When we think of gambling, our first thoughts may be of casino games or the lottery. However, the IRS requires all gambling income to be reported, including winnings from raffles, fantasy football, and even sports betting. The IRS has specific regulations for reporting gambling activities, which can significantly impact your tax obligations. Here’s an overview of taxes on gambling winnings.
All Gambling Income Must Be Reported
All income earned through gambling must be reported to the IRS. Gambling income includes any winnings from lotteries, raffles, horse races, casinos, and other forms of betting. This also covers cash winnings and the fair market value of non-cash prizes such as cars, trips, or other items. Failing to report all income can result in IRS penalties.
How to Report Gambling Income
When you win a significant amount, the payer (such as a casino or lottery agency) must issue a Form W-2G to report the winnings to you and the IRS. The thresholds for this reporting vary by the type of gambling:
$600 or more in winnings (if the payout is at least 300 times the wager amount)
$1,200 or more from bingo or slot machines
$1,500 or more from keno
$5,000 or more from poker tournaments
Even if you do not receive a Form W-2G, you are required to report all gambling winnings, both cash and non-cash, as “Other Income” on your Form 1040.
You Can Deduct Gambling Losses If You Itemize
Reporting cash winnings is straightforward. However, taxpayers should know that they are not allowed to subtract the cost of gambling from their winnings. In other words, if you place a $10 bet and then win $500, your taxable winnings would be $500, not $490. While you cannot deduct the cost of your wager from your winnings, you can deduct your losses if you itemize your deductions on Schedule A.
You can deduct losses up to the amount of the gambling income claimed. For example, if you won $1,000 but lost $3,000, you can only deduct $1,000. You must also include the $1,000 won in your income. To claim these deductions, you must keep accurate records of your gambling activities, including:
Receipts, tickets, statements from the gambling establishment
Form W-2G, if applicable
Canceled checks or credit records
A detailed diary of your gambling activity, noting the dates, types of gambling, amounts won and lost, and the names and addresses of the establishments.
You Can Deduct More If You’re a Professional Gambler
If you gamble to make a living, you are also not allowed to deduct losses that exceed your winnings. However, you would be considered a self-employed individual and would be able to deduct “business expenses” using Schedule C. This can include magazine subscriptions that relate to gambling, internet costs if you place bets online, and travel expenses.
Professional gamblers can also carry forward net operating losses to future tax years, which can help offset income in those years. However, like any other business, you will be responsible for paying self-employment tax and estimated taxes each quarter. Remember that state tax laws vary, and some states do not allow the deduction of gambling losses. Additionally, certain types of gambling may be illegal in some jurisdictions, which can complicate the tax reporting process.
You Should Keep Adequate Records
If you are ever audited, the IRS will expect to see detailed records of your gambling winnings and losses. Whether you gamble professionally or casually, you should record the date, name of the gambling establishment, type of wager made, amount won or lost, and the names of anyone with you during the gambling. You should also keep copies of receipts, W2-G forms, wager tickets, and anything else that can supplement your gambling log.
Tax Relief for Gamblers
Whether you gamble casually or professionally, you must always report all gambling winnings. It may be tempting to report large losses and downplay your winnings, but reporting losses typically raises red flags with the IRS. This means higher chances of being audited by the IRS, which is a whole other issue. In short, it’s always best to report your gambling income and losses accurately. Optima Tax Relief is the nation’s leading tax resolution firm with over $3 billion in resolved tax liabilities.
The Senate recently approved nearly $80 billion in IRS funding, with $45.6 billion specifically for enforcement. This new funding is expected to result in more tax audits. There is no sure way to avoid an IRS audit. However, there are some things that the IRS has generally viewed as “red flags.” These could increase the chances of an audit for taxpayers. Here are our top five tips to avoid an IRS audit.
File Your Tax Return
Currently, you must file a tax return if your gross income meets certain thresholds based on your age and filing status. If you meet the minimum income requirement and you do not file a federal income tax return, or file late. In 2024, you can be penalized 5% of your unpaid tax liability for each month your return is late. However, the penalty will not exceed 25% for your total tax balance. Additionally, you will incur a 0.5% per month for failure to pay penalty, up to 25%.
While both penalties have a cap, interest will continue to accrue until the balance is paid off. It is compounded daily at the federal short-term rate, plus an additional 3% for individuals. In 2024, the underpayment penalty is 8% for individual taxpayers. In addition, the IRS may prepare a substitute for return (SFR) on your behalf. They do this by using your W2 and 1099 forms for that tax year and even your bank account records. The SFR will likely result in a larger tax bill, since tax credits and deductions will not be claimed. In short, choosing to not file a return each year will not excuse you from paying taxes.
Report All Income
Underreporting income is one of the most common reasons taxpayers get audited. Remember, the IRS receives copies of all your W-2 and 1099 forms for the year. If incomes do not match up, they will investigate your tax situation. The IRS could then give you the IRS negligence penalty. This can cost you an additional 20% of the underpaid amount in penalties. That said, it’s always best to report all earnings the first time around.
Use Common Sense with Business Expenses
The IRS reminds taxpayers that business expenses should be “ordinary and necessary” to produce income for your specific trade or business. In other words, items like office equipment and advertising costs are fine, but you should not try to deduct your daily lunch expenses. You should always avoid comingling personal and business expenses.
Keep Good Records
Keeping good records that support your reported income is critical. This can include invoices, canceled checks, mileage logs, and other documents. The IRS recommends keeping records for three years after filing. Bookkeeping can be a tedious process, so it may be best to hire a professional if you are not up to the task.
Know How to Report Losses
The IRS will likely audit individuals and businesses that report multiple or consecutive losses. If your business claims a loss for several years, the IRS may classify it as a hobby instead of a for-profit business. Once this happens, you will not be allowed to claim a loss related to the business and you will have to prove that your “business” has an acceptable motive to earn a profit.
Tax Relief for Taxpayers
Odds of an audit increase when the IRS notices any red flags. The audit process can be tedious and taxing. Failing an audit can result in a huge, unforeseen tax bill. It’s best to seek assistance from experts who can help you avoid an IRS audit. Optima Tax Relief is the nation’s leading tax resolution firm with over a decade of experience helping taxpayers with tough tax situations.
The worst thing that can happen for most taxpayers is being told by the IRS that they are being audited. However, what most people don’t realize is that there is a timeframe for how long the IRS can audit an individual. This timeframe is known as the audit statute of limitations. Taxpayers have a right to dispute an IRS audit if they have proper substantiation. In this article, we’ll explain how long the IRS has to audit taxes and what factors may affect this timeline.
Audit Statute of Limitations: The Three-Year Rule
Section 6501(a) of the Internal Revenue Code sets out the rule for the IRS audit statute of limitations. The IRS generally has three years from the date a tax return is filed to assess any additional taxes owed. It starts ticking on the date the return is filed.
Exceptions to the Three-Year Rule
The three-year rule serves as a broad guideline. However, there are exceptions and circumstances that can extend or suspend the audit statute of limitations. Some key exceptions include:
Substantial Omission of Income:If a taxpayer omits more than 25% of their gross income on their tax return, the IRS has six years from the filing date to assess additional taxes.
No Return Filed: If a taxpayer fails to file a tax return, the statute of limitations doesn’t apply, and the IRS can initiate an audit at any time.
Agreements and Extensions: If a taxpayer agrees to extend the statute of limitations or signs an agreement with the IRS, the audit period may be extended.
Omission of Foreign Income: If a taxpayer omits more than $5,000 of their foreign income on their tax return, the IRS has six years from the filing date to assess additional taxes.
Omission of Gifts or Inheritances: If a taxpayer receives a gift or inheritance of over $100,000 from a non-U.S. person and does not file Form 3520, the IRS can initiate an audit at any time.
Fraudulent Returns: In cases of fraud or the willful intent to evade taxes, there is no statute of limitations. The IRS can initiate an audit at any time.
Audit Process
Flagged tax returns typically end up going into an IRS audit. At this point, these taxpayers may receive an IRS notice called a CP2000. The IRS agent will be required to open and close an audit within 26 months after a tax return has been filed. The IRS strictly adheres to its guidelines to ensure that the audit is complete within the three-year timeframe.
For audits that start a few months after a return is filed, the IRS will typically freeze any refunds. However, the IRS will have to pay interest on refunds that are sent late. This is why the IRS will attempt to resolve its audit quickly. Once a taxpayer answers the questions regarding their tax return with accuracy, their refund will be released and sent out. Audits that happen immediately after filing a tax return typically contain tax credits. Usually, these will include earned income tax credits, and the child tax credit. The IRS usually wants to verify the filing status, dependents, and other return items before sending your refund.
Practical Considerations
While the IRS has a specified period to initiate an audit, taxpayers should keep their tax records for at least three years after filing. However, keeping records for an extended period, such as seven years, can provide an added layer of protection. This is especially true if there are concerns about substantial omissions or potential audits related to certain transactions.
Seek Help if You’re Being Audited
Understanding the IRS audit statute of limitations is crucial for taxpayers to navigate the complexities of tax compliance confidently. While the general rule is a three-year window for the IRS to initiate an audit, exceptions can affect this timeframe. As tax laws and regulations are subject to change, it is advisable to consult with a tax professional to stay informed about any updates that may impact the audit process. By maintaining accurate records, individuals and businesses can mitigate the risks associated with IRS audits. Optima Tax Relief provides assistance to individuals struggling with unmanageable IRS tax burdens.
Receiving an IRS notice in the mail can be scary, but the situation can be less daunting if you know what to do. First, it’s important to note that not all IRS notices are negative as some are only informational. In any case, taxpayers should know what steps to take upon receiving an IRS notice.
Do Review Your IRS Notice
The IRS will send notices for many reasons, from notifying you of a balance dueto informing you of a delay in processing your return. From inquiring whether your return is missing a schedule or form required for processing to informing you of a potential audit. Carefully review your notice for important information. If you’re unsure of what the notice means, you can look up the CP or LTR number, located on the top or bottom right-hand corner of the notice.
It also shows the date and time the IRS expects you to respond. In the best case scenario, the IRS is pursuing a correspondence audit covering one or two items of a single year’s tax return. Correspondence audits are conducted entirely by mail and makeup 75 to 80 percent of all audits. An in-person interview audit takes place at your local IRS office. A field audit is scheduled for a particular date and time but takes place in your home or office. It is considered the most comprehensive type of audit.
Do Not Panic
Understand what auditors are seeking. While each audit is different, all audits focus on three basic questions:
Is your business truly a business – or just a hobby?
If you can answer these three questions to the satisfaction of the auditor, you stand a good chance of emerging from an audit relatively unscathed.
Do Gather Your Documentation
Once you have determined what information the IRS is seeking, it’s time to begin gathering your paperwork. If the IRS is challenging a particular deduction or tax credit that you claimed, gather whatever documentation you have to support your claim. This can include bank statements, receipts, and invoices. Provide as much information as possible concerning the inquiries the IRS has made. Also, make photocopies of everything that you intend to provide to the IRS. Never give up your original documents. If you must report in person for an office audit or prepare your home or office for a field audit, ensure that your paperwork – and your representative – will be available and ready.
Do Respondto the IRS Noticein a Timely Manner
If the information on the notice looks inaccurate, you should respond with a written dispute. Doing so in a timely manner can help minimize interest and penalty fees. Be sure to include any information and supplemental documentation to support your case. However, do not volunteer information the IRS has not specifically requested. Typically, the IRS should respond to disputes within 30 days.
Do Check for Scams
Remember that the IRS will never contact you via text message or social media. In fact, initial contact from the IRS is usually via mail. If the IRS notice does not appear credible, you can always check your online tax account on the IRS website to confirm balances due, communication preferences, and more.
The IRS will notify a taxpayer if they believe that there may be fraudulent activityoccurring on their tax return. The IRS will send a letter to you inquiring about a suspicious tax return that you may have not filed. They will request that you do not e-file your return because of the duplicate social security number that was used. Act quickly should you receive this letter from the IRS to avoid further fraudulent activity with your personal information.
Do Not Ignore the IRS Notice
Some IRS notices are purely informational and require no additional action. However, do not assume this is always the case and ignore the notice. Simple mistakes made on your return or underreporting income can result in the IRS requesting action from you. A notice can also be a notification that you owe taxes and will give instructions on how to pay the balance by the due date.
Do Not Replyto the IRS NoticeUnless Instructed To Do So
Typically, a response to an IRS notice is not needed. Once you confirm a response is not required, you can proceed with other actions. Even if the notice informs you of a balance due, there is no need to contact the IRS unless you do not agree with the information on the notice.
Do Learn from the Experience
Use the situation as an opportunity to learn more about tax regulations and ensure that your future tax filings are accurate and complete. Consider consulting with a tax professional for ongoing guidance.
Tax Help for Those Who Received an IRS Notice
Even if you prepare your own returns, having a professional from Optima Tax Relief check out your response before you return it to the IRS may save you from making a costly error. The IRS allows you to be accompanied by a representative if you have been contacted for an in-person interview audit or a field audit. Take advantage of this opportunity. You’ll likely be nervous during the procedure and may share information that might prompt the IRS agent to probe beyond the original scope of inquiry. Not only that, most IRS agents prefer dealing with a professional.
The best thing to do to avoid receiving warnings from the IRS is to always ensure that you remain compliant with tax law. However, if you find yourself in a situation where you owe the IRS, tax relief is always an option. Optima Tax Relief is the nation’s leading tax resolution firm with over $1 billion in resolved tax liabilities.
While there is no guaranteed method of avoiding tax audits, there are things that could help trigger them. Since the Senate approved nearly $80 billion in IRS funding through the Inflation Reduction Act of 2022, with $45.6 billion specifically for enforcement, the IRS has promised an increase in tax audits. Below are some things that the IRS has historically viewed as “red flags,” which could increase the chances of an audit for taxpayers. But first, let’s review the different types of audits.
Types of IRS Audits
The IRS conducts different types of audits to review and verify taxpayers’ financial information and ensure compliance with tax laws. There are three primary types of IRS audits:
Correspondence Audits: These are the most common and least intrusive type of IRS audit. In a correspondence audit, the IRS requests specific documentation to support claims on their tax return. Typically, these audits are focused on one or a few specific issues, such as income, deductions, or credits. Taxpayers can respond to these audits by mail, providing the requested documentation and explanations.
Office Audits: An office audit, as the name suggests, takes place at an IRS office or a local IRS branch office. The IRS will contact the taxpayer to schedule a face-to-face appointment for the audit. The taxpayer will be required to bring the necessary records and documentation to the IRS office. Office audits are often more comprehensive than correspondence audits as they can cover a wider range of issues on a tax return.
Field Audits: Field audits are the most extensive and thorough type of IRS audit. In a field audit, an IRS agent comes to the taxpayer’s home or business to conduct the audit in person. These audits are usually reserved for more complex or high-risk cases. That said, they can involve a comprehensive review of a taxpayer’s financial records and activities. Field audits are often conducted when there are significant discrepancies or concerns about a taxpayer’s compliance with tax laws. However, note that the IRS has halted most unannounced visits to taxpayers.
Reporting a Business Loss
The IRS will be more inclined to audit a taxpayer who reports a net business loss, even if it’s small. Reporting losses year after year will only increase IRS interest in your tax returns. Remember, it is mandatory to report all earnings in a tax year. However, it might be helpful to reconsider which expenses should be deducted from your tax return. Reporting even a small profit could reduce the chance of being audited by the IRS.
Being Vague About Expenses
When it comes to expenses, the more detail the better. This is especially true when categorizing them on your return. Try to avoid listing expenses under “Other Expenses” as this will lead to more scrutiny from the IRS. It may even be helpful to provide supplemental documentation explaining why certain expenses drastically increased or decreased for that year. Doing so can give potential auditors a valid explanation for such occurrences and possibly avoid a tax audit. Additionally, rounding dollar amounts are red flags for the IRS. You should always use exact dollar amounts on your tax return.
Filing Late
Some taxpayers believe that filing late can actually decrease the risk of being audited. However, filing on time, as well as paying on time, can help establish a history of IRS compliance. This will be far more beneficial in the long run. In addition, not filing by the due date will also result in receiving your tax refund later if you are expecting one. Even worse, if your late filing triggers an audit, it may prompt the IRS to look at older tax returns you’ve filed. If they find any other errors, this can add additional time to their normal processing schedule.
Claiming Excessive Deductions
It is best to avoid any excessive expenses. For example, deducting the cost of your breakfast and lunch each workday may not be acceptable to the IRS. Excessive deductions for your donations to charitable organizations can also increase the chances of being audited. Inflating business expenses can result in being audited, especially if you try to claim large amounts for business entertainment or claim a vehicle that is used for only business purposes 100 percent of the time.
Now that home offices are more common, it’s important to only claim the home office deduction for the portion of your home that is used exclusively for business purposes. When claiming this deduction, you will need to figure out how much square footage in your home is dedicated to your business. For tax year 2023, the rate for the simplified square footage calculation is $5 per square foot, with a maximum of 300 square feet or $1,500. Excessive deductions claimed on your return are fast tracks to being audited by the IRS. That said, it’s best to only claim the deductions you actually qualify for to avoid owing any additional taxes.
Keeping Poor Records
Even the simplest tax situations require adequate records. If your finances are more complicated, then detailed records are necessary. Some taxpayers may feel inclined to estimate their expenses because they did not save receipts or documents, which the IRS views as a red flag. It’s important to make sure you have detailed records for the past three tax years at minimum. Having items like your previous tax returns, medical bills, business receipts, real estate documents, and investment statements can help substantiate your claims and avoid an IRS audit.
Choosing the Wrong Filing Status
Your filing status (single, married filing jointly, married filing separately or head of household) determines how you treat many tax decisions, such as what forms you’ll fill out, which deductions and credits you’ll take and how much you will pay (or save) in taxes. Select the wrong status, and it will trigger a cascade of mistakes–maybe even an audit. On top of that, if you decide to file jointly with your spouse, this means you’re responsible for any errors or deliberate falsehoods on your partner’s return, so make sure that you’re comfortable with what it says.
Tax Relief for Those Being Audited
The chances of being audited are low, but those chances increase when the IRS notices any of the above red flags. The audit process can be very stressful. It is a tedious process that requires collecting information regarding your income, expenses, and itemized deductions. Failing an audit can result in a huge, unexpected tax bill. It’s best to seek assistance from experts who can help you avoid an IRS audit. Remember, filing your taxes correctly the first time can help avoid interest, tax penalties, and additional taxes owed. Optima Tax Relief is the nation’s leading tax resolution firm with over $1 billion in resolved tax liabilities.
