Two clients came into my office recently, call them John and Jane Lucky. John is a professional gambler; his wife Jane owns her own business.
"Well, John," I began, "I see that you made $125,000 this year. Aren't you glad that under the Online Gambling Legalization Act of 2010 your business is treated just like any other, and you can take the net operating loss you had in 2009-the first time you had lost money-and can apply that against your 2010 income? That's going to save you a lot of money on your tax bill.
"And I noticed you're using your iPhone to record your live gambling sessions. Under the OGLA you no longer have to have a handwritten log. It was about time that the government entered the 21st Century. But do remember to log every session, as it's still required.
"You may have noticed that there's no Form TD F 90-22.1 included for you to file. Once the OGLA passed, the online gambling business moved back to the United States. You may remember that a couple of years ago the IRS and the Department of the Treasury began to classify online cardrooms and casinos as foreign financial institutions requiring reporting on your tax return and for you to file Form TD F 90-22.1 if you had more than $10,000 in a foreign bank account."
"Sure, I remember that," John said. "How was that determined?"
"Well," I told John, "You took the maximum balance at any time during the year of each of your foreign accounts, added them together, and if the total was $10,000 or more you had to report all of your accounts on Form TD F 90-22.1 and you had to check a box on Schedule B. I'm glad that's gone for almost all my clients.
I turned to look at Jane. "As for your...."
BUZZ!
My alarm woke me up, and it was back to reality. I'm preparing 2008 tax returns, not 2010 returns. There is no OGLA. Yet one thing that I wrote above is true: The IRS and the Department of the Treasury now consider online gambling accounts to be foreign financial accounts that may have to be reported on Form TD F 90-22.1. The procedure outlined above is accurate. The penalty for willfully not reporting a foreign financial account is the greater of $100,000 or half the balance of the account. You can also go to prison for failing to report a foreign financial account.
I'd love to see my gambling clients treated the way my other business clients are. Yet the Tax Code is anything but fair towards gambling. Legislatures believe that people who play a game of skill (poker) should be treated as second-class citizens for taxes. We're bombarded daily by advertisements for the lottery (a tax on fools) and the same governments want to outlaw poker. The Senate confirms as Secretary of the Treasury a man who didn't pay his taxes. It's no wonder I'm cynical about politicians.
This article is limited to the one or more Federal tax issues addressed in the opinion. Additional issues may exist that could affect the Federal tax treatment of the transaction or matter that is the subject of this article and the article does not consider or provide a conclusion with respect to any additional issues. With respect to any significant Federal tax issues outside the limited scope of this article, the article was not written, and cannot be used by the taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer.
Russell Fox is the co-author of "Mastering No-Limit Hold'em," "Why You Lose at Poker," and "Winning Strategies for No-Limit Hold'em." He's a federally licensed tax preparer specializing in gambling, with a blog at taxabletalk.com. E-mail Russ at rcfox@claytontax.com
