Don't bet on fooling IRS with bought losing lottery tickets
Monday, April 06, 2015
No, this is not another nag reminder from me to report your NCAA men's basketball championship winning bets as income when you file your 2015 tax return next year.
It is instead a warning to be honest about any gambling losses you claim to offset your Duke vs. Wisconsin office pool or any other winning wagers.
Apparently some filers are betting they can get away with using losing lottery tickets they purchased, or even rented, from others to reduce their taxable gambling income.
That, my wagering friends, is definitely a bad tax bet.
Writing off gambling losses: Everyone, or at least loyal readers of the ol' blog, knows by now that gambling winnings are taxable income. They also know there's a legitimate way to whittle down that taxable wagering money.
If you itemize, you can claim all your tax year's losing bets against your gambling income. If you have enough losing bets, you can claim as much in losses as you pocketed that year.
You enter your losing wagering amount, up to your winning balance, on Schedule A line 28 in the Other Miscellaneous Income section.
Click excerpt image to see full Schedule A
Note how this one-line section is separate from the job expenses and miscellaneous deduction block just above it? That's because your gambling losses that you enter on line 28 don't have to meet the 2 percent of your adjusted gross income threshold that applies to the prior section of itemized expenses.
All of your year's gambling losses can be used to reduce all of that year's gambling winnings.
No percentage limit on gambling losses: Even better, your wagering losses don't have to be the same type of bets as your winners.
Losing lottery tickets can count against that trifecta you correctly picked at the horse track. All those coins down the one-armed bandit in a Las Vegas casino can reduce your roulette wheel winnings.
You just need to keep receipts where possible and a good records, such as logs of your betting activity, both wins and losses.
And, of course, you need to make sure that the documentation you claim as gambling losses is actually from your bets.
Using others losses: Some creative gamblers are using losing lottery tickets that they didn't buy to reduce their federal tax bills.
The Daily Beast reports:
Gamblers have concocted a scheme to repurpose the dud ducats to offset their winnings. A winner can go online and get $5,000 worth of losing lottery tickets to cover their $5,000 in gambling winnings. The lottery tickets serve as a sort of security blanket if the auditor comes calling.
Ads captured on Craigslist and eBay from Florida to California hawk the tickets so the potential lotto buyer can defraud Uncle Sam.
A Detroit-based seller was getting rid of $10,000 worth of scratch-off tickets for $500. "So ya don't look like a xxxxx :) come tax time," the ad reads.
Good luck with that.
Expect IRS questions: The Internal Revenue Service is going to find it awfully suspicious if in the year you happened to hit it big at the betting tables, you had just enough bets to offset all those winnings.
Be prepared to answer some questions about the specifics of your losing bets.
And if the scratch off game slips are from, say, New Jersey and you live in, oh, New Mexico, the tax man might want to see some evidence that you were in the Garden State for the dates those losing lottery tickets were issued.
Renting instead of buying: Some filers aren't even bothering to buy the losing lottery tickets. They're just renting them.
Companies are set up to rent losing lottery tickets just for tax audits, according to The Daily Beast story. They will lend them to the taxpayer for a certain period and if in that time the taxpayer is audited, they can use the tickets to justify the gambling loss deduction. After the audit, the tickets are returned to the owner to be lent to others.
In fact, reports the website, "possibly the first prosecution for this type of fraud was of none other than an accountant. Actually, he was a former IRS revenue officer named Henry A. Daneault."
In 1985, one of Daneault's clients won a $2.7 million Massachusetts State Lottery Megabucks jackpot. Daneault, with his client's OK, decided to claim $65,000 in gambling losses for the year. When the IRS flagged the case, Daneault paid a Massachusetts man $500 to rent $200,000 worth of losing lottery and racetrack tickets for a month.
It didn't work. Both Daneault and his lottery-winning client Phillip Cappella pleaded guilty to tax fraud charges and served time in prison.
So keep your own losing betting receipts and nonpaying lottery tickets. I do. Those pictured above are some of my old ones that I held onto for naught since I never won a dang thing!
If I had won, though, they could have helped me reduce my gambling winnings.
But definitely don't try to claim someone else's losing tickets as yours, or you likely will face a loss of your freedom.
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