Poker tournament winners get time to pay Uncle Sam

By Liz Benston

Thursday, Oct. 4, 2007 | 7:30 a.m.

Imagine that you've just won $100,000 in a poker tournament. But before you can pocket the cash, the casino swoops in to collect $25,000 to pay Uncle Sam.

That was the worst-case scenario feared by casinos and players after the Internal Revenue Service issued a bulletin last month saying that casinos would be required to withhold 25 percent of poker tournament winnings over $5,000.

The notice sent a shock wave through the poker community, which feared short-circuiting tournament growth in Las Vegas and beyond. Withholding taxes could have devastated legions of professional poker players who require a large cash bankroll to ply their trade, driving them from land-based casinos to offshore Internet competitors that allow players to dodge U.S. tax laws.

Or so everyone feared.

Negotiations between the IRS and the casino industry as recent as last week appear to have yielded the rarest of all outcomes: a win for all parties.

Rather than forcing casinos to withhold players' winnings, the IRS will require casinos to report winnings on a W-2G form. Players will continue to be responsible for paying taxes on their winnings at tax time. The policy will take effect March 4.

The American Gaming Association, which has butted heads with the IRS regarding the rate of casino worker tip taxes, is cheering the new rule.

"The IRS was appreciative of our efforts to ensure the flow of these tournaments," gaming association lobbyist Wally Chalmers said. "We're very happy with this procedure."

The IRS also benefits from the decision by the creation of a paper trail on players who win more than $5,000. Gambling winnings, with some exceptions, are taxable.

Although the World Series of Poker, the world's largest poker tournament, had reported winnings to the IRS, several casinos in town did not issue W-2Gs. Players at those casinos could collect winnings under the radar, potentially avoiding taxes.

Casinos that don't report winnings could be liable for players' back taxes, though it's unlikely the IRS would go after the casino.

A likelier scenario would involve winners who prevent casinos from completing a W-2G by refusing to give up personal information, such as their Social Security numbers. In that case, casinos would be obligated to withhold taxes immediately, letting them off the hook for the tax bill.

If the casino does not withhold or the player cannot be found, the IRS could assess the casino the tax owed.

The rule also could snag players who don't pay up at tax time.

Many poker players are lax about paying taxes because they are too lazy or preoccupied to do the detailed accounting needed to keep track of frequent wins and losses, said Anthony Curtis, publisher of the Las Vegas Advisor, a newsletter aimed at gamblers. Others, he said, are simply uninformed.

"They do everything off the books. They're walking around with big wads of cash like you wouldn't believe," Curtis said. "They don't have records and wouldn't know what to do to report taxes. They just know that they've got to get to the next game."

Curtis said he began logging his own wins and losses after having trouble recalling them from memory.

Not changing the withholding rules will benefit taxpaying poker players, who are loath to dent their bankrolls before tax time.

"This is good because poker players need to be liquid at all times," said Jeff Shulman, editor of Card Player magazine.

The gaming association, seeking a level playing field for competitors, sought clarification on the issue of whether poker tournaments are considered "wagering pools."

Rules dating from the 1970s, the days of the first big poker tournaments, require operators to withhold taxes on pooled funds such as lotteries and racing events. The rules included "other wagering transactions if the winnings are at least 300 times the amount wagered," but did not specify poker.

In repeated attempts to close loopholes and ensure compliance, the IRS has established different tax rules for particular games, inviting criticism for its patchwork quilt approach to regulation.

Slot or bingo winnings of $1,200 or more, including wagers, trigger a W-2G, while the reporting threshold is $1,500 for keno winnings, excluding the amount bet.

Of about 134 million tax returns received by the IRS in 2005, at least 1.8 million reported gambling earnings totaling $24.9 billion, or roughly $13,800 per return.