Court Rules That Not Reporting Gambling Activity When Net is a Loss is a CRIME!
by Yolanda Smulik-Roche, E.A. and Roger C. Roche, E.A.
Over the years we have tried to inform the gaming public that they must report the total amount their winning sessions separately from their total losing sessions when filing their annual Federal income tax return From 1040. You are not allowed to net your winnings and losses and if the result is a net loss, fail to report either. You think, "why should I report anything my net is zero (or negative, an overall loss) so there will be no effect on my total income tax since I can only deduct losses to the extent of winnings" Read the following recent court case and you will know why you had better start reporting these losing years.
In a decision rendered by a Federal District Court, it ruled that a false return was a crime, though there was no tax deficiency. The case involved, of all people a Superior Court judge in the Arizona court system until his indictment for filing false federal income tax returns. A compulsive gambler, didn't heed his accountant's advice to report both gambling winnings and losses. In years that gambling losses exceeded winnings, he reported neither gambling gains nor gambling losses. In other years, he reported only the small gambling winnings reported to IRS on Forms W-2G.
This taxpayer was convicted in a Federal District Court jury trial on the false return charge. The taxpayer had argued against conviction because he owed no tax on his gambling activities he had just netted losses and winnings. The jury found him guilty of the crime of filing a false return which was recently upheld by the Ninth Circuit Court of Appeals upheld the conviction.
This is a shocking case because we suspect there are many gamblers who do the same thing, only claim winnings if they are reported to the IRS on a W-2G, "Certain Gambling Winnings", then offset that amount with losses of an equal amount. The rest of your gaming activities do not get reported because of the faulty premise that it does not matter because you have enough losses to offset your winnings that were not reported to the IRS. In the years that you do not receive a W-2G, you, as did the judge in the case above, do not report either your winnings or your losses.
The IRS taken a very hard line in this case. Probably because of the status of taxpayer, it would make a good news article. They like to make examples out of high profile taxpayers, hoping the publicity will act as a deterrent. But do not get me wrong, they will and can do it to anyone.
What makes this case a criminal offense rather than a lesser violation of the tax laws. Let's examine the elements of the false return offense under IRC Section 7206(1), which are:
1. Defendant signed a return that was incorrect as to a material matter;
2. The return was made under the penalties of perjury;
3. The defendant didn't believe the return to be true as to every material matter;
4. The defendant signed the return with the specific intent to violate the law.
These elements were present here. The material incorrectness results from the failing to report the winnings which would increase your adjusted gross income which determines the phase out values for certain itemized deductions and other tax breaks. Every return you sign, in the fine print it you have declared "Under penalty of perjury, I declare that I have examined the return and accompanying schedules and statements, and to the best of my knowledge and belief, that the are true, correct and true". Even if you have your return prepared by a preparer, it does not effect This declaration you, as the taxpayer, signed under penalty of perjury. The argument that the net loss from gambling would not effect the amount of tax. In this case court ruled that "Whether there was an actual tax deficiency is irrelevant because the statute is a perjury statute."
IRS instructions on reporting gambling gains and losses aren't ambiguous. Gains go on Form 1040, line 21. Losses go on Schedule A, line 27. Gambling losses aren't subject to the 2 percent floor, or the overall limit on itemized deductions. The IRS Publication 529 (1998) Miscellaneous Deductions says "You cannot reduce your gambling winnings by your gambling losses and report the difference. You must report the full amount of your winnings as income and claim your losses (up to the amount of winnings) as itemized deductions.".
So we hope this case will motivate those of you may be doing the same thing to report all your gambling activities, even when your loses are limited to your winnings to you too could be facing criminal charges in the near future. And as always, we hope have more wins than losses. Good luck and keep that diary.
by Yolanda Smulik-Roche, E.A. and Roger C. Roche, E.A.
Over the years we have tried to inform the gaming public that they must report the total amount their winning sessions separately from their total losing sessions when filing their annual Federal income tax return From 1040. You are not allowed to net your winnings and losses and if the result is a net loss, fail to report either. You think, "why should I report anything my net is zero (or negative, an overall loss) so there will be no effect on my total income tax since I can only deduct losses to the extent of winnings" Read the following recent court case and you will know why you had better start reporting these losing years.
In a decision rendered by a Federal District Court, it ruled that a false return was a crime, though there was no tax deficiency. The case involved, of all people a Superior Court judge in the Arizona court system until his indictment for filing false federal income tax returns. A compulsive gambler, didn't heed his accountant's advice to report both gambling winnings and losses. In years that gambling losses exceeded winnings, he reported neither gambling gains nor gambling losses. In other years, he reported only the small gambling winnings reported to IRS on Forms W-2G.
This taxpayer was convicted in a Federal District Court jury trial on the false return charge. The taxpayer had argued against conviction because he owed no tax on his gambling activities he had just netted losses and winnings. The jury found him guilty of the crime of filing a false return which was recently upheld by the Ninth Circuit Court of Appeals upheld the conviction.
This is a shocking case because we suspect there are many gamblers who do the same thing, only claim winnings if they are reported to the IRS on a W-2G, "Certain Gambling Winnings", then offset that amount with losses of an equal amount. The rest of your gaming activities do not get reported because of the faulty premise that it does not matter because you have enough losses to offset your winnings that were not reported to the IRS. In the years that you do not receive a W-2G, you, as did the judge in the case above, do not report either your winnings or your losses.
The IRS taken a very hard line in this case. Probably because of the status of taxpayer, it would make a good news article. They like to make examples out of high profile taxpayers, hoping the publicity will act as a deterrent. But do not get me wrong, they will and can do it to anyone.
What makes this case a criminal offense rather than a lesser violation of the tax laws. Let's examine the elements of the false return offense under IRC Section 7206(1), which are:
1. Defendant signed a return that was incorrect as to a material matter;
2. The return was made under the penalties of perjury;
3. The defendant didn't believe the return to be true as to every material matter;
4. The defendant signed the return with the specific intent to violate the law.
These elements were present here. The material incorrectness results from the failing to report the winnings which would increase your adjusted gross income which determines the phase out values for certain itemized deductions and other tax breaks. Every return you sign, in the fine print it you have declared "Under penalty of perjury, I declare that I have examined the return and accompanying schedules and statements, and to the best of my knowledge and belief, that the are true, correct and true". Even if you have your return prepared by a preparer, it does not effect This declaration you, as the taxpayer, signed under penalty of perjury. The argument that the net loss from gambling would not effect the amount of tax. In this case court ruled that "Whether there was an actual tax deficiency is irrelevant because the statute is a perjury statute."
IRS instructions on reporting gambling gains and losses aren't ambiguous. Gains go on Form 1040, line 21. Losses go on Schedule A, line 27. Gambling losses aren't subject to the 2 percent floor, or the overall limit on itemized deductions. The IRS Publication 529 (1998) Miscellaneous Deductions says "You cannot reduce your gambling winnings by your gambling losses and report the difference. You must report the full amount of your winnings as income and claim your losses (up to the amount of winnings) as itemized deductions.".
So we hope this case will motivate those of you may be doing the same thing to report all your gambling activities, even when your loses are limited to your winnings to you too could be facing criminal charges in the near future. And as always, we hope have more wins than losses. Good luck and keep that diary.
