Friday, March 31, 2017
Gambling Taxation Part 5 -- Record Keeping
As we saw in Parts 3 and 4 of this series, a gambler, whether a full-time professional or an occasional weekend player, may deduct the amount of losing bets from winnings to reduce taxable income (but not to create a loss that can be applied against non-gambling income). But how do you show how much you’ve lost? This post, the last in my series on taxation of gambling, addresses the question of how a horseplayer should document her wins and losses, and what the IRS and the Tax Court are likely to do if you have less than perfect documentation.
When I was living in Florida, I had a client – a jockey agent, naturally – who suddenly felt the need to file taxes (for the first time in his career, he had somehow landed a jockey who could actually win races). I asked the agent to bring his financial records, and he showed up with a very large trash bag filled with everything that conceivably might relate to his expenses for the past three years, expecting that I would sort through the trash and get him lots of deductions. Needless to say, there are better ways of keeping records, but many cases involving gamblers reflect a similar approach to record keeping. (By the way, and I’m sure this is no reflection on jockey agents in general, this guy stiffed me for half of my very reasonable fee.)
The most common problem that bettors have in sorting out how much they have won and lost is that a bettor hits one or a few big scores during the year and, as a result, gets some W2-G forms. Those report income, and the IRS computer programs will see that income whether the bettor reports it or not. But the track record of most bettors doesn't consist solely of a few big-ticket winners. Most of us win some, lose some and also, if we’re lucky, hit a few big scores that generate a few W2-G forms. I looked at my NYRABets account for last year, and, yes, I did get one W2-G on a Pick 4, but that accounted for less than 10% of my total winnings.
But if the IRS spots a win via the W2-G, what typically happens is that the bettor says, well I lost more than that. Then the IRS says, but you won more than that too, so it’s up to you to prove the amounts. And that's true. The law says that the burden of proof is on the taxpayer.
So what should a horse race bettor do to satisfy the IRS and the courts? The starting point is an IRS guideline that was issued 40 years ago and that even Andy Beyer would have trouble satisfying.
Under this guideline, a “diary or similar contemporaneous record,” supplemented by “verifiable documentation,” will “usually” be acceptable proof of wagering losses. The diary or betting log is supposed to show the date and type of every bet, the name and address of the place it was made, the amounts won or lost, and, ideally, the names of witnesses. The guideline goes on to say that losing tickets, ATM withdrawals, and other paper provided by the track or casino qualify as verifiable documentation.
Back in 1977, when the guideline was issued, there probably weren’t many bettors who kept a bet-by-bet record, no matter how many times the how-to books tell you to do it. Now, though, it’s surprisingly easy to produce this record. Just make every single bet through your ADW betting account, and then print out the monthly or annual statements at the end of the year. Even if you’re at the track, make the bets through your account, either on your phone or tablet or by using a card at the teller machines.
Because so many people are doing it this way, the number of cases involving racetrack betting has declined to virtually zero. These cases came up all the time in the 1960s and 1970s. Now, there are still just as many cases about gambling record keeping, but they’re almost all about slot machines, not racetracks.
But what if you don’t do all your betting on an ADW account, and you don’t have the contemporaneous records that the IRS guidelines call for? You might still be saved by something called the “Cohan rule,” named for famed Broadway actor and producer George M. Cohan, who showed up at the IRS back in the 1920s with the equivalent of my jockey agent's black trash bag and said, “look, you know I had expenses, so you have to allow me some sort of deduction.”
The courts agreed, and the Cohan rule has now become part of tax law. Under it, a taxpayer can rely on reasonable estimates of expenses, as long as there is some factual basis for the estimate. So the next question is, what’s “some factual basis”?
Going back to those cases from the 1960s and 1970s, we know that a pattern of borrowing money from friends every time you go to the track isn’t enough. Nor is bringing in a shoebox full of losing tickets, at least when they’ve been purchased from many different windows and some still have heel prints on them. If the losing tickets all come from the same or adjacent windows, though, and if they appear to have been saved more or less contemporaneously (one winning taxpayer wrapped up each day’s losing tickets in a rubber band), then the IRS or the Tax Court may find that convincing enough to allow at least some deduction.
But most of these Cohan rule cases end up allowing the bettor a deduction that’s not as big as the amount of their winnings, because judges still look with disfavor on gamblers, so there’s still some net betting income on which tax is due. If, like most bettors, you lose money over the course of a year, the best course is to use your ADW account and -- presto! – you have the contemporaneous records required by the IRS guidelines.
Not to mention that keeping contemporaneous records, so you can see how you’re doing, is one of the essential steps to becoming a member of that nearly extinct species, winning horse race bettors. If you don’t know what bets you’re losing, you can’t figure out why you’re losing and what steps to take to stem the leakage.
So, to summarize, if you want to be able to offset (reportable and other) wins with losses, at least up to the point of zeroing out the wins, keep good records in an orderly way. An ADW account that provides monthly statements showing each bet is ideal, but sometimes that shoebox full of losing tickets will still be useful.