Gamblers more frequently misstating results, IRS says

By Richard N. Velotta

Tuesday, May 27, 2003 | 11:15 a.m.

With gambling proliferating nationwide, the Internal Revenue Service is seeing more tax returns showing casino losses.

But an IRS official said Friday that gamblers who show losses also have to say what they won -- and if they don't, they may face an audit.

Eric Lacher presented a case study in which an Arizona man had his conviction for filing a false income tax return affirmed by an appeals court. The presentation was part of the Financial Executives Gaming Forum.

Lacher, a gaming industry specialist with the IRS, said the 1999 appeals case illustrates a growing problem the IRS is trying curtail with education. Many people, he said, believe they must only report net winnings.

But Lacher said gambling winnings and losses have to be shown on tax returns.

Lacher said a case that reached the 9th U.S. Court of Appeals in San Francisco affirmed that gamblers are obligated to report gambling income separately from gambling losses.

The case involved a compulsive gambler, William Scholl, an Arizona judge who was convicted on four counts of filing false tax returns and three counts of illegally structuring currency transactions. Scholl received five years' probation on each count with the sentences running concurrently.

Lacher said with gambling proliferating across the United States, the IRS is attempting to give taxpayers more guidance on how to report income as well as deduct losses. Another problem, he said, includes how to treat wins and losses from Internet casinos that operate offshore. He had no estimate of how much tax revenue is lost annually to gamblers who fail to report off-shore winnings.

Lacher's presentation was one of the highlights of the taxation panel that also included an update on the $350 billion tax package approved by lawmakers just before the Memorial Day recess and a presentation on the taxation of tip income -- which won't affect most Nevada workers because a model system instituted in 1999 will continue through next year.

MaryAnn Cloyd, a partner with PriceWaterhouseCoopers, reported on the $350 billion tax package approved late last week by lawmakers.

Cloyd noted a provision of interest to the Nevada tourism industry -- Sen. Harry Reid's proposal to make business travel expenses tax deductible for spouses and dependents -- wasn't a part of the bill.

Lawmakers trimmed several special-interest provisions in the legislation, including the plan from Reid, D-Nev., which he said would result in more people flying, eating out and shopping while at convention destinations like Las Vegas.

Representatives of Reid's office could not be reached for comment this morning on whether the proposal would be resurrected.

In another matter, panelist Keith Holmes, vice president and tax counsel for Las Vegas-based Park Place Entertainment Corp., said a model program used by Nevada resorts to calculate taxes on tip income is spreading to other states that have casinos.

Holmes said as a result of using the Gaming Industry Tip Compliance Agreement, most Nevada workers won't see any changes.

Under the program, adopted in 1999, participating employers and employees agree to an estimated income level for tips and the employer taxes that amount of income. Employees are responsible for reporting deviations from the agreed-upon income level. Different classifications of tipped employees have different income levels and amounts also vary by property.

Under the program, if employee participation falls below 50 percent of the property's work force, workers would have to go back to reporting tip income and having tax withheld on those amounts -- a system Holmes said would be a "red flag" for an audit from the IRS.

If employee participation falls below 75 percent of the work force, the IRS sends a warning letter to the property to encourage participation.

"The terms (of the plan) have been favorable to both employers and employees," Holmes said. "The Nevada program is a model for gaming industry employees across the country."

Holmes said the terms of the existing program will be in effect through July 1. The IRS and representatives of the industry are expected to make some adjustments and renew a similar agreement through the end of 2006.