Sometimes an audit of a tax return concludes in the taxpayer’s favor. “No change” are the magic words in the tax controversy world.
What could be a better result than “no change”? A change resulting in the taxpayer having paid too much in tax. To receive the overpayment, a taxpayer must make a claim for refund. Claims for refund have expiration dates, however.
In a recent case before the Wisconsin Tax Appeals Commission, taxpayer Dennis Spear’s claim for refund from his 2004 tax year was not timely.
Dennis Spear was a professional gambler in Wisconsin. His 2004 through 2007 tax returns were audited by the Wisconsin Department of Revenue, who challenged his status as a pro gambler for 2005 through 2007. He filed as an amateur in 2004. The amount of tax and interest at stake during his pro years was $149,901.17.
Wisconsin is known as a “bad” state for amateur gamblers because one cannot deduct gambling losses for state tax purposes, but professional gamblers can to the extent of winnings. Clearly, the state tax consequences between filing as a pro or amateur in Wisconsin can be very significant.
Spear submitted 225 pages of documentation to establish his status as a professional gambler. The Department agreed to cancel its assessment for the 2005 through 2007 tax years. The only remaining issue was whether Spear was entitled to a refund from his 2004 year.
Spear sought to apply a different method than originally used to calculate his total gambling winnings for the 2004 year. Apparently, the method he originally used was inappropriate. Applying the appropriate method would have resulted in less total income tax. The different method was the “session method,” which involves netting gambling gains and losses on a daily or per session basis rather than bet-by-bet.
As an aside, I’ve written about gambling sessions before. The tax code does not define a gambling session. In the two U.S. Tax Court cases referenced in Spear, the taxpayers were entitled to treat all gambling activity during a day as one gambling session.
Those cases do not necessarily imply all gamblers may treat a day as one gambling session. In each of those cases, the taxpayers played exclusively on slot machines. If, however, a taxpayer throughout one day plays slots, blackjack, and roulette, he is almost certainly required to treat the gain or loss from each type of game as separate gambling sessions.
In this case, the taxpayer could not change to the “session method.” The reason was because his request to make the change was untimely.
Under the Wisconsin tax code, a taxpayer may make a request for an income tax refund if the claim is filed within four years of the original due date of the tax return. (Note: Under the Internal Revenue Code, a taxpayer may make a request for an income tax refund if the claim is filed within three years of the original due date of the return or within two years of the overpayment, whichever is later.)
Spear’s 2004 tax return was due April 15, 2005. His claim for refund was made on May 17, 2010, more than a year after the four year period expired on April 15, 2009.
Spear argued that the four year statute of limitations should have been extended in his case. The problem was that the plain language of the statute establishing a four year period is clear. A court won’t rule against plain language in a statute unless the statute is unconstitutional.
Ultimately, a small price to pay for an otherwise victorious result for the taxpayer.