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The IRS’s Gambling Losses Have Been Examined 

Michelle Wilson
Latest posts by Michelle Wilson (see all)

You, like many other people in the United States, most likely enjoy gambling. Maybe you go to Atlantic City or Las Vegas a few times a year to have some fun and possibly win some money. But how does gambling affect your financial responsibilities to the government? 

Winnings from gambling are taxable income, which means you must report them when filing your income taxes for both the federal government and your state. These winnings can be deducted by listing your annual gambling losses on Schedule A of your tax return. This will help to equalize the winnings. On the other hand, if you don’t keep good records, the IRS may audit your gambling losses and fine you. 

The vast majority of people do not keep meticulous records of how much money they lose while gambling at a casino, racetrack, or another type of gambling establishment; as a result, gambling losses are frequently used as a trigger for IRS audits. Even though you have the legal right to deduct gambling losses up to the same amount as your winnings, doing so may result in an IRS investigation into your finances. If you find yourself in a situation where you are subject to this type of audit, a skilled attorney who specializes in IRS audits can defend you and protect your rights. 

The Gambling Winnings and Losses Declaration 

In just one year, nearly 120 billion dollars were lost in American casinos (2016). Gambling can be a lot of fun, but there’s a reason why the proverb “the house always wins” exists. When you gamble, there is a much greater chance that you will lose money than that you will win a large sum of money. 

In the United States, people who gamble for fun rather than for a living can deduct their losses from their taxable income under tax law. This sum can be deducted from gambling winnings, which are otherwise taxable and must be reported to the IRS. The number of your gambling losses will not be deducted from your non-gambling income. 

If you win money while gambling, the Internal Revenue Service (IRS) may send you a Form W2-G to report your winnings. You can report “other income,” which includes gambling winnings, directly on your Form 1040. In most cases, you will receive a Form W2-G from a reputable gambling establishment, such as a casino or racetrack, but not from a local bingo hall or an unofficial poker tournament. This is because these types of events are not considered gambling businesses. 

Following that, you can itemize your losses on Schedule A in the same way that you would any other itemized deduction. By deducting your losses from your winnings, you can reduce your taxable income by the number of your gambling winnings, up to the amount that you won. 

For example, if you won $5,000 in gambling in 2020, you would have to report that amount as taxable income. If you lost $7,500 in gambling that year, you must report those losses on Schedule A of your tax return. As a result, your winnings would be declared null and void, and you would not be required to pay taxes on the $5,000. Losses that exceed your winnings for the year, in this case, $2,500.00, cannot be carried forward or used to offset other sources of income that are not related to gambling. 

How to Avoid an IRS Audit for Gambling Losses 

It is critical to be able to deduct gambling losses; however, to do so, you must be able to demonstrate that you sustained those losses. Most of us do not keep meticulous records of how much we spend or even the day of the week on which we spend it when we gamble. This is especially true if we are consuming alcoholic beverages while playing blackjack. 

Regrettably, the Internal Revenue Service requires you to keep a record of any gambling winnings or losses. This record can then be used as proof that you won or lost money as a result of your gambling activities. At the very least, the following items should be included in these records: 

  • The date on which you gambled 
  • The type of gambling that occurs 
  • The people you gambled with The names and addresses of the casinos you frequented 
  • The total of your victories and defeats. 
  • Taking the time to document these occurrences properly can help protect you in the event of an audit. 

These records should include all forms of gambling that you participate in, such as lotteries, slot machines, keno, casino games, poker, sports betting, sweepstakes, and off-track betting. They should also include the monetary values of the prizes, such as the fair market value of automobiles and vacations. 

Itemizing gambling losses is usually frowned upon by the Internal Revenue Service (IRS), especially if the losses are substantial and/or completely offset gambling winnings. This is because most people do not keep meticulous records of their gambling losses. This could lead to an audit by the IRS. 

If you do receive an audit letter from the IRS, your next step should be to contact an experienced IRS audit attorney as soon as possible. Your attorney will assist you in gathering the necessary documentation and developing a legal strategy to give you the best chance of winning your case. 

Are you facing an IRS audit? We Are Here to Help You

Receiving a letter from the IRS requesting an audit can be a terrifying experience. Depending on the outcome of the audit, you may face a sizable tax bill in the future. An experienced IRS tax audit attorney can represent you and help you obtain the best possible outcome, which is a letter stating that there will be “no change.” 

At Paladini Law, we represent both individuals and businesses in a wide range of tax matters. Because of our extensive knowledge of tax law at both the federal and state levels of government, we can handle even the most difficult tax issues for you. Call us right now at 201-748-2401 or fill out our online contact form to learn more or to schedule a consultation with a member of our team.