Irs Gambling Losses Proof

Some taxpayers seem to believe that a casino’s statement is sufficient to substantiate a taxpayer’s reported gambling winnings and losses. In a recent case decided by the California Board of Equalization, taxpayer Marsha Kakalia learned the hard way that such statements are not sufficient.

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During 2003, Ms. Kakalia gambled at several casinos, mostly playing slot machines. She reported gambling losses of $89,980, offsetting her entire federal AGI (adjusted gross income) of $89,980 and determining a California AGI of zero.

It’s no surprise the California Franchise Tax Board examined her return. For the year, six casinos issued to her (and to the IRS) Form W-2Gs, reflecting $89,834 of total gambling winnings. For slot machine winnings, a Form W-2G is issued only when winnings are $1,200 or more.

Irs Gambling Losses Proof

The IRS requires you to keep a diary of your winnings and losses. Please view the Turbo tax FAQ below for more information about what records to keep. Please view the Turbo tax FAQ below for more information about what records to keep. The Courts and the IRS have interpreted Section 165(d) of the Internal Revenue Code in such a way that gambling activities cannot be reported in a summary fashion. Instead the IRS prefers, yes insists, that gamblers keep a gambling diary (See Revenue Procedure 77-29) and report their activity by “ gambling session ” (See IRS Chief Counsel.

Irs Gambling Losses Proof Against

The taxpayer was essentially saying that all of her winnings were $1,200 or more; she never won smaller amounts. The auditor questioned this by requesting documentation of her winnings and losses from the year.

To substantiate her winnings and losses, the taxpayer provided to the auditor two statements: One from Harrah’s dated July 7, 2007, and one from Thunder Valley Casino dated July 2, 2007. The Harrah’s statement showed she had total net gambling losses of $14,666 during 2003 as a result of gambling from four different Harrah’s locations. The Thunder Valley Casino statement reflected total net losses for 2003 of $36,151.20.

The taxpayer took the position these two statements demonstrated there was “no doubt” that she had no gambling income for 2003 from any casino.

The position is weak. First, the statements only included gambling activity when the taxpayer used her rewards cards. Second, the statements themselves emphasized that they were not intended for tax purposes, and that the IRS recommends keeping a contemporaneous diary of gambling activity. See IRS Publication 529.

The Franchise Tax Board took the following—and correct—legal position:

1. Nonresidents whose gambling winnings are connected to a trade or business may deduct gambling losses to the extent of winnings, however, under Sec. Case law and IRS guidance have established that a taxpayer may determine gambling winnings and losses on a session basis.
2. If the bank statement shows funds withdrawn for gambling that would be good supporting evidence. Remember that you can only deduct losses to the extent of winnings and only if you itemize deductions on your return.
3. These workbooks are helpful in claiming the losses on Form 4684; keep them with your tax records. Casualty losses are deductible in the year you sustain the loss, which is generally in the year the casualty occurred. You have not sustained a loss if you have a reasonable prospect of recovery through a claim for reimbursement.

[A]dequate recordkeeping is essential to establish entitlement to a gambling loss deduction… “[I]f a taxpayer fails to maintain adequate records, both her gambling losses cannot be ascertained. In such a case, it cannot be determined whether her gambling losses exceeded her unreported gambling income. In those circumstances, courts have denied the taxpayer a gambling loss deduction.”

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The taxpayer made a final effort to support the gambling loss deduction by providing bank records reflecting ATM cash withdrawals at various casinos. The problem with using bank statements for proving gambling losses is that there was no indication the cash withdrawn was actually used for gambling.

Ultimately, the Board of Equalization held for the Franchise Tax Board, disallowing the taxpayer’s gambling loss for the year.

As I say over and over, a taxpayer should maintain a contemporaneous diary of gambling activity. Otherwise one faces a steep uphill battle to meet the burden of proof for substantiation. In today’s case, the taxpayer came up very short.

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Case: In re Kakalia, Case No. 404650, California Board of Equalization (Dec. 14, 2011).