Published in March 2007
Bluff Magazine

Accountants always preach about keeping records. It’s difficult to get our clients to do it until it’s too late. One such event happened to a couple who did not keep good records during the time that they gambled. To be blunt, they were nailed – here is a summary of the story without the boring accounting details. Keep in mind, this just occurred in September of 2006.

The Hartsocks gambled in several casinos by playing slots. They were not professional gamblers. Unfortunately, they did not maintain the records required by the IRS Code to substantiate the gambling losses that they incurred.

On their tax returns for 1999 and 2000, the Hartsocks properly claimed $230,825 and $293,022, respectively, as other income. They then used the same amounts for each year as their gambling losses on their Schedule A as an itemized deduction. (Remember, gamblers cannot deduct more than their winnings as losses).

The IRS disallowed most of their gambling losses due to the fact that they “offered only self-prepared worksheets and self-serving testimony about how they computed their losses that was uncorroborated and insufficient”. The Hartsocks showed how they estimated their losses by using a minimum amount required to be wagered in each slot machine that they played, and estimated the amounts that they would have been able to wager within a minute in each slot machine.

So, just what did the IRS say about this? “We have serious reservations about the reliability of the self-serving and uncorroborated workpapers on which petitioners rely.” Not only did they disallow their deductions, they also hit them with an accuracy-related penalty of 20%! The accuracy-related penalty is based on the determination of whether the taxpayer “acted with reasonable cause and in good faith, depending on the pertinent facts and circumstances”. The IRS also looks at the taxpayer’s efforts to “assess proper tax liability, the knowledge and experience of the taxpayer and the reliance on the advice of a professional, such as an accountant”.

So what did they do wrong? My opinion is that they unreasonably estimated their losses. It was a guess, basically. The IRS doesn’t want you to guess. What does this mean to you? Remember these words, as ugly as they are – “the taxpayer bears the burden of proving entitlement to any deduction claimed.”

I don’t want any of my poker clients, pro or otherwise, to get caught like these guys did. They ended up owing an additional $229,589 in tax, of which $38,265 was the 20% accuracy-related penalty. You have got to keep records with real numbers. The worse thing that could ever happen to you as a poker player is for the IRS to disallow any of your gambling losses because you didn’t keep proper records.

So how do you do this? It is easier than you think, whether you are playing slots or poker. The same principles apply. Let’s strictly focus on poker players. It is pretty simple to keep up with your money because you know your buy-in when you begin to play. For the casino poker table, you write down the date and how much money you start with. If you are reaching into your pocket for more money or you go to the ATM, you need to record that as well. The best way is to keep a log.

Whether playing on-line or physically sitting at a poker table, write down the date and the time you start playing. When you start to play, be sure to write down exactly how much money you start with. It is also extremely important to write down any funds added during your session. Most casinos will not let you take money off the table (except to tip the drink server). Therefore, you truly can measure your win/loss amount by counting your money when leaving the table.

The fact of the matter is that if you keep a log, even by hand, you are able to produce this as your substantiation to the IRS in the event of an audit. I have a log you can download on my website to use as a guide. It is important to keep the log “as you go”. There have been cases where the IRS has been able to prove that a log was done many years after the tax return was prepared. Their opinion on this is that it is impossible to accurately reconstruct events that happened many years later. They also know that people do this only after they received notice of an audit.

Remember, in order to win the game, you must know the rules. Keep out of trouble.


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