The tax attorneys at Nardone Law Group, LLC frequently advise clients in Ohio and throughout the United States on tax law issues involving gambling. The most frequent issues that arise are those involving substantiating gambling losses before the IRS. Whether you are a professional or an occasional, amateur gambler, you can only deduct gambling losses to the extent of gambling winnings. Professional gamblers have the added benefit of being able to deduct ordinary and necessary business expenses relating to their gambling, such as expenses for travel, meals, and lodging. Amateur gamblers cannot deduct these expense as they are considered personal in nature when an activity is not engaged for profit. Professional gamblers report gambling winnings and losses on Schedule C, while amateur gamblers report their more limited losses as itemized deductions.
For most people, gambling is a form of entertainment, and they do not maintain detailed records for their gambling like they would a business or other for-profit activity. Gambling losses typically exceed gambling winnings. As a result, the most common issue that arises is substantiating gambling losses. In general, adequate documentation is required to claim gambling losses. A recent case that highlights the importance of maintaining adequate documentation of gambling losses is Lakeisha R. Figures v. Commissioner, TC Memo 2012-296. This article briefly describes the problems that Ms. Figures encountered in Tax Court for substantiating her gambling losses and sets forth proactive steps for taxpayers to follow to substantiate their gambling winnings and losses.
Taxpayer Substantiation of Gambling Losses in Figures v. Commissioner, TC Memo 2012-296
In Figures v. Commissioner, TC Memo 2012-296, Petitioner Lakeisha Figures, an amateur gambler, claimed itemized deductions for gambling losses of $8,500, $15,455, and $5,522 for 2007, 2008, and 2009, respectively. The Petitioner offered only her testimony that she played the slots quite often and that she incurred some losses. The Tax Court recognized that it could estimate the amounts of allowable deductions, but the taxpayer must first provide some credible evidence upon which to base the estimate. The Petitioner ultimately failed in providing credible evidence. She did not keep any records of her gambling activities for the years at issue. She did not testify as to the number of times she played or as to the amount of money she lost at any given visit. The Tax Court held that the evidence was insufficient to base an estimate as to Petitioner's gambling losses. Thus, the claimed gambling loss deductions were disallowed and the Petitioner was assessed with an accuracy-related penalty under I.R.C. § 6662.
This case illustrates that Ms. Figures needed to provide more evidence to substantiate her gambling losses. But how much evidence is needed? The documentation standard may not be as narrow as it seems. In fact, the Tax Court indicated that if sufficient evidence exists that a taxpayer incurred a gambling loss, then it can estimate the amount of allowable deductions. The question then becomes what evidence could Ms. Figures have presented that would have been sufficient to prove her gambling losses?
1. Ms. Figures could have used a Player’s Club Card while she gambled at the casino.
By using a Player’s Club Card, you can request a win/loss statement and a signed letter that summarizes all of your tracked gaming activity. You can request this information from the casino representative where you gambled. The casino will generally require these requests to be in writing. The tax attorneys at Nardone Law Group, LLC can assist in obtaining these statements and letters. But, if you did not use a Player’s Club Card for the majority of your gambling activity, you cannot substantiate your gambling losses in this manner. Accordingly, other evidence will be required.
2. In lieu of a Player’s Club Card, Ms. Figures could have maintained an accurate diary or similar record.
If a diary is kept, the IRS requires that it contain the following information: (1) the date and type of specific wager or wagering activity; (2) the name and address or location of the gambling establishment; (3) the names of other persons (if any) present with the taxpayer at the gambling establishment; and (4) the amount won or lost. It is best to keep this diary with you at the casino and update it contemporaneously with your gambling activities. It is also advisable to withdraw the cash you are going to use gambling from the casino’s ATM machine and to use your credit card for other expenses at the casino to corroborate that the ATM withdrawals were for gambling only. The more detailed gambling records you have to substantiate gambling losses the better.
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If you have started gambling in 2013, you should have a plan to document your gambling losses even if you only gamble recreationally. There are other ways to document your gambling losses based on your specific facts and circumstances. If you have questions, you should contact an experienced tax lawyer today. The tax lawyers at Nardone Law Group, LLC have experience representing professional and non-professional gamblers in substantiating gambling losses. Contact us today for a consultation to discuss your case.