“The taxpayer—that’s someone who works for the federal government, but doesn’t have to take a civil-service examination.”
—Ronald Reagan
JEAN: It’s no surprise to anyone, I imagine, that the federal government is interested in what happens in a casino—or anywhere else where gambling occurs. And there’s probably no governmental department that’s more interested in your money than the IRS. And where there’s government, there’s paperwork.
Gamblers, if they know anything about gambling paperwork, are probably most familiar with the IRS form W-2G (the G stands for gambling) that applies to “Certain Gambling Winnings.” This is the tax form that any for-profit organization issues you—and sends a copy to the IRS—when you win a specified amount while gambling. (Churches and other non-profit organizations are exempt from issuing W-2Gs.) Go to Appendix A1 to examine a sample form.
Most people don’t know that there are different rules for when a W-2G must be issued, depending on the form of gambling. For horse and dog racing, jai alai, state lotteries, and some other kinds of wagering, this form must be given for any winnings that are at least 300 times the amount of the bet. However, there’s a special rule for bingo and slot machines: You get a W-2G for a gross win that’s $1,200 or more, no matter how much your original bet was. And to make it more complicated, keno has its own special rule: a W-2G for any net win of $1,500 or more.
A player will receive a W-2G for a single winning table-game bet if both of the following apply:
1. The payout is $600 or more and
2. The winnings are paid at 300-to-1 (or higher).
Some examples would be progressives on Caribbean Stud and Fortune Pai Gow and some bonus bets on Let It Ride.
An important note on W-2G rules for machine play: You don’t get a W-2G when you cash out more than $1,200 on a slot machine after a period of play. It’s required only for the win of $1,200 or more on one hand or spin. I’ve heard of players who’ve had to explain this to green casino employees, especially in Indian casinos.
Also, on multi-line machines, all line winners on one “play” are totaled together and are usually considered one hand. For example, on the usual non-progressive quarter Triple Play machine, a dealt royal gives you a $1,000 win on each of the three lines. When multi-line first came out, there was confusion on this issue. Sometimes it was treated as three separate hands and no W-2G was issued. Occasionally, you might find a casino that still does it this way. However, the common practice is to consider all lines together as one hand, and in this example, you’d be issued a W-2G for $3,000.
MARISSA: The reporting figures mentioned above were established in the ’70s and have not been updated to account for inflation and the introduction of high-denomination and multi-line machines. However, if you stick with quarter machines, you may have to stop for this sometimes maddeningly slow W-2G paperwork only once in a while, i.e., the infrequent top jackpot on slots or on a progressive video poker machine. But if you play at the $1-or-higher levels, you can be held up quite often when the machine locks up, you dig for ID, and you have to wait until the W-2G shows up.
Fortunately, casinos are allowed to keep a log of a player’s W-2G payoffs for higher-denomination machines and can issue one form covering the total at the end of play in one session or on one day. This is sometimes called being put “on session” or “on the board” (because the log is kept on a clipboard). And if you’re playing in the lofty high-limit salons, such as on a 5-coin $100 Jacks or Better video poker machine, you trigger a W-2G anytime you hit 3-of-a-kind or above. In that case, you’re assigned one employee who sits beside you as long as you’re playing and records each $1,200 payoff you hit.
Don’t look for the feds to raise the $1,200 threshold that triggers a W-2G for a machine jackpot. With the non-compliance of gamblers is already widespread, plus the fact that “sin activities” always provide good taxation targets, we’re much more likely to see them require more restricting paperwork.
JEAN: Both players and casinos harbor some widespread misconceptions about W-2Gs. First, most players believe (or want to believe) that if you don’t get a W-2G, you don’t have to report that particular gambling win. And this viewpoint is supported by information in print, even from otherwise accurate gambling writers, seeming to encourage players to look for a machine with a top jackpot under $1,200.
Surprisingly, even the casinos seem to encourage this kind of thinking. I’ve seen many slot machines with a $1,199 top jackpot that seems to give the appearance of circumventing tax law. Some casinos have reduced the payoffs slightly on some winning video poker hands, so the jackpot is just under the W-2G-issuing amount of $1,200, such as a $5 machine that drops the regular payoff of 250 credits ($1,250) for the straight flush to 239 ($1,195). Or they create a high-limit slot machine that replaces W-2G-generating jackpots on a primary game with lots of bonus wins on a secondary one, keeping each one under that paperwork $1,200 figure.
One casino went so far as to rename some of its VP machines where management had fiddled with the schedules so there were fewer W-2G jackpots. They even sent out press releases, touting the new “duty-free” machines: Duty-Free Double Bonus and Duty-Free Double Double Bonus. I’m not sure whether the short tenure of these games was due to a lack of play or the casino’s realization that it might not be wise to promote so obviously the erroneous idea that they could eliminate your tax liability. It’s one thing to try to cut out cumbersome paperwork and irritatingly long delays for your customer; it’s another to encourage them to break the law.
No matter how shrewdly gambling writers and casinos may seem to be steering you down a different and dangerous path, you’re responsible for reporting all gambling wins, and whether you get a W-2G or not has no bearing on that. The fact that many people don’t report gambling wins when there’s no W-2G evidence won’t help you in an IRS audit.
MARISSA: There have always been “ten-percenters” hanging around dog and horse tracks and casino race/sports books—guys who had little income of their own and, therefore, ordinarily didn’t pay income taxes. They’d cash for someone a winning ticket that was high enough to generate a W-2G, assuming the tax liability of the win (which usually would be little or none for them) for a 10% commission or “tip.” |
Sometimes you’ll see “volunteers” sitting around poker rooms, especially near the end of a tournament, willing to claim your winnings for you. They give you their name and Social Security number for your W-2G, because they say that they have plenty of losses. What’s the catch? They want a percentage of your winnings in cash. |
Of course, we need to point out, although it’s probably obvious, that none of this is legal. Technically, it’s tax evasion and perjury. |
What if you don’t keep a gambling diary and you have one or more W-2Gs from slot machine jackpots that were $1,200 or more? Can you just count these as your gross win? Probably thousands, even hundreds of thousands, of people do this every year and don’t get audited by the IRS. Why not? In the majority of these cases, people are actually paying more in taxes than they would have if they’d kept the required records and kept track, as we talked about in Chapter 2, of all their gambling session wins and losses separately. A W-2G jackpot total is not the same as a winning-session total; all truthful gamblers readily admit that they don’t always end up a session with the whole jackpot intact. In fact, many are the days when Brad and I get a W-2G or two and end up with our total for the day’s session in the loss column.
MARISSA: The other problem with using your W-2G totals as your win totals, without any yearly diary, is that if you’re audited, the IRS may question you about other gambling sessions. They’ll assume you had other winning sessions when no W-2G was issued and will start looking for other evidence. You say you lost on all the other days? The burden of proof for losses is squarely in your lap, and although you may be able to get some kind of statements from casinos, these may not always be accepted as proof without a detailed diary. Tax-court decisions have supported the idea that gambling records are much more believable when they include both W-2G and non-W-2G wins.
JEAN: An important warning here. You don’t have to include W-2G forms with your return unless tax has been withheld. However, if you don’t use your W-2G total as your actual gross-win total (or if your gross-win total is less than the W-2G total), you must be sure to make a list of all your W-2Gs and gambling-related 1099s and attach it to your income-tax return, with the explanation that these amounts have been included in your session win/loss records. Otherwise, you’re likely to get caught in the government’s computer-run “Information Reporting Program.” A computer, when it’s matching up various reporting forms (i.e., W-2Gs and 1099s) to returns with the same Social Security number, will kick out your return if it can’t find that you accounted for these amounts, and you’ll get a letter informing you that you owe taxes on the difference.
This isn’t a full-fledged IRS audit, but what’s called a “letter audit.” Still, it’s always scary to find a letter from the IRS in your mailbox, especially one that states you owe more money, sometimes a lot more. One year I forgot this list of W-2Gs with my return and got such a notice, but a simple letter of explanation with the list of W-2Gs solved the problem quickly. I wasn’t even asked to produce my diary.
MARISSA: These letters that Jean is referring to are called CP-2000 letters. They’re sent when the information reported on a tax return does not match other information that the IRS has collected, e.g., the W-2Gs. Unfortunately, when you respond with an explanation, the IRS employees who review them are usually entry-level personnel who know little or nothing about the taxation of gambling. Add the fact that they’re overworked and too often this becomes a frustrating paperwork battle. If letters of explanation and phone calls don’t solve the problem, you may be forced to hire a professional to fight the battle for you. Or if the disputed amount is not too large, you may simply pay it to make the problem go away. We discuss this problem further in Chapter 7, which you should read if you have any questions about whether you should use your winning-sessions total on the “Other Income” line 21 on page 1 of your return or your W2-G total.
JEAN: Be diligent in hanging on to all your W-2Gs, or at least keep a list of every one you’re given. This is a warning from a high-roller’s painful experience: “If you lose or misplace any of the hundreds of W-2Gs the casino issues you for qualifying jackpots and don’t account for them on your tax return, the government will charge you interest and you’ll have to submit an amended tax return that will take months to settle.”
MARISSA: I’d like to add to that. Don’t rely solely on W-2Gs to have an idea as to how much tax you should pay. IRS rules state that extensions extend the time to file only, not the time to pay. Therefore, if your records aren’t in order by the tax deadline, you should still send in enough money to cover your tax liability. Any shortfall will be charged a “failure-to-pay” penalty and interest. However, with a properly filed extension, there’s no “failure-to-timely-file” penalty, which is much higher.
W-2Gs on Cruise Ships |
JEAN: Many years ago you’d never get W-2Gs from casinos onboard ships, but now most cruise ships issue them to American citizens and permanent American residents on wins of more than $1,199 on machines, the same as land-based casinos do. Apparently, this is a policy change since 9/11 and is a result of the Patriot Act. Of course, as we’ve emphasized in other chapters, all gambling wins are required to be reported, whether or not any paperwork is issued. |
Although each cruise line has its own policies on this subject, the following information from the Norwegian Cruise Line “Casinos at Sea” Web page, www.nclcasino.com/faq.htm, gives some helpful information: |
“The Federal Income Tax Act stipulates that all American citizens and Permanent Residents are subject to global income tax. Regardless if a U.S. citizen or Permanent Resident earns this income in international waters or with a ship that carries a foreign flag, if income is generated, such income becomes taxable. If a Social Security number is furnished, then the document W-2G will be issued with no upfront tax deduction. If a Social Security number is not furnished, then an upfront withholding tax will apply. Foreign guests will be taxed only if winnings are derived within U.S. domestic waters. Whenever a tax form is issued to the guest, a duplicate copy will be sent to the IRS.” |
If you’ve lost some W-2Gs and 1099s and haven’t kept a list, you can request by phone that the IRS mail or fax you a complete record of them. There’s no charge for this service, but it may take some time for them to respond. They don’t send you duplicate copies, but just a list, with the name of the payer, date issued, and amount. If you need them quickly, some filers have been successful in obtaining records from their local IRS offices, but I suggest you don’t try this on April 14th! More often than not, the IRS won’t have complete information in their computers until around August, so if you need this information to file your return, you’d better send in the form asking for an extension and include a generous best estimate of the tax that will be due to avoid any penalties and interest charges.
“Taxes: Of life’s two certainties, the only one for which you can get an automatic extension.”
—Anonymous
JEAN: Federal tax withholding is not required for any amount of winnings from slot machines, bingo, and keno for U.S. citizens who have proper ID and give a Social Security number. However, you may request withholding by the casino for any amount, a handy technique at times to save you the extra paperwork of filing estimated taxes. Casinos will usually do this for you with no problems, but occasionally I’ve had this request refused, because the particular employee wasn’t familiar with the procedure or didn’t want to bother with it.
Federal withholding tax (25%-31%) is required for most other forms of gambling, usually payouts of more than $5,000 that are at least 300 times the amount wagered. However, the IRS gave a new withholding wrinkle to the poker world in September 2007. They issued Revenue Procedure 2007-57, which stated that starting March 8, 2008, there would be a mandatory 25% withholding on all U.S. poker-tournament wins when the money received exceeds the entry and buy-in fees by $5,000. Fortunately soon after, negotiations between the casino industry and the IRS resulted in the IRS rescinding this requirement in favor of new stricter rules for issuing W-2Gs. Go to Chapter 6 for more details.
A reminder: Don’t forget to account for any tax withheld from W-2G jackpots on your tax return.
MARISSA: A common misconception is that if you hit a big jackpot, so big that you have no reasonable chance of losing it all back that year, you have to send the government an estimated tax payment or be hit with a penalty. That’s not always the case. Perhaps the withholding from your other income is enough to satisfy the IRS requirement for most people: that you send in each year either 90% of the current year’s liability or 100% of the previous year’s liability in order to avoid being assessed a withholding penalty.
A Withholding Tip from an Internet Friend |
“Requesting withholding can do more than just save time on paperwork. If you’ve underwithheld or underpaid estimated taxes during the year, having taxes withheld from a jackpot can save you money in penalties and interest. Withholding at any point during the year is treated as if it’s been done equally throughout the year. Theoretically, therefore, if you’ve underpaid your estimated taxes by $5,000 during the year, on December 31 you could go to a $5 machine and have every W-2G payment withheld until you made up the $5,000, thereby eliminating any underwithholding penalties you might have incurred.” |
JEAN: Of course, this might be a more expensive option in the long run, unless you get lucky fast and win.) |
“A couple of years ago, a friend hit a $2,000 royal flush at an Indian casino in Wisconsin. He did not carry his Social Security card with him and, as a result, they wouldn’t pay him anything. They did allow him to return later with the card and get his money, but it proved to be a huge hassle.”
“One casino in Florida will withhold federal income tax if you cannot present a valid Social Security card—no exceptions—they wouldn’t even take my valid military ID card with SSN and photo on it.”
“A few years ago my wife hit a jackpot for $2,500 at an Indian casino in New Mexico. She did not have her government-issued Social Security card. She did have her driver’s license and her passport with the Social Security number on it. They wouldn’t take any Social Security info without the official card. After about an hour’s wait, they gave her a W-2G, but only paid her 60% of the win value, the rest being withheld for federal income taxes.”
JEAN: The horror stories pour in when the subject of Social Security numbers and casinos is brought up on Internet gambling forums. We all know that identity theft is a big problem and we’ve been warned not to carry anything that has our Social Security number on it. But the message hasn’t seemed to get to some casinos.
The fact is that there’s no federal or state law that requires a U.S. citizen to give printed proof of his Social Security number in order to be issued a W-2G and paid a jackpot. He can provide it verbally or write it down. But you may ask how the casino can be sure that a customer gives the correct number. The IRS has provided a form they can give to the player, a W-9 form, Request for Taxpayer Identification Number and Certification (see Appendix A-6). By signing this form, you are certifying, under penalties of perjury, that this is your Social Security number.
I hear your next question already. No, you don’t have to give your Social Security number, but in that case, the IRS requires that the casino withhold 28% of the winnings for federal income tax.
As shown by the stories at the beginning of this section, some casinos seem to mix up Social Security cards and ID cards. You do have to show a valid ID or the casino can refuse to pay off a W-2G jackpot until you do. You do not have to show your original Social Security card. In fact, it is written right on your Social Security card that it is not be used as identification.
What can you do if a casino doesn’t seem to be following the IRS rules and requires an original Social Security card? I’d ask to speak to a supervisor or even a senior casino executive. One player suggested carrying W-9 forms with you (they can be printed out from the IRS website) and giving one to the casino employee making this mistaken request. He said that some new and/or small casinos, especially Native American ones, do not seem to know about this option.
JEAN: There’s more government paperwork required from casinos than just the W-2Gs and 1099s we discussed earlier. Casinos are required to do other types of reporting to the government to fulfill new anti-money-laundering rules. Some players, for example, think (hope?) that if they stay under the now-famous $10,000 limit for cash transactions, they’re safe. However, casinos have special requirements that trigger reports at lower amounts.
Note that there’s also been a change in Nevada. Regulation 6A, a Nevada statute that had slightly different rules for Nevada casinos, expired on July 1, 2007. Nevada casinos are now classified as financial institutions—just like banks—and follow the Title 31 rules for MSBs (Money Service Businesses) at the federal level, which casinos in other states have been following for years.
MARISSA: In this post-9/11 era, we must all be aware of the USA Patriot Act. The $10,000 that Jean just referred to is not just a onetime transaction requisite. A casino must keep track of one person’s transactions that total $10,000 in cash-in or cash-out in a 24-hour period and fill out a Currency Transaction Report (CTR).
This is a huge tracking problem for a large casino, where customers may be playing many different games, buying and cashing in chips all over the place, and/or taking markers and cashing out for multiple smaller amounts. Therefore, a casino is required to record many single transactions below $10,000. According to Title 31, when recording a transaction of $3,000 to $10,000, the casino employee must verify and record customer information, including ID; record transaction information, including the amount, date, and serial numbers if exchanging cash for travelers checks; and retain the record for five years from the date of the transaction.
Again, as mentioned earlier, the casino is not required to record your Social Security number on the CTR for amounts less than $10,000, but that won’t stop them from asking. It’s unlikely that a cash transaction of between $3,000 and $10,000 will be denied if you don’t supply a SSN, but that assumes the casino employee is completely conversant with the new regulations.
In addition, any financial-institution employee, and that includes those in casinos, is required to fill out a SAR (Suspicious Activity Report) for any cash transaction over $2,000 if, in his opinion, it looks to be “suspicious.” This form goes to the FINCEN (Financial Crimes Enforcement Network), the U.S. Treasury Department’s financial-crimes tracking organization. You might suspect that this form is being filled out if you’re asked for your ID and Social Security number. However, casinos aren’t required to inform you that they’re filing a government report if they already have this information about you (e.g., from a players card application or previous W-2Gs), so you won’t necessarily know when you’re being watched and reported on. In fact, in some cases, the casinos are forbidden to inform you that they’re reporting some of your personal gambling information to a government agency.
GAMBLING ISSUES FOR NON-U.S. CITIZENS
JEAN: The rules for taxation and withholding tax for non-resident-alien (NRA) gamblers vary, depending on the tax treaties in force between their countries and the U.S. As I write this in the fall of 2011, the IRS lists the following countries whose residents are exempt from U.S. taxation on gambling income: Austria, Belgium, Bulgaria, Czech Republic, Denmark, Finland, France, Germany, Hungary, Iceland, Ireland, Italy, Japan, Latvia, Lithuania, Luxembourg, Netherlands, Russian Federation, Slovak Republic, Slovenia, South Africa, Spain, Sweden, Tunisia, Turkey, Ukraine, and the United Kingdom. (In addition, there is no U.S. tax for any non-resident from any foreign country on wins from blackjack, baccarat, craps, roulette, or the big-6 wheel in the United States.)
All non-residents will be issued paperwork, not a W-2G, but a Form 1042-S, Foreign Person’s U.S. Source Income Subject to Withholding. It depends on the terms of their countries’ treaties with the U.S., but most of these non-residents must have U.S. income tax withheld, usually at a rate of 30% of the gross amount of the win. Non-residents from countries with a no-taxation treaty should not depend on the casino to have up-to-date treaty information, and there is a form they should always carry to show the casino in case of a big win, Form W-8BEN, Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding. Although they will still get paperwork, no tax will be withheld.
I saw an example first-hand when Bob McKeown, “Dateline’s” on-camera correspondent and a Canadian citizen, hit a W-2G-size jackpot as I was teaching him on camera the correct way to play video poker while NBC was filming a story about Brad’s and my life in Las Vegas. If I had been playing the machine, I would have received a W-2G and no tax would have been withheld. Bob received a 1042-S and was paid only 70% of what I would have been paid.
This story brings up to a common question for foreign visitors to our casinos: Is there any way to get back the U.S. tax withheld?
Some non-residents, again depending on which country they come from, have the option of getting back some or all of the amount withheld, but to do so they have to file a non-resident tax form with the IRS, Form 1040NR. However, as I described in earlier chapters and just as for U.S. citizens, they must have good records in order to itemize their losses to offset their winnings. Therefore, I suggest that non-residents, especially those who often gamble in the U.S., keep a gaming log. You never know when you’ll get lucky and win a jackpot big enough for Uncle Sam to take a piece.
Another smart thing a non-resident should do before beginning to gamble in the U.S. is to apply for an Individual Taxpayer Identification Number (ITIN). This number is the equivalent of a resident’s Social Security number and can be given to a casino when hitting a jackpot that requires the 1042-S form that I described above. You could wait to see if you do hit a jackpot, but then your 1042-S would not have this number on it. You’re required to have an ITIN if you want to file a 1040NR form for a refund of the withholding tax, and it’s much simpler if the IRS can match up all documents with the same ITIN number.
The easiest way to get an ITIN is to apply for it while you’re in the U.S. You can download Form W-7, Application for IRS Individual Taxpayer Identification Number, from the IRS website and take the completed form and your ID requirements (such as a passport) to an IRS office. There’s no charge for this. Or you can apply at a U.S. embassy. You can also apply by mail as long as you submit certified copies of documents, such as a passport. You can get your documents certified at a U.S. consulate, but there may be a charge for this.
There are also “jackpot-recovery” companies that will help you with filing forms and obtaining the ITIN. Fees for this service tend to be high, usually 25%-30%, but sometimes as high as 50% of amounts recovered. However, this may be worth it to some people, because part of their service includes dealing with casino accounting departments and obtaining win/loss data.
Some years ago, Canada and the U.S. changed their tax treaty so that Canadians could get a refund of U.S. taxes withheld from jackpots. Here’s an excerpt from the IRS website, which uses Canada as an illustration of how many non-residents can get a refund of withholding tax. It’s a fairly simple straightforward procedure.
Q: “I won money at a Las Vegas casino and my winnings were subject to a 30% withholding tax. I am a Canadian citizen. How can I get the withholding tax back?”
A: “Generally, you must file a tax return to claim a refund of withholding. Gambling winnings by nonresidents of the U.S. are taxed at a flat 30% tax rate. However, under the U.S./Canada Tax Treaty, residents of Canada may claim gambling losses, but only to the extent of gambling winnings. You should report both your total gambling winnings and your total gambling losses on page 4 of Form 1040NR, U.S. Nonresident Alien Income Tax Return, on the dotted portion of line 79. If you have net gambling winnings (after offsetting your total losses against your total winnings), you should include this net amount on line 79, column (d) of the Form 1040NR. You should also attach a copy of the Form 1042-S, Foreign Person’s U.S. Source Income Subject to Withholding, showing the taxes withheld, to your Form 1040NR.”
Items to check on the IRS website for more information:
1. Publication 515, Withholding of Tax on Nonresident Aliens and Foreign Corporations
2. Publication 519, U.S. Tax Guide for Aliens
3. Publication 901, U.S. Tax Treaties
4. Publication 1915, Understanding Your IRS Individual Taxpayer Identification Number
5. Form W-7 IRS, Application for Individual Taxpayer Identification Number
6. Form 1040NR, U.S. Nonresident Income Tax Return