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Recordkeeping Your Gambling Activity

In my debut post I discussed the story of an individual who faced major tax problems related to his income earned from poker. Audits happen, and they are not going away. Sometimes, an audit is not triggered by apparent wrongdoing. In fact, I have seen returns audited because of government error. Just because you believe you are not a target does not necessarily mean your return will not be selected for audit.

If you receive a letter in the mail stating your return has been selected for audit, you want to have comfort knowing what is on your return is accurate and that you can prove it. To be in a position of comfort, I would tell a taxpayer to do two primary things: (1) Know how the tax code applies to you (or ask someone that does); and (2) Keep good records.

The 2010 tax year is nearing a close, and now is a good time as any to begin the process of having your return completed. The first step is to gather all your records. Recordkeeping gambling activity is vital for two reasons: (1) records enable you to properly compute tax return figures, and (2) in case you are audited, you have documentation to substantiate those figures. What records will the IRS accept?

Today’s takeaway: The IRS says an accurate diary of all gambling winnings and losses must be kept, including the following information:

  • Date and type of gambling activity;
  • Name and address of location of the gambling establishment;
  • Names of other persons present with you at the establishment; and
  • Amounts you won and lost.

To me, the third piece of information is asking for a lot. Unless you play with top flight poker studs, you aren’t going to know who you played with. While it can’t hurt for you to record who you played with, I’d be hard pressed to think of a case where missing only that information sinks you.

This written diary should itemize each separate gambling “session,” the definition of which is discussed here. With respect to online play, it is more likely the IRS will accept a printed excel spreadsheet, since the nature of the play is different from in person games. Indeed, different types of gambling activities call for different recordkeeping requirements. With regards to poker, the IRS has suggested to record the number of the table at which you were playing.

Maintaining adequate gambling records has been illustrated in many cases over the years. The burden of substantiating return items falls on the taxpayer, and a taxpayer is asking for trouble if he/she lacks adequate records. The taxpayer may attempt to substantiate the accuracy of reported gambling activity via other means, but often such situations result in adverse consequences.

If you have not been keeping records of your gambling activities, I strongly suggest you start doing so now, and try to reconstruct your previous play as best as possible. The IRS prefers contemporaneous records. You don’t want to be caught in a position scrambling to put together records after your return has been selected for audit. Auditors have a knack of sniffing out fishiness and will take extra care combing through a return if there is a sense of ingenuity.

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