What Do I Do if I Don’t Have My Records Showing Gambling Losses?

Can You Deduct Gambling Losses On Your Taxes?

Yes, you can deduct gambling losses on your taxes, but there are specific rules that apply. Navigating the intricacies of gambling and taxation can be pretty complicated, but understanding the rules laid out in IRS Publication 529 is crucial. According to these guidelines, you’re allowed to deduct gambling losses, but there’s a key limitation: you can only deduct losses up to the amount of your gambling winnings. In other words, you can’t use your gambling losses to eliminate your entire tax liability, but you can offset your winnings to reduce the taxable income.

Now, when we talk about gambling losses, it’s not just about the bets you placed. The IRS recognizes that the full picture involves more than just chips and cards. It extends to the actual cost of your wagers and, interestingly, your travel expenses to get to the casino. Yes, you read that right – you can indeed write off your trip to Las Vegas, including those sometimes exorbitant parking fees at the glitzy Strip casinos. So, while your gambling winnings might be subject to taxation, these deductions can help level the playing field a bit.

However, there’s a catch – a rather specific one. You must maintain a detailed diary of your gambling activities. This isn’t just a vague recollection of the nights you tried your luck; it’s a comprehensive record that should include:

• The date and type of each specific wager you made.
• The name and address of the casino where you placed those wagers.
• The names and addresses of the other individuals who were your gambling companions.
• The amounts you won or lost on each occasion.

Keeping this diary in good order isn’t just a recommendation; it’s a requirement. This diary serves as a vital piece of evidence to substantiate your claims if the IRS comes knocking. It’s your ticket to establishing the legitimacy of your deductions.

What Other Documentation Is Required To Claim Gambling Expenses?

In the intricate world of gambling and taxation, keeping detailed records and maintaining a paper trail can make all the difference when it comes to proving your gambling-related claims to the IRS. Besides diligently keeping that key diary of your gambling activities, there are other forms of documentation that can significantly enhance your ability to substantiate your deductions. Let’s delve into these supplementary records that can be instrumental in supporting your claims:

1. W2-G Forms: These forms become particularly relevant when your gambling ventures take you into the realm of poker rooms, where the stakes can rise substantially. If you happen to be one of the fortunate individuals who walk away with substantial winnings exceeding $5,000, you’ll typically receive a W2-G form. This document serves as an official record of your gambling earnings, a paper trail that the IRS readily acknowledges and considers as essential for tax purposes. By keeping your W2-G forms in an organized manner, you not only ensure accurate reporting but also provide a clear and certified document to support your claims.

 

2. Slot Machine Records: Slot machine enthusiasts, fear not; IRS Publication 529 has been considerate of your gaming preferences. It recognizes the prevalence of slot machine gaming and stipulates specific requirements for those who enjoy the thrill of the one-armed bandits. According to these guidelines, for slot machine winnings, you must maintain “a record of the machine number and all winnings by date and time the machine was played.” In this context, machine numbers, timestamps, and details of your slot machine wins become critical components in verifying the accuracy of your reported gambling income.

 

3. ATM Withdrawal Statements: To further strengthen your case and provide an additional layer of evidence, consider retaining your ATM withdrawal statements. These documents can be a valuable resource in demonstrating the financial transactions associated with your gambling activities. When you withdraw cash at or near a casino, these statements not only confirm your access to funds but also indirectly establish a connection between your withdrawals and your gambling pursuits.

 

4. Statements Provided by Casinos: Casinos often issue statements detailing your wins or payments as a part of their customer service. These statements are instrumental in validating your earnings and losses. They provide an official record from the casino, which can offer vital insights into your financial transactions while gambling. Including these statements in your documentation enhances the credibility of your claims.

In the ever-evolving landscape of tax regulations, maintaining comprehensive documentation is a prudent and essential practice. It not only safeguards you from undue tax liabilities but also streamlines the auditing process, should you find yourself subject to IRS scrutiny. So, while the world of gambling may be riddled with uncertainties, your approach to record-keeping should be unwaveringly systematic, ensuring you’re well-prepared to meet the IRS’s requirements and maintain the integrity of your tax returns.

Does Anyone Actually Keep These Records?

Maintaining meticulous diaries chronicling gambling wins and losses is a bit of an elusive endeavor for most people. In the vast and dynamic realm of gaming, it’s rare to find enthusiasts rigorously documenting their adventures on the casino floor. Professional poker players, the few exceptions to the rule, might maintain informal diaries noting the locations of their play, as well as the fluctuating sums they’ve won or lost. However, even within these hallowed circles, names of fellow players often escape record, preserved solely as poker faces across the felt.

Digging deeper into the casino, we may encounter a legion of slot machine enthusiasts, yet scarcely a soul among them keeps a diary. The rhythmic chimes and spins of slot machines may create an enchanting melody, but it’s unlikely that many players are recording their gaming journey with a contemporaneous account, noting both dates and times, or the specific machines they’ve tried their luck on (with machine number!). 

The challenging conundrum arises when these individuals are confronted by the IRS, either due to gambling winnings reported through W2-G forms or an intensive office or field audit. In such cases, the IRS will issue a CP2000 notice, a formidable document that disallows all claimed losses, except when the taxpayer can present a correctly maintained diary, backed by concrete proof of both wins and losses.

For those who engage in casino gambling through a player’s card, an ounce of salvation may be found in the form of Coin-In and Coin-Out statements. These statements, formally tracked by casinos, offer a detailed breakdown of the amounts won and lost based on the frequency of spins made by the taxpayer. It’s a mathematical inevitability that over time, the house holds an advantage ranging from two to fifteen percent, a stark reality for slot machine players who may be lured by the allure of a life-changing jackpot.

While Coin-In and Coin-Out statements can serve as compelling evidence of losses, the IRS remains a stringent judge of documentation. Astonishingly, the mere presence of these statements is often considered insufficient, as the IRS demands the crucial companion – a diary. It’s this requirement that often leaves taxpayers in a predicament.

One potential loophole in this scenario is the absence of a requirement within Publication 529 for the diary to be contemporaneous, meaning it doesn’t need to be recorded in real-time. Yet, submitting a diary to a Revenue or Appeals Officer, which is reconstructed from memory and not contemporaneous, is typically met with rejection by the IRS. The stakes are high, and the IRS holds a formidable hand when it comes to verifying the legitimacy of gambling losses.

Can I Get A Witness?

But what happens when you’re dealing with gambling losses, and there’s no diary or any other concrete records to support your case? It’s a tricky situation, especially when you consider that the more you gamble, the less likely it is that you’ll end up ahead. The fees and parking charges from casinos might seem like small change, but it’s the relentless spinning of those slot machines that really keeps these mega-resorts afloat.

Enter Mark Nicely, the founding expert at Nicely Done Gaming. With over two decades of experience in the world of casino gaming, Mark Nicely brings a level of expertise that’s hard to match. He doesn’t just know the games; he holds advanced degrees in mathematics and computer science and boasts an impressive portfolio of over 200 gaming patents.

Mark has a unique ability to take complex pieces of the gambling puzzle – like W-2Gs, Coin-In and Coin-Out statements, or even informal diary reconstructions – and use his mathematical acumen to make a compelling case. As an expert witness, his role is to establish the validity of gambling losses beyond a shadow of a doubt, even when solid documentation is scarce.

In a world where clear records are often hard to come by, Mark Nicely’s knowledge offers a practical guide through the challenges of gaming and taxation. So, if you’re faced with the task of proving your gambling losses, particularly when you lack a diary or concrete documentation, Mark Nicely is an expert you can rely on. 

Should I Go To Tax Court?

In most cases, tax court is worth the gamble. 

In the realm of taxation, the path to Tax Court becomes accessible through a pivotal document: the Statutory Notice of Deficiency or the 90-Day notice. This notice serves as the irrefutable evidence that a proposed assessment, often initiated through a CP 2000, has taken a concrete form. It’s essentially the “golden ticket” that grants you entry into the Tax Court arena.

In circumstances where an IRS Revenue Agent or Appeals Officer remains unyielding or uncooperative in matters concerning your tax liability, there exists a powerful recourse. You can take the initiative to file a Tax Court Petition. This strategic move serves as your formal protest against the arbitrary disallowance of your gambling losses, ensuring that your case receives the judicial attention it merits. In essence, this represents your second opportunity to present your case, affording you a “second bite at the apple.”

Navigating the intricacies of tax disputes can be a complex and daunting journey, but understanding the significance of these legal avenues can provide taxpayers with a potent tool for seeking a fair resolution to their tax matters.

What Can We Learn From Coleman V Commissioner?

Case Reference: Coleman v. Commissioner, T.C. Memo 200-146 Docket No 19540-17

This particular case delved into the intricacies of substantiating gambling losses, and it offered a crucial insight into the taxpayer’s ability to do so. The case hinged on a meticulous analysis of financial records, compelling trial testimony, and the insightful report of an expert witness, Marc Nicely. Ultimately, it revolved around whether the taxpayer could effectively substantiate his gambling losses, particularly in relation to his gambling winnings.

The taxpayer in question, John Coleman, has a longstanding history of compulsive gambling, a pattern that has persisted since his teenage years. His journey into the world of gambling commenced with card games during his high school years and evolved to encompass commercial slot machines in Atlantic City, New Jersey.

The year under scrutiny, 2014, witnessed John’s gambling activities at four different casinos. He did maintain an informal diary, which attempted to track some of his wins and losses. However, none of the four casinos in question had comprehensive records documenting the entirety of his gambling activities. While casinos are obligated to issue W2Gs for winnings exceeding $1,200, they are not mandated to keep tabs on losses or smaller winnings. A crucial element in this scenario was the use of casino-issued player’s cards, as they tracked John’s wins and losses when he engaged with slot machines.

Yet, the records stemming from W2Gs and player cards were inherently incomplete, as they could not provide a comprehensive overview of John’s financial dealings in the realm of gambling. The cumulative result was an income figure exceeding $50,000. John’s gambling habits were compulsive and repetitive. In cases where he did not possess winnings from previous trips, which was the norm, he would resort to withdrawing cash from ATM machines in substantial amounts, often ranging from two to three thousand dollars. Moreover, he occasionally turned to withdrawals from his two credit cards to fuel his gambling endeavors.

The case proceeded to trial in February 2020, with testimony presented by the taxpayer himself, his wife, his daughter, and the expert witness, Marc Nicely. Marc Nicely leveraged well-established statistical techniques to offer a meticulous estimation of the probable outcome of John’s gambling activities throughout 2014. This estimation was based on factors such as the frequency of John’s gambling ventures and the expected win percentages, which naturally varied from casino to casino. Notably, Marc Nicely’s conclusions were underpinned by a remarkable 99% level of certainty, asserting that John Coleman had indeed incurred losses exceeding a staggering $150,000.

Marc Nicely further emphasized that in situations where a gambler indulges in their habit over extended periods without securing substantial winnings, the concept of net annual gambling winnings becomes an impossibility. In John Coleman’s case, the odds of such an occurrence were staggering, standing at 140 million to one.

In the context of taxation, deductions on a tax return necessitate the ability to substantiate them. It’s a requirement that often poses a challenge, especially in the realm of gambling where record-keeping might be lax. However, under the established legal precedent, as set forth in Cohan v. Commissioner (39 F. 2d 540, 2nd Cir. 1930), taxpayers are allowed to claim an estimated amount as a deductible expense when precise records are not available.

While the government successfully established gambling winnings exceeding $350,000, John Coleman presented compelling evidence to substantiate a deduction that, at the very least, matched the amount of his gambling winnings. This case serves as a noteworthy example of the complex interplay between gambling, taxation, and the demands of proving deductible expenses.

What Can We Learn From The Case Of Vic Martinez?

On January 6, 2020, the Internal Revenue Service sent Vic Martinez a Statutory Notice of Deficiency, a stark document that proposed an increase in his reported income by a substantial $71,320 for the year 2017. This adjustment was primarily based on W2Gs, which were reported from his gambling activities at San Miguel casino. Strikingly, the IRS took no cognizance of any gambling losses in their calculations. Victor, known as Vic, wasn’t about to take this sitting down.

In response to the Statutory Notice of Deficiency, Vic promptly filed a Petition for Redetermination. His primary assertion was that the Government had disregarded his legitimate gambling losses, a vital aspect that the IRS had seemingly overlooked.

The case was subsequently assigned to an Appeals Officer for a potential settlement. Vic put forth a compelling argument, claiming that his gambling losses far exceeded his winnings. His gambling journey had commenced after his retirement, seemingly filling a void in his newfound free time. Despite receiving a lump sum retirement, Vic had taken multiple distributions and, sadly, had watched the money vanish into the gaping maw of slot machines. His situation had deteriorated to the extent that he was now living in his truck, a stark contrast to his previous life in an apartment.

Vic’s commitment to gambling was evident in the frequency of his activities. He had wagered on at least 190 days throughout 2017, if not more. Much of the time, he utilized a San Miguel player’s card, but in an attempt to change his fortune, he occasionally refrained from using it. 

There were also occasions when he simply forgot the card at home. Vic had constructed a diary of his gambling activities, though it was not contemporaneous. While this diary was presented to the Appeals Officer, it did not align with the strict guidelines outlined in IRS Publication 529, rendering it unacceptable in their eyes. Vic also produced ATM receipts, canceled checks payable to the casino, and pointed to the palpable decline in his standard of living, from residing in an apartment to experiencing homelessness.

The financial trail painted a telling story. Vic’s bank accounts offered no evidence of an increase in net worth that could substantiate gambling winnings. Instead, withdrawals from his accounts showcased quite the opposite trend, affirming his substantial losses.

In the midst of this fiscal maelstrom, the services of Mark Nicely were enlisted to evaluate Vic’s reported losses. Mark Nicely, armed with the diary, ATM withdrawal records, and bank statements, concluded that it was mathematically implausible for Vic to have not incurred greater losses than winnings.

The case proceeded to trial, with an attorney from the IRS District Counsel office assigned to argue their side. Yet, the discussions seemed to reach an impasse. The IRS attorney, basing their argument on the records from San Miguel, contended that Vic had, in fact, accrued net gambling winnings at the casino. The deadlock prompted the presiding judge to order a three-way conference call. During this call, the judge meticulously reviewed the diary and Marc Nicely’s Expert Witness report. A key point made in Marc Nicely’s report was the fundamental principle that in a game that inherently favors the house, prolonged play will inevitably lead to net losses for the gambler. As such, it was strongly recommended that the case be resolved amicably.

In the wake of further discussions between Vic and the IRS attorney, a persuasive case was made. Vic contended that San Miguel’s records were incomplete, only including jackpots of $1,200 or more and failing to account for his gambling activity when he refrained from using his player’s card. Vic’s bank account and ATM withdrawals were presented as corroborative evidence of this practice.

Ultimately, Vic succeeded in establishing a discernible pattern of compulsive gambling that had effectively depleted his income. Just a week later, a Decision Letter drafted by the IRS District Counsel marked a full abatement of the proposed tax assessment. This remarkable turnaround occurred despite Vic’s inability to strictly adhere to the diary and proof of losses and winnings guidelines established in IRS Publication 529.

In the end, Vic’s case serves as a testament to the power of perseverance, the importance of expert insight, and the potential for resolution in even the most challenging tax disputes.

Ultimately, the flawed state of our tax system is nowhere more evident than in its enforcement of tax laws related to gambling losses and winnings. It’s perplexing to fathom a scenario in which the IRS disallows a taxpayer’s slot machine losses merely due to a missing record of the machine number and the precise winnings, recorded by date and time of the session. Yet, this regrettable reality is not uncommon. The tax laws concerning gambling must inevitably adapt and evolve alongside technological advancements. This necessity arises from the stark impracticality of the current IRS enforcement of tax laws governing gambling losses and winnings.