It is not, however, unusual for adults to gamble, even if it’s only occasionally. Approximately 85% of U.S. adults have gambled at least once in their lives, and 60% have gambled in the past year. Some form of legalized gambling is available in 48 states plus the District of Columbia. The two states that do not have legalized gambling are Hawaii and Utah. Illegal Gambling Is a Risky Tax Strategy.
Whether it’s a friendly bet or hitting the jackpot, it’s important to know that gambling winnings need to be reported for federal income tax purposes. In cases where the winnings reach a significant threshold, these earnings are also reported to the IRS using Form W-2G, known as ‘Certain Gambling Winnings.’ Specifically, Form W-2G is issued when gambling earnings, excluding those from bingo, slot machines, keno, and poker tournaments, amount to $600 or more, provided that the amount is at least 300 times the initial wager.
IRS-CI’s Focus on Illegal Gambling and Gambling Risky Tax Strategy
For bingo or slot machine wins, the reporting threshold increases to $1,200 or more, and for keno payouts, it’s $1,500 or more. Form W-2G is also issued when winnings are subject to withholding, which includes both backup and regular gambling withholding. In 2023, the rate for gambling withholding remains the same as backup withholding, standing at a flat 24%.
Although the IRS diligently monitors taxpayers who might underreport their earnings, the IRS Criminal Investigation (IRS-CI), the enforcement arm responsible for investigating criminal activities related to taxation, is primarily concerned with a distinct set of issues. Their focus shifts to instances where games of chance cross the line into illegal criminal activity. According to IRS-CI, illegal gambling frequently connects to a variety of other criminal offenses, encompassing activities such as money laundering and tax evasion.
The answer is simple: cash. IRS-CI Chief Jim Lee emphasizes that whenever substantial sums of money change hands without being subject to reporting, the likelihood of criminal activity rises. Lee points out that the U.S. government relies on transaction reports, which encompass various forms such as those issued for funds entering the country (like the FinCEN 105), deposits or exchanges at financial institutions (like the FinCEN 104), or payments received as part of regular business operations (like Form 8300).
Money Laundering Risks in Illegal Gambling Operations
Transaction reports and their associated documentation play a crucial role in ensuring the proper reporting and taxation of financial transactions. Money that originates from illicit sources, often referred to as ‘dirty money,’ becomes more challenging to legitimize and convert into ‘clean’ funds once it has been reported. Similarly, when taxpayers are aware that federal authorities are aware of the existence of these funds, it becomes easier to guarantee that such funds are appropriately reported to tax authorities.
The nature of gambling inherently involves the movement of substantial amounts of cash, spanning from casual office pools to online betting platforms and traditional casinos. Reputable gambling establishments typically prioritize accurate reporting because the presence of illicit cash can pose a threat to the integrity of their financial systems.
Illegal gambling operations operate on a completely different playing field, often entangled with various criminal activities, such as money laundering. In contrast to their legal counterparts, illegal bookmakers disregard established regulations. Given their reliance on cash transactions, these illicit bookies may actively encourage customers to bypass reporting requirements, all without providing any safeguards. Subsequently, the cash amassed by illegal bookies may be funneled into other criminal endeavors.
Between 2021 and 2023, the IRS-CI launched over 100 investigations into illegal gambling, with a cumulative value exceeding $178 million. Out of these cases, 89 culminated in indictments, boasting a remarkable 96% conviction rate among prosecuted cases. The average prison sentence for cases that went through adjudication stood at 23 months.
As per the Department of Justice, Vincent Delgiudice, also known as “Uncle Mick,” orchestrated an unlawful gambling operation in the greater Chicago area spanning from 2016 to 2019. Delgiudice contracted a company in Costa Rica to manage a website, Unclemicksports.com, which served as a platform for bettors to place wagers on professional and college-level sporting events, including Major League Baseball.
Official court documents reveal that Delgiudice collaborated with over 20 agents and sub-agents, responsible for recruiting and overseeing a network of more than 1,000 bettors, all while sharing the profits generated from their losses. To mitigate potential losses if his clients won, he frequently placed bets at casinos and then funneled his gambling earnings through cashier’s checks and investments in cash-based businesses.
Ultimately, Delgiudice pled guilty to charges of conspiracy and illegal gambling. In March 2022, he received an 18-month federal prison sentence and was instructed to forfeit $3.6 million due to charges of money laundering and running an illicit gambling enterprise.
According to Lee, the money laundering aspect is unsurprising, as he states, “Ultimately, these unscrupulous actors need to find a way to integrate their cash into the financial system.
How to Safeguard Your Finances in Gambling: ‘KYB’ and Smart Choices
How can taxpayers ensure their protection? In a lighthearted manner, Lee suggests, “KYB, Know your bookie,” a playful twist on the commonly heard phrase “KYC,” which stands for “know your customer.” The underlying principle remains the same: establishing the identities of parties involved in a transaction is crucial, especially when cash transactions are at play. If you’re inclined to try your luck, the safest route is to opt for reputable gambling opportunities, such as casinos and legally sanctioned betting platforms.
By engaging with legitimate gambling establishments and websites, you can expect to receive tax documentation, as mentioned earlier, which will aid in your reporting process. It’s also wise to maintain comprehensive records of your winnings and losses, as these losses may be deductible against your earnings. If you have any uncertainties regarding your tax responsibilities or require guidance on reporting gambling income, it’s advisable to seek assistance from a qualified tax professional or refer to the official IRS website. Remember, ignorance of tax laws does not exempt you from your obligations.