Facing an IRS Tax Bill for Unreported Gambling Winnings?
When people win big in a raffle, in bingo, or at the casino, they may not stop to think about taxes—especially if they don’t regularly gamble and have never encountered this situation. Too often, this leads to an unpleasant surprise at the end of the year when they get a 1099 or an unexpected tax bill. If you’ve found yourself with a large tax bill due to unreported gambling winnings, it’s important to address this situation immediately.
At Seattle Legal Services, we’ve helped many clients tackle complex tax issues and address tax debt that seemed unmanageable. We’re here to discuss your tax bill and help you develop solutions. Call us at 206-536-3152 to set up a consultation.
Immediate Steps to Take If You Receive an IRS Tax Bill
It’s normal to panic when you receive unexpected correspondence from the IRS, but there are immediate steps you can take to address this issue.
Understanding Your Tax Bill
The tax bill you receive from the IRS is likely due to information reported by whichever institution or institutions reported your gambling winnings. Generally, this occurs when a company submits a 1099 reporting your gambling winnings as a source of income. If you didn’t report that same income on your tax return, the IRS will adjust your tax return and send a bill for your new total due.
Often, the IRS alerts taxpayers about these types of changes by sending out a CP2000 or similar IRS notice. It’s important to check the due date, as well as any interest or penalties added to your tax bill, so you can avoid additional interest and penalties or collection actions by the IRS.
Contact Seattle Legal Services
At Seattle Legal Services, we help clients like you with a wide variety of tax resolution services. We understand the stress that a sudden tax bill can bring, and we’re here to support you with a variety of different solutions. You may be able to decrease your tax bill by itemizing your deductions and reporting your gambling losses, and even if your tax bill is still too high for you to pay in full, there are payment options that may make the burden more manageable.
We offer a free consultation for clients considering our services. Schedule your free consultation now, and when you come in, bring your tax bill and any other correspondence you’ve received from the IRS, any records you have from your gambling wins and losses, and proof of any gambling payments you have received.
Why You May Not Owe the Full Amount
It’s possible that even if your gambling winnings have increased your tax bill, you may owe less than you think. When the IRS adjusts your tax bill, there are other factors that they do not take into account. That’s where we can step in to help.
In particular, when the IRS adds income related to gambling winnings to your tax return, they don’t give you any deductions for expenses. However, legally, if you itemize, you can use certain expenses incurred during gambling to offset the income from winning. Additionally, in some cases, the casino or other organization that paid you may have already withheld enough money to cover the increase in your tax bill.
Gambling Withholding Rates
When you win a significant amount gambling, the casino or other payer will generally withhold 24% of the payment, but some types of non-cash winnings are subject to a 31.58% withholding rate. However, depending on your income and filing status, you may actually not have to pay that much on your reported income.
For example, single filers at 2024 tax rates do not reach the 24% bracket until they earn at least $100,526. Married couples filing jointly have to earn at least $201,051 before they reach that tax bracket. If the institution that reported your winnings took out 24% and you are actually in a lower tax bracket, you may be due some of that money back.
Deductible Losses
Furthermore, gambling losses in the United States are deductible for those using itemized deductions. You can deduct up to the amount you won in order to decrease your tax burden. Imagine you win $7,000 in one year but lose $10,000 to win that $7,000.
Assume that all $7,000 was subject to withholding because it met the W-2G threshold for the type of game you were playing. Even though the facility would have taken out $1,680—24%—for taxes, you could deduct $7,000 of your losses to cancel out your winnings. You would then be owed that $1,680 back.
If you’re claiming losses, make sure that you have good records. If the IRS decides to audit your amended return, they will want to see the receipts, and dealing with an audit without receipts can be tricky.
When the IRS adjusts a tax return for reported gambling winnings, they likely only have part of the picture. It’s rare to only win while gambling, but the IRS only has records from companies reporting your wins—they do not have any of the information on your losses until you provide it. Once you do, there’s a good chance that your overall tax bill will be lower.
Filing an Amended Tax Return
Rather than simply accepting the IRS’s adjusted tax return and paying the amount they claim you owe, it may be in your best interest to file an amended tax return. This allows you to claim any gambling losses you have to report and will likely result in a lower tax bill.
To file 1040X, you must have your original tax return that you wish to amend. This should include any other forms or schedules you need to complete. You can then use Form 1040X to correct Form 1040. Under “Explanation of Changes,” you’ll need to indicate why you are filing this form and why you need to change your tax return.
Fill out a new Form 1040 and write “Amended” across the top of the new tax return. Attach the new and corrected Form 1040 to the back of Form 1040X and submit it to the IRS.
Generally, if you want to claim a refund, you have to file your 1040X either within three years of your original return’s due date or two years from the date that the tax was paid. After filing, you can go to the Where’s My Amended Return? page to track whether or not it has been received and processed. You should give it at least three weeks, but processing could take up to 16 weeks.
The IRS generally accepts amended returns, but if there is an error with yours, they will send you a notice of claim disallowance or a denial letter. Assuming that yours is accepted, you will either receive a new tax bill reflecting your new amount due or a tax refund reflecting your new deductions.
How Seattle Legal Services Can Help
Figuring out how much you owe, how much you can deduct on your tax return, and how to file the necessary forms can be overwhelming. If this is your first year having to claim gambling winnings and losses, working with the team at Seattle Legal Services can help you get on track, gather the necessary documentation, and avoid paying more than you have to.
Expertise in Tax Resolution
Since our firm works exclusively in tax resolution, we regularly help clients with a wide range of tax issues—even those that seem impossible to navigate. The tax pro assigned to your case will help you understand your IRS tax notices, explain the penalties and increased taxes listed on your new tax bill, and provide clarity on why your tax bill has changed.
From there, we can help you avoid collection actions—levies, liens, wage garnishment, and more—by helping you take swift action to respond to the notice and address the IRS’s concerns. Depending on your financial circumstances, we may also be able to assist you in finding a payment option that accommodates your budget.
Personalized Assistance
There are no one-size-fits-all solutions to complex tax issues, which is why we put in the time needed to find solutions that fit your current situation. No matter what correspondence you’ve received from the IRS, it’s natural for you to be panicking and worrying about your next steps. There are many different ways to approach an unexpectedly high tax bill, and what works for one taxpayer may not be a suitable solution for the next. By taking an in-depth look at your tax documents and your financial documentation, we’ll use our expertise to recommend the best option for you and your family.
Reducing Your IRS Tax Bill
While you may be alarmed at your new tax bill, the odds are good that you can reduce it by documenting your gambling losses. This requires sufficient documentation, and once your final tax bill is received, you may also be able to negotiate what you owe.
Documenting and Reporting Gambling Losses
The gambling industry is highly regulated, so if you are organized and keep track of your gambling activities, you should have no problem documenting your gambling losses. Many people find it helpful to keep a written log in which they keep the date, type of gambling activity, gambling establishment, wager amount, and loss or win amount written down for each time they make a wager. You can then substantiate this record with proof of your losses in order to include them in your taxes.
If you play the lottery, you may have proof in the form of unredeemed tickets, receipts indicating your ticket purchases, and payment slips showing your redemptions. Those who play slot machines can track their losses by documenting their machine number. If you bet on horse racing and similar activities, you should receive records of your wagers and records of each race’s outcome. In certain types of gambling, you’ll receive copies of tickets and wagers. Anything you have documenting the fact that you were gambling and making wagers can support your loss claims.
Negotiating With the IRS
If you successfully lower your tax bill by deducting your losses, you’ll then need to figure out how to pay the resulting tax bill. While the IRS would like to have everyone pay their taxes in full and on time, they do have other payment options to help taxpayers.
Perhaps you are able to pay your taxes in full, but you are unable to do so all at once. The IRS offers both short-term and long-term payment plans, lasting up to 180 days and 72 months, respectively. This type of arrangement is fairly easy to get approved for, and it can leave you a lot more room in your budget as you tackle your tax debt.
However, there are also taxpayers who cannot pay their tax debt in full, even when it is spread out over 72 months. In these situations, an Offer in Compromise may be the better option. When you pursue an Offer in Compromise, you fill out a detailed packet of forms outlining your financial situation and proposing an amount for which you would like to settle your tax debt. This is a time-consuming step since the IRS requires extremely detailed records of your income sources, monthly expenses, assets, and debts.
You can then calculate your offer and submit it to the IRS. They will either accept it, deny it, or propose a higher offer amount. If they accept your offer or suggest a counteroffer you are willing to pay, you’ll then make payments as agreed. Depending on your initial offer, that may mean making one lump sum payment or making payments on a monthly basis until the offer amount is paid off.
There are multiple payment options available through the IRS, but figuring out the best one for your needs can be confusing. When we look at your current tax debt and financial situation, we can make suggestions that best protect your financial stability and keep you compliant with IRS regulations.
Preventing Future Issues
Assuming that you will continue to gamble in the future, it’s important to have documentation protocols and habits in place that will help you avoid surprise tax bills in years to come.
Accurate Record-Keeping Practices
Keeping thorough records of all of your gambling activities can help you accurately calculate wins and losses. This allows you to track taxes paid on winnings and estimate the taxes you’ll owe on winnings that haven’t been reported by gambling facilities. While you can keep a paper log or diary, there are also phone apps and spreadsheet templates that streamline the process and save time.
Understanding IRS Reporting Requirements
Throughout this process and while gambling, it’s important to remember that not all gambling winnings are reported to the IRS by payers. However, it is still your responsibility to report those payments to the IRS and pay appropriate taxes on them. Facilities generally issue W-2G forms when you win $1,200 or more at bingo or on slot machines, $1,500 or more in keno games, and $5,000 or more in poker tournaments.
Other forms of gambling generally result in a W-2G if you win at least $600 and 300 times your original wager. While you should still document these for ease of calculation and tracking, you must also track your smaller wins. Thorough documentation can help you stay compliant with IRS regulations and avoid unexpected tax bills and penalties in the future.
Seeking Ongoing Professional Help
Even after you have addressed your current tax issue, you may still need ongoing assistance with your tax needs—especially if you have complicated situations, such as multiple gambling losses and wins throughout each tax year. Taxpayers in these situations often find it helpful to work with tax pros throughout the year to provide documentation and find out if there’s anything they need to be doing to avoid end-of-year surprises.
For example, if you have a long series of small wins that do not automatically have taxes withheld, the tax pro you work with at Seattle Legal Services can caution you about how much you will likely owe at the end of the year so you can begin preparing for it. This makes tax prep an ongoing, low-stress task rather than something you dread at the start of each year.
Frequently Asked Questions
What should I do if I receive an IRS tax bill for unreported gambling winnings?
First, you should review your bill to understand what the IRS is asking you to do, why they have adjusted your taxes, and how long you have to respond. From there, you should gather all the documentation you have of your gambling wins and losses so you can schedule a consultation with Seattle Legal Services.
Can I reduce my gambling bill by reporting gambling losses?
Yes. The IRS allows you to deduct gambling losses up to the amount you win in a calendar year, assuming you use itemized deductions. For example, if you win $5,000 and lose $10,000, you can deduct $5,000 in losses.
How does Seattle Legal Services help with IRS tax issues?
Our team focuses exclusively on tax problems and solutions, so we have a wide range of tools and expertise at our disposal to help with complex tax concerns and needs. From helping you understand your IRS notices and potential outcomes to coming up with ways to reduce your tax bill and manage your payments, our goal is to make dealing with the IRS as stress-free as possible.
What documents do I need to prove my gambling losses?
Any documentation provided by the gambling facility can help prove your gambling losses. You should also keep a running log of your gambling activity, including wins and losses, for accurate calculations. Many taxpayers find it helpful to use specialized apps designed for hobby gamblers.
How long does it take to resolve an issue with the IRS?
In this scenario, where you often just need to file an amended tax return and request a suitable payment option, the process can be fairly quick. It may take up to 16 weeks to process an amended tax return and several months to process an Offer in Compromise, but the process could also be much shorter depending on the IRS’s backlog.
What are the consequences of not addressing an IRS tax bill?
If you ignore a tax bill, the IRS will not give up on pursuing payment. You’ll receive a long list of notices and letters, and at some point, you’ll likely receive a certified letter indicating that the IRS plans on levying your assets. If you do not respond within the given response window, they can then seize your bank accounts, garnish your wages, and seize other assets. This is definitely not a situation you want to avoid or ignore.
Can I negotiate a lower tax bill with the IRS?
In some circumstances, you can negotiate a lower tax bill with an Offer in Compromise. The IRS only accepts offers from those whose financial situation leaves them unable to pay their tax debt in full, so you may want to discuss this option with a tax attorney before spending any time on it.
How can I prevent future issues with the IRS related to gambling winnings?
Maintaining thorough records and working with a tax pro who can manage your documents for you throughout the year can help you avoid this situation again.
What is an Offer in Compromise and how can it help reduce my tax bill?
An Offer in Compromise lets certain taxpayers settle their bill by paying less than what they owe, either in one lump sum payment or in monthly payments. The IRS is very restrictive with this option, so you’ll need to prove that you qualify by providing extensive financial documentation and records.
What if my spouse didn’t report gambling winnings?
Say your spouse didn’t put gambling winnings on your tax return, and now, you’re facing an unexpected bill from the IRS due to their actions. Legally, you are jointly responsible for the tax due on a jointly filed return, but in certain situations, if you can prove that you didn’t know about the income and had no reason to know, you may be able to get relief through the IRS’s innocent spouse relief program.
Is it necessary to hire a tax professional for these issues?
While you do not have to hire a tax professional, doing so will make the entire process easier, faster, and less stressful. Hiring a tax professional can also help you maximize your deductions and lower your tax bill as much as possible, which saves you money in the long run.
A tax bill resulting from unreported gambling winnings can be stressful, but you don’t have to navigate this issue alone. With the team at Seattle Legal Services, you can learn more about IRS requirements, take steps to reduce your tax bill and approach your final tax bill in a way that suits your budget and ability to pay. Be proactive about your taxes and contact Seattle Legal Services to discuss your options—just reach out online or call us at 206-536-3152.