and other penalties. 

It’s best to take care of your tax bills as soon as possible. The IRS doesn’t hesitate to levy heavy sanctions against you, and the additional financial penalties can compound very quickly.  

These are the best methods of paying off your tax with the IRS:

Set Up An Installment Agreement

The IRS is willing to help you as long as you make payments on your tax. Entering into an installment agreement will show the IRS that you are serious about paying your back taxes.

Installment agreements are essentially payment plans for your tax. Fees, interest, and other penalties will be added to your total tax owed and divided into even monthly payments. As long as you continue making these payments, your account will be in good standing with the IRS. 

Be careful to maintain your monthly payments. The IRS might take more aggressive collection actions if you start to fall behind.   

Take Out A Personal Loan

It’s usually a bad idea to incur more back tax to pay off existing tax liabilities. However, owed tax is unlike other types of bills because the IRS can take collection actions that would otherwise be illegal. 

It might be a good idea to consider taking out a personal loan to pay off your back taxes. You can also use your credit card or refinance your home. 

Make sure you take the time to review the terms and conditions of your loan. The idea is to save you money by paying off the IRS quickly, not paying more money to your bank or credit card company. 

Apply For A Currently Not Collectible Statuses

If you are currently experiencing economic hardship, then you might be eligible for a currently not collectible status. You will need to prove to the IRS that paying off your tax obligation is virtually impossible at this moment, and you will need more time. Currently, collectible statues aren’t normally granted, but they can be worth trying. 

It’s important to note that even if the status is granted, the owed tax is not forgiven or reduced in any way. You will still owe the IRS the total amount and possibly additional penalties and interest. A currently not collectible status will only freeze collection attempts by the IRS for a specified time. After the time period is over, the IRS will resume its efforts to recover them.

Make An Offer In Compromise

Owed taxes can quickly grow and become virtually insurmountable. An offer in compromise is an attempt to pay off the owed tax without having to pay the full amount. The IRS usually rejects these offers, especially if they can prove that your tax obligation is legitimate. However, they might be willing to accept your offer so that they can at least recover some of the back taxes. 

There is a non-refundable fee of $205 required for submitting an offer. Make sure that your offer is serious, or you can end up paying this money just to get rejected. If the IRS does accept your offer, you will still have to pay taxes on the forgiven amount. Remember that forgiven loans are also considered taxable income by the IRS. 

The Takeaway

The money you win while gambling is considered taxable income by the IRS. You will be required to report any amount of money you win during the year. Failure to do so could result in an audit and the IRS determination that you owe them back taxes. 

If you owe back taxes or are undergoing an audit, meeting with a tax expert might be a good idea. The professionals at Coast One Tax Group can advise you on how to handle the audit process and pay off your back taxes. 

SOURCES:

Gambling And The Law – Pivotal Dates | PBS

10 Taxable Items That May Surprise You | Investopedia

Topic No. 419 Gambling Income and Losses | Internal Revenue Service

What Taxes Are Due on Gambling Winnings? | Investopedia

Top Audit Triggers That Catch the Attention of the IRS | The Balance

How Do IRS Audits Work? | Investopedia

What Is a Tax Levy? | The Balance

Five Ways To Pay Your Taxes When You Don’t Have The Cash | Forbes

Payment Plans Installment Agreements | Internal Revenue Service

Currently Not Collectible | Taxpayer Advocate Service

Offer in Compromise | Internal Revenue Service