The tax attorneys at Nardone Law Group in Columbus, Ohio, routinely advise clients on tax law issues involved with gambling. One issue that taxpayers frequently encounter is the need to substantiate gambling losses before the IRS. Whether the taxpayer is a professional or recreational gambler, gambling losses can only be deducted to the extent of gambling winnings. Professional gamblers have the additional benefit of being able to deduct ordinary and necessary business expenses related to their gambling, such as travel, food, and lodging expenses. Amateur, recreational gamblers cannot deduct these expenses because they are considered personal in nature when the activity is not engaged for profit. Professional gamblers report their gambling winnings and losses on Schedule C, while recreational gamblers report their losses as itemized deductions.
Gambling is often a form of entertainment for most people and, as a result, they do not maintain detailed records of their gains and losses, like someone would for a business or other for-profit activity. Gambling losses usually exceed gambling winnings, so taxpayers often have issues substantiating their gambling losses. Adequate and thorough documentation is required to claim gambling losses, and can often help taxpayers substantiate and defend their claims to the IRS, should any discrepancies arise in an audit or examination. A recent decision by the U.S. Tax Court highlights the importance of adequate gambling records, as well as the IRS’ ability to assess accuracy-related penalties as a result of deficiencies.
Unsubstantiated Gambling Loss Deductions
In Jacqueline F. Burrell v. Commissioner, a recreational gambler was denied deductions for gambling losses beyond amounts conceded by the IRS for the years 2007 to 2009. The IRS’ determination found deficiencies of approximately $115,000 for the relevant period and, as a result, assessed accuracy-related penalties of nearly $23,000. The court found that the petitioner failed to properly substantiate additional losses, even though she submitted documents entitled “Cash Recycled” and “Cash Ledger.” The documents helped the court establish the amount of cash the taxpayer brought to the casinos each day, however, they did not show how much she left with at the end of the day.
Taxpayers are required to maintain permanent books of account or records, sufficient to establish the amount of gross income, deductions, credits, or other matters required to be shown on their federal income tax return. If taxpayers establish that an expense is deductible but are unable to substantiate a precise amount, the court may estimate the amount, bearing heavily against the taxpayer. In the case of gambling winnings and losses, taxpayers can substantiate their income and deductions by maintaining a detailed log.
The petitioner did not track her winnings and losses. However, based on casino letters and other documents, the IRS conceded that the petitioner was entitled to deduct approximately 70% of the total reported gambling losses for the three years involved. Since the petitioner had no records of her winnings and losses, the court held that the evidence was insufficient to entitle the petitioner to greater deductions for gambling losses than those conceded by the IRS. Consequently, the court found the petitioner liable for the accuracy-related penalty of $23,183.20.
NLG Comment: This case exemplifies the importance of keeping detailed records, for both professional and recreational gamblers. Adequate documentation of financial gains and losses can help taxpayers substantiate claims on their federal income tax returns, as well as defend against potential liabilities in the event of an IRS audit or examination.
Contact Nardone Law Group
Nardone Law Group frequently represents individuals who are undergoing an IRS audit or examination, including professional and amateur gamblers. If you have been contacted by an IRS revenue officer, or if you have questions regarding deductions for gambling losses, contact one of our tax attorneys today. Our tax lawyers and professional staff have vast experience representing and advising professional and non-professional gamblers regarding substantiating gambling losses. Adequate documentation is vital to ensuring compliance with all relevant tax reporting requirements. We will thoroughly review your case to determine what options and alternatives are available.