DanG
12th March 2009, 08:01.34 PM
If Mayo wouldn’t mind I would like to re-post his excellent ‘IRS Reporting thoughts in this 2009 tax season. Like many of you; these are the kinds of posts I copy and paste to a folder on useful information and later (sometimes much later…LOL :D ) organize by topic.
IRS Reporting.
I sent a response to Ken via email and will share my personal IRS experience with everyone in an attempt to clarify this issue. I have spent several thousand dollars in legal fees to find out this information and know it to be 100% accurate inspite of the information some of you may have received from IRS personnel on some 800 number. Most do not know the complete rules.
Since 1993 I have reported as a profession on my tax return as professional horseplayer even though I also have a W-2 salaried income from my nursing home company. I have reported this on a schedule C as a separate business. From 1993-2003 the IRS never questioned this. In January 2007 I received a notice from the IRS for the 2004 tax year claiming that it was not possible for me to be a professional horseplayer because I had a W-2 income and therefore they were disallowing all deductions on the schedule C and transfering the income to schedule A and taxing it as ordinary income. Keep in mind that I reported ALL income (both tourney and daily wagering) on the schedule C along with all expenses related to that business. It obviously included all travel, hotel and meals associated with the tourneys as well as all daily expenses associated with the daily wagers.
My CPA wrote letters and made phone calls explaining our situation. This was all a waste of time at that level of IRS personnel. Once the computer kicks it out they do not usually change it at that level.
I then hired a tax attorney and we sued the IRS in tax court. When you do this the case is automatically transferred to an appeals officer who communicates with your attorney in an attempt to settle the case before it goes to the IRS legal division. The appeals officer reviewed my records and surrendered the case and we won. The reason we won was because of my record keeping which is the key to all of this. My business records include a daily journal of all wagering amounts as well as the of profit or loss for that day. I keep records of all expenses and income from all tournaments as well. I also have monthly printouts from the online wagering sites. The appeals officer issued me a letter that stated that I was a professional horseplayer for the year 2004 based my records. The only problem is the letter is good only for the tax year 2004.
As of this week I now have to go through the same song and dance again for 2005 since the computer has flagged me. We should prevail again since my attorney and I are 100% confident that my records meet all the IRS rules pertaining to this issue, as well other tax court cases where other individuals have won on these same issues with less records than I have. However, we are going to require as a settlement that the IRS accept me as a professional horseplayer for future years (if I report myself as such) based on the fact there is no where in the tax code that says the IRS has the right to tell anyone what they can do for a living or how many jobs or businesses they may have, so long as they report all income from such. If they refuse, then we will sue the IRS in federal court. We feel we can prevail since they are violating their own rules.
The IRS obviously does have the right to audit your records from those schedule C businesses to make sure you can document and prove what you claim on your tax return. This is where most all individuals get into trouble is they can not document all of their deductions. In my case they are simply disallowing all deductions based on the fact that I have a W-2 salary and could not possibly have time to be a professional horseplayer. I will not bore everyone with all of those details but I can prove and document otherwise.
In closing, documentation is obviously the key to this. If you can do so then you may report on schedule C as a business and deduct expenses. Otherwise you must report on schedule A and can only deduct gambling losses up to the amount of winnings only. You cannot deduct expenses. This does not mean you will not get audited or flagged but you should be able to win. I have chosen to fight this on this issue because I do not want to set a precedent for future years, as I plan on doing this for many years and long after I am retired from the nursing home business. Each of you must decide what is best for you.
Sorry for the long explanation and hope this helps all to whom this may apply.
Mayo
IRS Reporting.
I sent a response to Ken via email and will share my personal IRS experience with everyone in an attempt to clarify this issue. I have spent several thousand dollars in legal fees to find out this information and know it to be 100% accurate inspite of the information some of you may have received from IRS personnel on some 800 number. Most do not know the complete rules.
Since 1993 I have reported as a profession on my tax return as professional horseplayer even though I also have a W-2 salaried income from my nursing home company. I have reported this on a schedule C as a separate business. From 1993-2003 the IRS never questioned this. In January 2007 I received a notice from the IRS for the 2004 tax year claiming that it was not possible for me to be a professional horseplayer because I had a W-2 income and therefore they were disallowing all deductions on the schedule C and transfering the income to schedule A and taxing it as ordinary income. Keep in mind that I reported ALL income (both tourney and daily wagering) on the schedule C along with all expenses related to that business. It obviously included all travel, hotel and meals associated with the tourneys as well as all daily expenses associated with the daily wagers.
My CPA wrote letters and made phone calls explaining our situation. This was all a waste of time at that level of IRS personnel. Once the computer kicks it out they do not usually change it at that level.
I then hired a tax attorney and we sued the IRS in tax court. When you do this the case is automatically transferred to an appeals officer who communicates with your attorney in an attempt to settle the case before it goes to the IRS legal division. The appeals officer reviewed my records and surrendered the case and we won. The reason we won was because of my record keeping which is the key to all of this. My business records include a daily journal of all wagering amounts as well as the of profit or loss for that day. I keep records of all expenses and income from all tournaments as well. I also have monthly printouts from the online wagering sites. The appeals officer issued me a letter that stated that I was a professional horseplayer for the year 2004 based my records. The only problem is the letter is good only for the tax year 2004.
As of this week I now have to go through the same song and dance again for 2005 since the computer has flagged me. We should prevail again since my attorney and I are 100% confident that my records meet all the IRS rules pertaining to this issue, as well other tax court cases where other individuals have won on these same issues with less records than I have. However, we are going to require as a settlement that the IRS accept me as a professional horseplayer for future years (if I report myself as such) based on the fact there is no where in the tax code that says the IRS has the right to tell anyone what they can do for a living or how many jobs or businesses they may have, so long as they report all income from such. If they refuse, then we will sue the IRS in federal court. We feel we can prevail since they are violating their own rules.
The IRS obviously does have the right to audit your records from those schedule C businesses to make sure you can document and prove what you claim on your tax return. This is where most all individuals get into trouble is they can not document all of their deductions. In my case they are simply disallowing all deductions based on the fact that I have a W-2 salary and could not possibly have time to be a professional horseplayer. I will not bore everyone with all of those details but I can prove and document otherwise.
In closing, documentation is obviously the key to this. If you can do so then you may report on schedule C as a business and deduct expenses. Otherwise you must report on schedule A and can only deduct gambling losses up to the amount of winnings only. You cannot deduct expenses. This does not mean you will not get audited or flagged but you should be able to win. I have chosen to fight this on this issue because I do not want to set a precedent for future years, as I plan on doing this for many years and long after I am retired from the nursing home business. Each of you must decide what is best for you.
Sorry for the long explanation and hope this helps all to whom this may apply.
Mayo