Saturday, January 24, 2015

6 Tips on Gambling and Income Taxes: Don't Play the IRS for a Sucker

Each year we have clients that have received a tax document from a casino documenting their gambling winnings. They always state that they have lost far more than they have won, but the following article highlights the scrutiny this area is under from the IRS.

6 Tips on Gambling and Income Taxes: Don't Play the IRS for a Sucker

In other words, gambling losses aren’t completely tax-deductible on their own, but you can write off losses up to the amount of your winnings. Those winnings are taxed at ordinary income rates reaching as high as 39.6% on the federal level.

But you can’t just deduct the amounts that you say you lost on your return. The IRS is a stickler for requiring adequate records to substantiate losses and this is a frequent audit item. Practically speaking, you should advise clients – especially those who are heavy gamblers – to keep a log of their activities stating the date of the activity, the location, names of any people who were there with you, the amounts wagered, the type of gambling and your winnings and losses. Supplement this log with receipts, tickets, statements and forms and the like.

The specific proof required by the IRS may vary according to the type of gambling activity. For instance:
  • Bingo and similar games: Keep records of the number of games played, the cost of cards purchased, and amounts collected on winning cards.
  • Slot machines: Maintain a record of the machine number and all winnings by date and time the machine was played.
  • Casino table games (e.g., blackjack, craps, poker and roulette): Write down the number of the table where you played and any casino credit information.
  • Racing (horses, harness, dog, etc.): Keep track of the number of races, the amounts of your wagers and the amounts you won and lost.
Reminder: Don’t try to play the IRS for a sucker. For example, if you finally hit the jackpot at the racetrack and offset the income with hundreds of tickets for small wagers the same day, an examiner will suspect that you simply scooped up losing ticket stubs off the ground. Losses should be realistic under the circumstances.

In addition, the IRS offers these tips:
  1. As noted above, gambling income can include a variety of types, as well as the fair market value of prizes a person may win, such as cars or trips.
  2. The taxpayer may, or may not, receive a Form W2-G.
  3. With or without that form, winnings should be reported as income for tax purposes.
  4. Winnings should be entered on the "Other Income" line of a federal tax return or tax software.
  5. Gambling losses can be deducted against the total amount of winnings, but not over.
  6. And, of course, keep accurate records.
Finally, be aware of this one “tax edge” for bettors: Gambling losses must be deducted as miscellaneous expenses on Schedule A, but they’re not subject to the usual floor of 2 percent of adjusted gross income (AGI). Thus, the losses are deductible, up to the amount of winnings, regardless of your client’s AGI or the amount of other miscellaneous expenses. You can take that to the bank.


Leave It to the Pros

There’s another way around the gambling loss restrictions for a select few taxpayers. If gambling legitimately is your livelihood, you may report winnings and losses from such activities on Schedule C, but you can’t claim an overall loss. In addition, the value of complimentary rooms, vacations, and other gifts from casinos is treated as taxable income, but can be offset by losses from your gambling activities.

Of course, it’s not easy to establish yourself as a professional gambler. Be prepared for an argument from the IRS. And the agency usually prevails in court, so be wary of the odds against you.

Wednesday, January 21, 2015

3 Costly and Common Tax Scams to Avoid

The following article reposted from Yahoo Finance is a timely reminder of the most common scams currently facing taxpayers.

The Fiscal Times 

Tax season officially opened Tuesday, meaning that the Internal Revenue Service is now accepting 2014 returns — and that taxpayers should officially go on alert for scams that could cost them dearly.
From identity thieves to imposters posing as the IRS on the phone, con artists have become masters at obtaining sensitive personal information from taxpayers to make a quick buck. Many of these scams happen all year long, but are especially common during tax season.
Below are three common tax scams to watch out for this year. You can find other tax scams that were popular during last year’s tax season on the IRS website.
Tax Identity Theft
Scammers have bilked the IRS out of billions by stealing Social Security numbers and using them to obtain fraudulent tax refunds. Most victims don’t find out until after they’ve filed their real tax return.
You can prevent yourself from becoming a victim of tax ID theft by protecting your Social Security number — don’t carry around your Social Security card, for example, and be careful when giving out the number. Also, check your credit report annually to make sure your Social Security number isn’t attached to unfamiliar credit accounts.
If you’ve already become the victim of an ID theft scam, you should file a police report and a complaint with the Federal Trade Commission. You should also contact one of the three major credit bureaus to place a fraud alert on your credit record.
IRS Imposters
Someone from the IRS calls you and tells you that you owe Uncle Sam money and need to pay immediately through a wire transfer or a prepaid debit card. They may ask for your credit card information. Only they’re not with the IRS. 
Some con artists may also call you and say you’re owed a refund to try to trick you into sharing private information. If you refuse to share information, they may threaten to report you to the police or to revoke your driver’s license.
“They might know all or part of your Social Security number, and can fake caller ID information to make it look like it really is the IRS calling,” the FTC warned in a release last week.
Email Phishing Scams
Every year con artists come up with new email phishing scams during tax season.  Often, the bogus emails appear to be coming from the IRS Taxpayer Advocate Service and to include a fake case number. Recipients are typically asked to click on a link to resolve some kind of mistake, such as a document processing error.
The links may take taxpayers to a web page asking for personal information. If you receive such an email, it’s best to refrain from replying to it and from clicking on any link in the email. Taxpayers can forward the email to
Even if you aren't the victim of a tax scam, you may still be impacted. Some states including Ohio and Illinois have already warned taxpayers that their tax refunds may be delayed due to their revenue department implementing new security measures to catch fraudulent returns.
The Good NewsIt’s actually not that difficult to spot a tax scam, as long as you keep in mind that:
  • The IRS never calls taxpayers about money owed without first mailing a bill.
  • The IRS always gives taxpayers the opportunity to question or appeal the amount supposedly owed.
  • The IRS never requires that taxpayers use a specific payment method for taxes.
  • The IRS never asks for credit or debt card numbers over the phone.
  • The IRS never threatens to bring in local police or other law enforcement group for not paying.
As part of Tax Identity Theft Awareness Week, the FTC, along with the AARP and the Treasury Inspector General for Tax Administration are also hosting a webinar on Jan. 27 at 2 p.m. EST to explain common tax scams and teach taxpayers how to protect themselves.

Monday, January 19, 2015


The IRS will open the 2015 filing season on January 20th and both the agency and taxpayers are preparing for some turbulence. The IRS is going into the filing season with a reduced budget, which could translate into fewer audits. Legislation passed by Congress in late 2014 could delay the start of the filing season, although to date, the IRS has not announced a delay. Taxpayers and the IRS are on alert for identity theft, a pervasive problem during filing season. Additionally, new requirements under the Patient Protection and Affordable Care Act kick-in. 
Budget cuts impact audits and service
The IRS must do more with less after Congress voted in December to cut the agency’s budget by some $345 million. In fact, the IRS has been doing more with less for the past several years as its budget has been reduced nearly every year. In December, IRS Commissioner John Koskinen told the agency’s employees that he was instituting a hiring freeze, with only a few mission-critical exceptions.
Koskinen also acknowledged that the number of taxpayer audits will likely decline because of staffing cutbacks and budgetary pressures. The audit coverage rate for individuals hovers around one percent and that rate could go down. Between 2012 and 2013, the audit rate experienced a decline, largely due to budgetary constraints at that time, according to the IRS.
Going into the filing season, the IRS has cautioned that its customer service functions will be challenged by the budget cuts. With limited budgetary resources, the agency will likely need to shift personnel from other functions to customer service during the filing season. This could slow the processing of refunds, Koskinen said. As a last resort, Koskinen indicated that the agency could consider furloughing employees for one or more days. Koskinen said the IRS spends $29 million every day to keep operating. 
Late legislation
When Congress make changes to the Tax Code late in the year, the IRS must scramble to incorporate these changes into its return processing systems. This year is no different. The Tax Increase Prevention Act of 2014, signed into law by President Obama in December, makes some 500 changes to the Tax Code through language extending the tax extenders, technical corrections and the removal of so-called “deadwood.”
The IRS has been upgrading its return processing systems for the new law. At this time, the agency has not delayed the start of the filing season. In past years, the IRS has opened the filing system generally but asked filers of certain returns and schedules, impacted by legislation, to hold off. Our office will keep you posted of developments.
Identity theft
Tax return identity theft is a growing problem. Identity thieves gather information financial information through phishing scams, discarded tax returns, and other records containing personal and financial information. Identity thieves typically file false returns early in the filing season with hopes to get a refund. Often, taxpayers discover for the first time that they are victims of identity theft when they file their returns.
The IRS has devoted significant resources to identifying false returns. The agency has developed special filters for its return processing systems. Special identity protection numbers have been assigned to victims of identity theft. The IRS receives some 150 million individual returns and issues around 110 million refunds, so the challenge is daunting.
Affordable Care Act
Unless exempt, taxpayers will need to report on their 2014 returns if they are covered by minimum essential health coverage. Individuals without minimum essential coverage – unless exempt – will make a shared responsibility payment. The IRS is bracing for a flood of questions about what is minimum essential coverage, how to calculate the shared responsibility payment and who is exempt. The IRS has revised Form 1040, U.S. Individual Income Tax Return, and created new forms, such as Form 8965, Health Coverage Exemptions.
Individuals who obtained health insurance through the ACA Marketplace in 2014 may be eligible for the Code Sec. 36B premium assistance tax credit. If they are, they will need to file a new form, Form 8962, Premium Tax Credit, with their 2014 return. If taxpayers received advance payments of the credit, they will need to reconcile the difference between the advance credit payments and the allowable amount of the credit. Taxpayers could discover that their advance payments exceeded their allowable amount. In that case, they will need to repay the excess, subject to certain limitations.

Please contact our office at (630) 986-0540 if you have any questions about the filing season.