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Currency Transaction Reports Burn the “Cook”

February 17th, 2011 Leave a comment Go to comments

That didn’t take long.  Within hours of my posting about how the IRS can detect a taxpayer’s gambling winnings from Currency Transaction Reports this past Monday, the U.S. Tax Court issued a decision sustaining a tax deficiency based in large part on, you guessed it, Currency Transaction Reports.  Credit fellow tax practitioner Russ Fox of Irvine, CA for breaking the story in the tax blogosphere.

On their joint 2004 and 2005 tax returns, the petitioner and his wife reported gross income amounts of $16,450 and $18,230, respectively.  The petitioner stated “cook” as his occupation for both years.

The petitioner did not just spend his time perfecting the culinary arts.  A New York resident, he traveled frequently to the Foxwoods Resort Casino in Connecticut.  And gambled, of course.

During the two years in question, Foxwoods issued currency transaction reports showing that the taxpayer purchased more than $800,000 in casino chips.  Foxwoods filed these CTRs with the IRS as required.  Seeing a large discrepancy between reported income and cash transacted by the taxpayer, the IRS selected the returns for audit.

During the audit, the IRS requested on numerous occasions an explanation of the taxpayer’s source for the cash used to purchase the casino chips.  For example, the taxpayer could have used borrowed money (nontaxable source).

Taxpayer presented two explanations:

  • He lent his “Dream Card” (a card issued by Foxwoods for patrons to use for gambling and to accumulate rewards points) to his friends.  The taxpayer ultimately demonstrated that approximately $211,860 in chips were purchased while he was out of the country; and
  • He obtained a loan from “Fukkianese company” and would testify to such at the trial.

Problem was, the taxpayer didn’t show for trial.  He was represented by counsel, who argued that because the IRS conceded that some of the CTRs were erroneously attributed to the taxpayer, that the remainder are unreliable.

It doesn’t take a leap of faith to accurately predict the taxpayer lost on this point.  The IRS used the CTRs to determine unreported taxable income, and ultimately, additional tax, interest, and penalties.

In a footnote, the decision notes that Foxwoods provided to the IRS a log detailing the taxpayer’s gambling activity at the casino.  The log reflected chip purchases exceeding those reported in the CTRs; this is no surprise since CTRs are issued only if total cash ins or cash outs in a gaming day exceed $10,000.  The IRS probably could have assessed even more tax from unreported income, but chose not to.

As a final note, the taxpayer’s total assessed liabilities regarding the two tax years in question will almost certainly not end with this entree of a decision.  It’s dessert time.  There was a reason for mentioning the taxpayer’s New York residency status:

Under NY Tax Law, taxpayers are *required* to report any change in their federal return that has the effect of changing NY tax liability.

NYS applies income tax on all income earned by its residents, regardless of the source.  NYS will assess tax on the taxpayer’s additional income, plus interest, plus penalties.  Perhaps a very minor “victory” for the taxpayer is that Connecticut does not impose income tax on gambling winnings of nonresidents, other than state lottery winnings.

In the end, the “cook” gets burned in more ways than one.

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