Following an audit that showed Uncle Sam might have failed to collect over $1 billion in income tax from recent casino jackpots, the IRS is intensifying efforts to address the issue. One of the most identifiable casino gamblers in Las Vegas finds himself targeted by the crackdown. 

This information was provided by the Sept. 30 report from the independent IRS oversight group Treasury Inspector General for Tax Administration (TIGTA). The study discovered that 148,908 Americans who had gambling earnings over $15,000 did not submit tax returns from 2018 to 2020. 

Their earnings surpassed $13.2 billion, resulting in unpaid taxes slightly over $1.4 billion. 

TIGTA examined the W-2G forms produced by casinos when players achieve slot jackpots of $1,200 or higher or Keno winnings of $1,500 or more. The report indicated that 103,000 of these noncompliant winners did not receive any notices or encounter attempts to ensure their compliance. 

In reply to the report, the IRS stated, “We concur with the recommendation,” promising to initiate enforcement measures. 

The Internal Revenue Code indicates that profits from gambling are entirely taxable and need to be declared as income by individual taxpayers. Gamblers can deduct losses on their tax returns if they itemize, but only up to the total of their winnings. 

Additional Results 

Among the additional issues highlighted in the TIGTA report were numerous W-2Gs submitted by casinos lacking the necessary taxpayer identification numbers. This renders it incredibly challenging for the IRS to track the winnings to their recipients. 

Additionally, the watchdog organization observed that the IRS lacks sufficient measures to detect noncompliance with excise taxes among gambling operators, especially in the fast-expanding online sports betting sector. 

The IRS concurred with the latter suggestion as well. Nevertheless, it questioned the importance of W-2Gs lacking taxpayer IDs, due to the small quantity. 

“While this population may not be large in absolute terms, we believe that the amount of backup withholding that should have been withheld is significant,” TIGTA responded.

Modifications to the Code 

The Summary of Withholding Requirements on Form W-2G does not currently differentiate earnings from sports betting or online gaming. Sports wagering is one of the rapidly expanding areas of the U.S. gaming market, with in-person and/or online sportsbooks regulated in 38 states along with Washington, D.C. 

The IRS is required to clearly notify taxpayers about their obligations regarding the reporting of winnings from sports betting and online casino gambling. 

“Form W-2G has not evolved with the growth of the gambling industry,” TIGTA’s report read. “For example, the wager codes on Form W-2G include only nine specific types of gambling activities, which do not include a wager code for sports betting. If there was a wager code specifically for sports betting, the IRS could use this information to identify potential non-filers and under-reporters.”

The Treasury estimates that American taxpayers shortchanged their federal taxes by $688 billion in 2021, with non-filers accounting for 11% of the uncollected money. The penalty for failing to file with the IRS is 5% of the owed taxes for every month or portion of a month that a tax return is overdue. The highest penalty is 25% of the tax that remains unpaid. 

The IRS generally confines criminal prosecution to extraordinary situations where there is overwhelming evidence of significant fraud and tax evasion. 

Crucial Mistake 

Last month, Scott Roeben, the creator of Casino.org’s Vital Vegas, got an IRS audit notice concerning taxes on $100,000 of unreported W-2G income for 2022. 

The letter allowed him 30 days to reply with particular documentation from four years ago or "additional actions" would follow. 

The sole issue, Roeben states, is that he submitted his 2022 tax return punctually, with all gambling earnings disclosed. 

“I filed everything properly,” he said. “I just had a large number of jackpots, so that triggered the audit, presumably.”

Roeben described the IRS's initiative as “targeted harassment of casino customers due to the negative perceptions associated with gambling,” noting that it reveals “how disconnected the IRS is from the actual gambling experience.” 

“This is making people jump through hoops, spend money on tax professionals to help with their audits and reconsider a pursuit they enjoy,” he says, adding that, even in the case of tax cheats, “jackpots are far from the entire picture when it comes to gambling.

“It’s like saying passengers of the Titanic had an absolute blast for 2,070 miles.”