The IRS has set its sites on millions of people who enjoy gambling: the huge gap between tax collections and people reporting them on their tax returns. Those unreported winnings ad up to a whopping $13.2 billion.
Since sports betting and online gambling in the U.S. has increased in recent years, the Treasury Inspector General for Tax Administration (TIGTA) recently audited the IRS for signs of these missed gambling winnings. This has prompted the IRS to take action to improve compliance. So, are you affected and if so, what steps will the tax agency take? I'm going to tell you what you need to know. Read on...
1) What if you don't report gambling winnings?
Here is what the TGITA report revealed: About $13.2 billion in lost revenue was due to non-filer gambling winnings. This unreported income was found across nearly 150,000 individuals who reported more than $15,000 per return. Since the audit only reviewed tax years 2018 through 2020, the $13.2 billion projection could be even higher if more recent filing years are taken into account.
This has prodded the IRS to increase their enforcement efforts. Starting with taxpayers whose income was at least $100,000, the agency will be sending out delinquency notices (CP59). Taxpayers receiving this notice can expect it as early as October 2025.
The IRS will also be taking a closer look at the sports betting and online gambling industries for new ways to identify those not reporting winnings. (I'm sure we'll see some new forms coming in the future to make it harder for people to evade detection.)
2) Will you get audited for gambling winnings?
The TGITA reports that 77% of the tax gap (the difference between taxes paid versus the amount owed) is due to non-filers. There are tens of thousands of people who simply do not file a tax return, because if you do not have a balance due on your return, you have no requirement to file for your refund. (You have three years to claim a refund or the IRS just get to keep it.)
So, what will that mean for the average gambler? A great chance of being audited?
Here's what you can do to protect yourself:
- Keep good tax records of gambling winnings and losses so if you're audited or claim a related deduction of your return, you’ll have documentation to support your tax position. (Especially losses which most people are bad at.)
- Deduct gambling losses by itemizing on Schedule A, where applicable. Basically, your Schedule A has to be more than the standard deduction to be able to deduct your gambling losses.
- Understand that gambling winnings are taxed regardless of whether you receive $5 or $5,000, though how much tax depends on your gambling winnings and losses
Casinos and other gambling establishments generally must report to the IRS (using Form W-2 G) winnings of $1,200 or more from bingo or slot machines, $1,500 or more from keno, and $5,000 or more from poker tournaments. Just because you don't get one of these forms doesn't mean you don't have to report it. Sometimes you will just get a letter stating your winnings, but that doesn't mean it won't be reported to the government.
Professional gamblers have different tax implications since they are considered to be running a business. They report their income on Schedule C and can generally deduct ordinary and necessary gambling-related expenses.
Still, as the audit report points out, “It is a crime for any taxpayer to willfully fail to file a tax return that is due.” - meaning you owe instead of getting a refund - So, what happens for underreporting your gambling winnings?
3) When does the IRS put you in jail?
Possible repercussions for intentionally withholding tax money include (but may not be limited to):
- A fine of up to $25,000 ($100,00 for corporations), and/or
- Imprisonment of up to one year
In the most serious cases, the IRS Criminal Investigation unit will get involved. To avoid potential legal action, you should find out how to pay the IRS if you owe taxes, including setting up a payment plan.
Also, be sure you know the tax laws surrounding gambling in your state. You'll need to find out that information on your State Department of Revenue’s website before you file.