SPORTSBETTING A CHALLENGE FOR THE I.R.S.

8 February 2008

This weekend an estimated 50 percent of adult Americans will bet on the Superbowl...


With the biggest betting event on the American sports calendar - the Superbowl - due to take place this Sunday, Fox Business published a well researched article on tax liability for gamblers and examined the online gambling phenomenon that has changed the industry so much over the past decade.

http://www.foxbusiness.com/personal-finance/lifestyle-money/travel-lifestyle/article/safe-bet-irs-wont-gambling-winnings_461643_22.html poses the question of how the IRS can harvest taxes in the present American legislative regime which appears to regard online gambling as illegal, yet pervasive.

"All these Super Bowl wagers spotlight a persistent Internal Revenue Service problem: tracking and taxing gambling winnings," opines the author of the article, which covers much of the development and current issues surrounding online offshore betting.

"It's a challenge the agency faces daily, because many people don't realize that gambling winnings are taxable. Of those who do, a good portion simply choose to ignore the law."

Nowadays, in addition to the well-publicised offerings of Las Vegas, Reno and Atlantic City, betting is commonplace throughout the United States. The choices range from off-track betting parlors to tribal bingo games to riverboat casinos to state-operated lotteries.

Then there's online gaming. A June 1999 Washington Post article reported "...at least 140 Web sites now offer some form of wagering to online users - an expansion in recent years that has alarmed opponents and put increased focus on the laws that govern Internet gambling."

By 2005, research firm Christiansen Capital Advisors estimated that nearly 23 million people gambled on the internet, with approximately 8 million of those gamblers from the United States. And recent legislation aimed at disrupting financial transactions with online gambling companies to halt the pastime in favour of more conventional gambling channels may have slowed the industry down, but have not terminated it.

The article takes a tilt at the regulations that are supposed to give teeth to the Unlawful Internet Gambling Enforcement Act, reporting that U.S. officials are just getting around to creating these rules. The Treasury Department and Federal Reserve Board issued a first draft last October. The comment period ended in mid-December, with most finding the proposed rules wanting.

"A common problem cited by reviewers was the vagueness of what constitutes gambling. Many noted that various U.S. governments, federal as well as many states, recognize and even support or operate gambling enterprises, ranging from state lotteries to tribal casinos.

"And as the international legal and domestic regulatory wrangling continues, online gambling sites and their cyberpatrons are adapting. Some sites have introduced dedicated debit cards and alternative, although circuitous, e-payment and electronic wallet services. It's a good bet that millions of U.S. customers will be utilizing them Super Bowl Sunday, the biggest global betting day of the year."

The author observes that betting on sporting events has arguably become the true national pastime. But if you want to keep your sports wagering [US] domestic, legal betting on athletic events is allowed only in Nevada, where in 2006, visitors to Vegas spent $10.6 billion on gambling, ranging from casino games to bets on professional and collegiate competitions.

The Super Bowl is the single biggest one-day sports betting event of the year. Worldwide, over 200 million individuals are expected to wager more than $10 billion on Super Bowl XLII. In the United States, Pregame.com president RJ Bell expects "over 50 percent of all adult Americans will risk money on Super Bowl XLII."

The greater-than-usual interest, says Bell, comes from having a team seeking a perfect record facing a team from New York, the nation's No. 1 market. That's likely to set a betting record of more than $100 million in Nevada alone; the record is $94.5 million for Steelers-Seahawks in January 2006.

And that brings us back to online sportsbetting : It's a difficult tax-collection proposition when it comes to bets placed at increasingly popular offshore sports-betting operations, dollars dropped into friendly office pools and illegal wagers handled by bookies. These bets, according to the American Gaming Association, represent more than 99 percent of all sports betting nationwide.

The National Gambling Impact Study Commission estimates that translates to as much as $380 billion annually in illegal wagers.

Legal betting operations - state lotteries, casinos and horse racing tracks - are regulated. One of the government agencies that has a say in these operations is the IRS. "That's why the bells go off when you hit the slots," says John Shelk, a former executive with the American Gaming Association. "So someone can get there to get your tax information."

In some cases, Uncle Sam even gets his cut (25 percent on most winnings) before you get your payout. That's the case for winnings of more than $5 000 from any sweepstakes, wagering pool or lottery; withholding also is collected on proceeds that are 300 times or more the amount of the bet. Gambling winnings from bingo, keno and the slots are not generally subject to withholding, but you're still required to provide your tax ID. If you refuse, the casino can assess backup withholding of your jackpot at a 28-percent rate.

And beginning this March [2008], the IRS will require all poker tournament sponsors to report US tournament winnings of more than $5 000. The new reporting requirement (Rev. Proc. 2007-57), aimed at poker tournament sponsors, including casinos, will help the IRS ensure that card game winners are including their winnings on their annual tax returns.

Those poker tourney winnings, along with your jackpots from the casino or horse track or lottery dealer, will be recorded on a Form W-2G showing how much you won and how much, if any, was withheld for federal taxes. And like all other income reporting forms, a copy will go to the IRS.

But, Shelk notes, there's a distinction between what's reportable and what's taxable.

All gambling winnings -- regardless of the amount -- are taxable. But it's ultimately the winner's responsibility to let the IRS know how much was won, even if the casino doesn't have to file a W-2G. This reliance on the gambler's tax-law compliance is where the IRS frequently gets shortchanged.

How tempting is it to assume the IRS won't miss a small jackpot?

IRS analysis of 2005 returns, the latest year for which data are complete, shows 1.8 million taxpayers reported almost $25 billion in gambling income; compared to 2004, that's a slight increase (5.8 percent) in the number of returns reporting gambling income and an almost 9 percent hike in dollars won. This includes winnings from casinos and horse tracks, lottery and raffle jackpots, as well as the fair market value of cars, houses and other noncash prizes.

Asked by Fox Business how many taxpayers didn't bare all about their betting at tax time, the IRS had no answer. "We can't tell you what we don't know," a spokesman said.

The IRS has a tax break for conscientious taxpayers who report their gambling income on line 21 of their Form 1040. They can subtract any gambling losses from winnings if they itemize. For many, that's a good deal. Just over 1 million gamblers in 2005 made their good luck less taxing by claiming slightly more than $16 billion in bad bets.

Losses to reduce gambling winnings don't have to be from the same game. If you go to the race track every weekend and drop $1 000 but then win $3 000 on the World Series, those losing horse betting slips can reduce the amount of baseball winnings on which you'll owe tax.

But you can't claim more in losses than you've won. And, as with any tax deduction, you need to keep records of your losses that will satisfy the IRS if you're ever audited.

"Your best bet is to keep track of gambling losses as you go through the year so you're not scrambling to reconstruct them if you do hit it big," advises the Fox Business writer.

Online Casino News courtesy of InfoPowa