The Internal Revenue Service (IRS) is cracking down on $1.4 billion of unreported gambling winnings, according to a recent report from the independent IRS oversight group Treasury Inspector General for Tax Administration (TIGTA).

TIGTA discovered that 148,908 Americans with gambling winnings exceeding $15,000 failed to file tax returns between 2018 and 2020. Their winnings exceeded $13.2 billion dollars, making the unpaid taxes roughly $1.4 billion.

Internal Revenue Code § 61 states that all income, including winnings derived from gambling activities, is includible in a U.S. resident’s gross income.

Additionally, TIGTA analyzed the W-2G forms provided by casinos when gamblers hit slot jackpots of $1,200 or more or Keno wins above $1,500.

TIGTA discovered the IRS lacks sufficient processes to identify tax noncompliance via online sports betting

TIGTA said approximately 103,000 of these offending winners were never issued notices or ever contacted to bring them into compliance.

Hundreds of Forms W-2G do not include a Taxpayer Identification Number (TIN) required to trace the income to the recipient.

TIGTA found that the IRS is lacking adequate processes to identify potential excise tax noncompliance by entities accepting wagers, such as online sports betting.

“Form W-2G has not evolved with the growth of the gambling industry,” TIGTA’s report reads. “For example, the wager codes on Form W-2G include only nine specific types of gambling activities, which do not include a wager code for sports betting. If there was a wager code specifically for sports betting, the IRS could use this information to identify potential nonfilers and under-reporters.”

The Treasury estimates that U.S. taxpayers underpaid their federal taxes by $688 billion in 2021. Nonfilers were responsible for $77 billion (or 11%) of the unreceived funds.

Requirements for reporting gambling winnings vary

The requirements for reporting gambling winnings and withholding Federal tax depend on the type of gambling and the amount won.

Payers must issue a Form W-2G if one of the following criteria applies:

  • Bingo or slot machine winnings (not reduced by the wager) are $1,200 or more.
  • Keno game winnings (reduced by the wager) are $1,500 or more.
  • Poker tournament winnings (reduced by the wager or buy-in) are more than $5,000.
  • The winnings (excluding horse racing and the above gambling activities) are $600 or more and at least 300 times the wager.
  • The winnings are subject to Federal income tax withholding, either regular gambling withholding or backup withholding.

Furthermore, gambling losses may be deductible for bettors who itemize deductions. However, a bettor cannot deduct losses without reporting his or her own winnings. Winnings and losses must be reported separately.

TIGTA said the IRS was not prioritizing high-income nonfilers

The Treasury Inspector General for TIGTA expressed concerns about the lack of priority the IRS places on high-income nonfilers.

For example, in a Fiscal Year (FY) 2020 report, TIGTA found there were over 800,000 high-income nonfilers in TYs 2014 through 2016 that the IRS did not pursue.

Then in a FY 2021 report, TIGTA also found almost 104,000 individual nonfilers with about $3 billion in income reported on Form 1099-K, Payment Card, and Third Party Transactions, that were never tracked by the IRS.

The IRS’ Failure to File penalty is 5% of the unpaid taxes for each month or part of a month that a tax return is late. The maximum penalty is 25% of the unpaid tax.

The IRS identifies a potential nonfiler systemically via the Individual Master File Case Creation Nonfiler Identification Process (IMF CCNIP).

Nonfiler enforcement starts with the Return Delinquency program. At least one notice is sent to the taxpayer to solicit the unfiled tax return. If the taxpayer does not resolve their return delinquency, the case may progress to a Taxpayer Delinquency Investigation (TDI).

Failing to file a tax return is punishable by a maximum fine of $25,000 ($100,000 in the case of a corporation). Imprisonment can also be ordered of not more than one year.