IRS Targets Unreported Gambling Winnings Amid Growing Compliance Issues

The IRS is facing a growing problem: a substantial gap in tax collections due to unreported gambling winnings. According to a report from the Treasury Inspector General for Tax istration (TIGTA), this issue could be costing the U.S. government approximately $13.2 billion in missed tax revenue, a significant shortfall in compliance.

Growing Concern Over Unreported Winnings

The rise of online gambling and sports betting in the U.S. has contributed to this growing compliance gap. Between 2018 and 2020, an audit by TIGTA revealed that nearly 150,000 individuals who received Form W-2G for gambling winnings of at least $15,000 failed to file tax returns. This noncompliance alone is linked to approximately $1.4 billion in uncollected federal taxes. The audit has prompted the IRS to step up enforcement actions to address these gaps, particularly targeting taxpayers with high earnings.

The IRS is planning to begin issuing delinquency notices (59) starting in October 2025, beginning with individuals whose income exceeds $100,000. These notices will alert noncompliant taxpayers about their failure to report gambling winnings and prompt them to take action before further legal steps are taken. The effort is part of a broader campaign to crack down on underreporting in the growing online and sports gambling sectors.

What Happens if You Don’t Report Gambling Winnings?

The TIGTA report highlights the scale of unreported winnings and the potential consequences for individuals who fail to comply with tax laws. Failing to report gambling income is a serious offense, and taxpayers found guilty of intentionally withholding taxes could face fines of up to $25,000 for individuals and up to $100,000 for corporations. In extreme cases, the IRS Criminal Investigation unit may get involved, potentially leading to imprisonment for up to one year.

In addition to criminal penalties, gamblers should also be aware of the tax implications of failing to report income. Casinos and other gambling establishments must issue a Form W-2G for winnings of $1,200 or more from bingo or slots, $1,500 from keno, and $5,000 from poker tournaments. Even if you don’t receive a Form W-2G, gambling winnings must still be reported, regardless of the amount. Professional gamblers who report income on Schedule C face different tax obligations and can deduct necessary gambling-related expenses.

Steps the IRS is Taking

In light of the TIGTA audit findings, the IRS has committed to improving its monitoring of the sports betting and online gambling industries. The agency plans to expand its use of wager codes to better track sports betting transactions and ensure compliance across various types of gambling. TIGTA issued five key recommendations to the IRS to address this gap, including increased enforcement actions against nonfilers and improving oversight of W-2G forms.

The IRS has acknowledged the audit findings and agreed to implement several of TIGTA’s recommendations. Specifically, the agency has committed to addressing more than 139,000 individual nonfilers who failed to report their gambling winnings from 2018 to 2020. These efforts are designed to close the compliance gap and recover the estimated $1.4 billion in uncollected tax revenue.

Awareness and Compliance: A Growing Challenge

One of the major challenges facing both taxpayers and the IRS is a lack of awareness regarding the tax implications of gambling winnings. As sports betting and online gambling have only recently become legalized in many states, many bettors are unaware of their obligation to report winnings to the IRS. Bill Speros, a senior betting analyst at Bookies.com, noted that many gamblers who transitioned from illegal betting operations to legal platforms are not fully informed about the tax implications.

This issue is further complicated by differing tax regulations across states. While some states have clear guidelines for reporting gambling income, others are still wrestling with the best way to address these concerns at the state level. Speros emphasized that federal legalization of sports betting could help standardize tax reporting procedures, but also warned that it could create new challenges for both the IRS and state governments.

In response to these challenges, TIGTA has called on the IRS to conduct a broader review of the sports betting and online gambling sectors, identifying potential risks and gaps in compliance. Expanding the wager codes and improving data collection from these industries are seen as key steps toward closing the gap.

Source:

Kiplinger: Is the IRS Coming for Your Gambling Winnings?, kiplinger.com, October 2023.