It’s No Gamble! The Lesson is: Keep Good Records

Tax law requires, it should be no surprise, that all winnings from gambling be reported as income. In fact, those gross casino winnings you may have are to be reported on the “other income” line on page 1 of Form 1040. And we know you’ll be disappointed to hear that your costs of gambling are deductible, but only as “miscellaneous itemized deductions” if you itemize, and even then they are limited to the amount of gross earnings from gambling. In other words, if you had a net loss for the year from gambling activities, you may not deduct the loss—no carryovers, no carrybacks, nothing!

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Here’s another thing for you to consider. The IRS expects you to keep a record of both your winnings and your cost of gambling (wagers). As is the case for most income and expenses, you must be able to substantiate what you are reporting. This is usually not much of a problem for the income, as the payer is to provide you with a W2-G for gambling winnings. The amounts won which require reporting differ depending on what type of betting is done, but slot machine winnings must be reported if they exceed $1,200 on a wager.

But the documentation of the wagers is not as easy: you should keep a log showing date, winnings and wager expense for each wager. Although you might make it through an IRS audit with less documentation, you shouldn’t count on it. In fact, you would not want to operate as the taxpayer did in a Tax Court case last year. The taxpayer, Jacqueline D. Burrell, in the words of the Court, “frequented gambling casinos for recreation several times each week, primarily playing slot machines. (She) gambled in cash; she did not track her daily winnings and losses.”

Ms. Burrell, the taxpayer in Burrell v. Commissioner (T.C. Memo 2014-217, October 14, 2014) was audited and Ms. Burrell’s gambling activity was one of the areas the IRS examined and made changes to.

In the examination, to substantiate her gambling losses, Ms. Burrell provided documents for 2 of the 3 years under audit, which listed the dates she gambled, the names of the casinos, and the daily amounts of cash she brought to the casino. She also provided ATM receipts and cash advance receipts from the casinos frequented, and a letter from 3 of the casinos for several of the years, stating the amounts the petitioner lost in some of the years being audited.

In the end, the auditor allowed all of the loss amounts reported on the casino letters, as well as the amounts set forth in the ATM receipts and cash advance receipts. Ms. Burrell did not get to deduct the rest. She had other (non-casino) issues with the IRS as well, and in the end owed $115,916 in tax, and $23,184 in accuracy related penalties, and of course paid interest on it all.

But be wary of this: the Tax Court said, in part: “Taxpayers are required to maintain “permanent books of account or records***as are sufficient to establish the amount of gross income, deductions, credits, or other matters required to be shown by such person in any return…” And, “On the basis of the casino letters and other documents, as well as petitioner’s oral explanations and the virtual certainty that she had slot machine losses during the years involved (emphasis added), the IRS conceded that petitioner was entitled to deduct approximately…70% of the aggregated reported gambling losses for the three years involved. The evidence in this case is not sufficient for us to hold that petitioner is entitled to deductions for gambling losses in amounts greater than those (the IRS) conceded.” The message is clear: even though the Court believed that it was virtually certain that Ms. Burrell lost money in her gambling activities, the Court accepted the IRS conclusion that she wasn’t entitled to deduct as much as she won because there was insufficient evidence for it.

The lesson is this: if you don’t have evidence, and the IRS doesn’t agree with you, the Tax Court is very unlikely to do so.

So take our advice, and that of the IRS and Tax Court, and if you gamble, keep very good records at the time of what and when you win and what and when you wager. You’ll be glad you did at tax time, and ecstatic if you get audited.

 

Joe

Home Isn’t Always Where the Heart Is

Generally travel expenses for business purposes are tax deductible. Generally. “Generally your tax home is your regular place of business or post of duty, regardless of where you maintain your family home,” according the IRS Publication 463 Travel, Entertainment, Gift, and Care Expenses,

By definition, travel expenses are incurred when you are working away from home. However, the way you think of home and the way tax authorities think of home are sometimes different.

When I use the word home I think about Fort Smith, Arkansas. I grew up in Fort Smith, went to twelve years of school here, went to church here, etc. I visualize my house where my wife and I raised our son and created years of memories. In my particular case, my personal definition of home is the same as the tax law’s definition. Each day I get up and go to work at my office seven miles away. When I leave the city limits of Fort Smith to conduct business, it is easy to determine which expenses are deductible travel expenses. Some people don’t have occupations that allow such a clear definition of home for tax purposes. These individuals have to determine the location of their tax home.

For income tax purposes, your tax home isn’t about where a person’s residence is located. It is more about where you make your money, where you do business. Your tax home is geographical by nature, the area you work. People who earn their keep in different locations can run into trouble by assuming their tax home is where their spouse and kids live.

So what occupations are people involved in that might be affected by the tax law’s definition of home? Some of the occupations or business activities that the tax court has had to deal with the issue of a person’s tax home include consultants, people who work overseas, truck drivers, project managers in the construction trade, welders, and the list goes on. If you are or become mobile in your work or business activities, where your tax home is could be important.

How do you determine where your tax home is? It depends. It depends on the facts and circumstances of your situation. There isn’t a checklist that when completed answers the question definitively. But here are the factors the IRS tells you to consider.

If you have more than one place of work, the IRS tells you to consider the following in order to decide which place is you tax home:

  • The total time you ordinarily spend in each place.
  • The level of your business activity in each place.
  • Whether your income from each place is significant or insignificant.

It is possible under income tax law to hold a job and be homeless. The IRS defines this as itinerate rather than homeless, but if you are defined as an itinerate worker, then you have no tax home and none of your travel expense can be deducted because you are never away from home.

Here are the factors the IRS will consider to determine if you are tax homeless (itinerate).

  • You perform part of your business in the area of your main home and use that home for lodging while doing business in the area.
  • You have living expenses at your main home that you duplicate because your business requires you to be away from that home.
  • You have not abandoned the area in which both your historical place of lodging and your claimed main home are located; you have a member or members of your family living at your main home; or your often use that home for lodging.

Publication 463 says that if you satisfy all three of the above factors, you tax home is where you live. If you meet two of the three factors, it’s up in the air. You may or may not have a tax home. But if you only satisfy one factor, you’re out of luck. You are itinerate and cannot deduct any travel expenses.

Then you have the question of whether your work location is temporary or indefinite. A temporary location is a location where you work for less than a year. You cannot deduct travel expenses to and from a temporary work location. However, if the work assignment is indefinite, it becomes your tax home.

I really don’t expect you to become an expert on what the tax law considers your tax home by reading this post. However, I do want to illustrate with this post that the determination of you tax home can be complex. I will take a deeper look at travel and what requirements tax law and the IRS impose on taxpayers in order for travel expenses to be deductible. In the meantime, if this issue is important to you and you need answers now, call our office and as to talk with one of our CPAs or download IRS Publication 463 from IRS.gov. [As of January 21, 2015 the IRS Publication 463 is for the one published to assist tax payer in preparing their 2013 income tax year. The rules regarding to the definition of your tax home hasn’t changed, but if you are concerned, I’m sure an updated publication will be posted soon by the IRS.]

 

David

Call the IRS at Your Own Risk!

Ad-vo-cate : Noun, /ˈadvəkət/

A person who publicly supports or recommends a particular cause or policy. “He was an untiring advocate of economic reform.”

Synonyms: champion, upholder, supporter, backer, promoter, proponent, exponent, spokesman, spokeswoman, spokesperson, campaigner, fighter, crusader, and more. [1]

The most serious problem facing taxpayers is the declining quality of service provided to them by the IRS when they seek to comply with their federal tax obligations. In FY 2015, the IRS is unlikely to answer even half the telephone calls it receives.

Federal law provides for the appointment of a National Taxpayer Advocate, and this position has been filled for some time by Nina E. Olson. This week, she delivered her required annual report for 2014 to the Congress. The full report is available here: http://www.taxpayeradvocate.irs.gov/2014-Annual-Report/ .

This year’s report, in a continuing and disturbing theme, says that taxpayers this year are likely to receive the worst levels of taxpayer service since at least 2001 when the IRS implemented its current performance measures. The report recommends that Congress enact a principles-based Taxpayer Bill of Rights, adopt additional safeguards to make those rights meaningful, and provide sufficient funding to make the “Right of Quality Service” a reality.

The report also urges congress to enact comprehensive tax reform, pointing out that simplification would ease burdens on taxpayers and the IRS alike.

The major areas in which the Taxpayer Advocate’s office found problems in the IRS were:

  • The Right To Quality Service
  • The Right to a Fair and Just Tax System: Complexity
  • The Right to Be Informed: Adequate Explanations
  • The Rights to Privacy and to a Fair and Just Tax System

Many of the deficiencies identified could probably be corrected or improved on if Congress would fund the IRS in the way the Advocate feels appropriate. Some of these would enable taxpayers and their advocates to have better lines of communication with the IRS. And of course, the tax laws and regulations grow more and more complex as time passes, and one of Ms. Olson’s criticisms of IRS is that it does not report on tax complexity as required by law.

Although if past is prologue we will see little attention paid to the Advocate by the Congress, it can be hoped that the Congress will adopt much or all of her advice.

We have written here about The Taxpayer Advocate in prior Pottscasts. You may view that Pottscast by clicking this link: http://pottscast.com/the-taxpayer-advocate/.

 

Joe

[1] Google’s online unattributed dictionary response.