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Until recently, online poker was nothing more than a distraction for me when I had a few moments to kill. I steadily lost minute sums of money through my FullTilt account while I watched television, read a book, did laundry, ate dinner, or all of the above si multaneously. My initial $50 deposit lasted nearly a year before it had dwindled to nothing, and I considered it cheap entertainment. After all, I was having fun and playing poker for mere cents per hour.
I was quite convinced my poker skills required actual felt. I have been winning steadily in the local casinos, but just didn’t have the same results online. That is, until a couple of months ago. Once I put down the book and turned off the TV, I suddenly started to win. And not just on occasion. I’ve tripled my bankroll in the past three weeks.
My newfound source of income inevitably led me to the question of income tax. Now I realize this might not be everyone’s fi rst thought, but since I’m a CPA specializing in taxation when I’m not playing poker or copy editing BLUFF’s sister publication FIGHT! Magazine, it’s the sort of thing I think about. Considering my background, doing what every online poker player I know personally does (ignore the issue) seemed less than ideal.
As a result, I went back to the basics. IRS code clearly states that all income received by U.S. residents, legal or illegal, is subject to taxation. So regardless of whether the Unlawful Internet Gambling Enforcement Act stands, the income has to be reported. I discussed this with a friend of mine who writes a local poker blog. He argued with me, saying that since the companies running the major online poker sites are foreign and outside the United States’ jurisdiction, there’s no way the IRS would ever fi nd out what he’s won or lost.
He has a point. Most of the companies in question chose their headquarters keeping in mind the generous taxation policies and minimal disclosure requirements of their host nations. So even if the IRS tried to request information on a gambler’s account, it is highly unlikely that anything would be provided. However, the IRS does have access to the records of banks and credit card companies doing business in the U.S. That means that they can request and receive the records showing every time I added money to my online bankroll. It also means that every withdrawal I make from my bankroll is available as well, since it shows up as a deposit in my bank account.
For highly recreational gamblers, this isn’t a big deal. Someone playing just for fun likely isn’t depositing large sums to his/ her online account, and rarely, if ever, is making a withdrawal. But for someone who does well, or plays online professionally, this could get sticky. At that point, my blogger friend asked, “But even if I don’t report my online winnings, what are the odds the IRS will catch me? And even if they do, what’s the worst that can happen?”
He asked the right person. Accountants are wizards at the worst-case scenario. It turns out that the typical taxpayer only runs about a 2% risk of being audited. Not bad. However, having a Schedule C in a return (this is where a small business is reported — it’s also where a professional poker player would report his winnings) increases the risk of an audit to one in ten. Having recreational gambling winnings and losses in a return can increase the risk even further. And a player can’t avoid reporting most winnings from live sessions — casinos issue 1099s and W- 2Gs for jackpots and tournaments.
So what if you decide to live on the edge and cross your fi ngers that your return isn’t pulled for audit? If you get caught, the penalties can be steep. Omitting substantial income from a return will likely get a taxpayer slapped with the “accuracy-related” penalty. In that case, “substantial” is defi ned as the greater of 10% of the tax shown on the return or $5,000. This penalty is 20% of the tax on the income not reported. But that’s not the worst of it. If the IRS determines that the nonreporting is fraud, the civil penalty can be 75% of the tax! Since I’m a CPA and not a lawyer, I won’t get into the potential for criminal proceedings, but it exists.
In addition, anyone with a foreign bank account of more than $10,000 at any point during the year is required to fi le a disclosure statement with the IRS/Department of the Treasury. And guess what? An online bankroll defi nitely qualifi es. The penalties for not disclosing a foreign account can include the entire value of the foreign account. What a horrible way to lose your bankroll, especially since jail time may be involved on this one as well.
While what you report on your tax return is between you and your accountant, that settles it for me — I am defi nitely walking the straight and narrow on this one.
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