Congratulations! You’re probably here because you won some type of prize, lottery, or game of chance. You’re also here because you now realize that Uncle Sam needs his share of your winnings.

Gambling Winnings

Gambling winnings are reported on line 21 of the 1040 (other income). Many taxpayers incorrectly believe that they only have to report what is reported to the IRS via form W-2G. Actually, you need to include ALL income derived from gambling activities, not just what was reported to you on a form W-2G.

Different types of gambling income include:

• Raffles
• Bingo
• Slot Machines
• Table Games
• Lottery Tickets
• Prizes and Giveaways (such as a car)

Every dollar that is derived from those various activities needs to be reported. Luckily, as you will see in the next section, you can deduct gambling losses up to your winnings on your itemized deductions.

Gambling Losses

As we mentioned before, gambling winnings are included in your income. Thankfully, if you have gambling losses, you can use them to offset some of your winnings. These losses are reported on line 28 of Schedule A (itemized deductions).

So basically, you can deduct you losing scratch-off lottery tickets, money that you lost at the slot machines, etc. Also, keep in mind that you can only deduct losses up to the amount of your winnings. For example, let’s say you had $60,000 in gambling winnings and $70,000 in losses. You can only claim $60,000 in losses on your Schedule A. As you will see in the next section, in order to claim these losses, you need to keep impeccable records.

Record Keeping

The tax law states that you must keep records (a diary) of all your winnings and losses due to gambling activity. The winnings and losses need to be listed separately and you cannot just have a letter from a casino showing your net profit or loss.

Your gambling diary should include all of the following:

• The date and type of your specific wager or wagering activity
• The name and address or location of the gaming establishment
• The names of other persons present with you
• The amount you won or lost

Yep, you read that right. You need to document all of that. It’s best to get into the habit of documenting each win and loss while gambling, right down to the last scratch-off ticket!

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Recently, I applied for a position with the IRS as a Revenue Officer. It wasn’t until after I read what they do that I decided that it wasn’t for me. Basically, a Revenue Officer is the Government’s bill collector. They are the ones on the front line that go to businesses and individuals to collect past due tax bills, even if it means seizing property. Want to know what the deciding factor was for me? They are not allowed to carry weapons. You mean to tell me that I am going out to some guys business (that he built over the past 30 years) to seize his property without a gun? Are you kidding me? Don’t you think he will do almost anything to protect his business?

I told you all of that to talk about a story that I read yesterday. Apparently, a Texas restaurant owner has been sentenced to 2 years in jail for trying to offer an IRS agent free pizza and a job. I guess he was a more friendly business owner.

It all started when, you guessed it, the owner decided to not pay his taxes. He owed $49,000 in back taxes for the years 2004 to 2007. When the IRS agent showed up, the owner offered the agent $2,500 (and all the pizza they wanted) in exchange for having the tax liability reduced from $49,000 to around $500. During these subsequent meetings, the IRS agent recorded their conversations and that was all that was needed for a conviction. The owner is a citizen of India and will be deported after his sentence is up.

So to those who think they can bribe their way out of a tax liability, think again!

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The IRS just released a list of the 9 most common mistakes on recently filed tax returns. Make sure you check each one of these as you send in your taxes over the next few days.

1. Recovery Rebate Credit

Many returns filed in 2009 have errors involving the Recovery Rebate Credit, a credit for people who did not receive a stimulus payment in 2008 or who did not receive the maximum amount. To avoid delays in tax refunds, it is critical that taxpayers know whether they received a payment in 2008 and the correct amount of that stimulus payment. For people using a paper tax return, the stimulus payment amount will be required when completing the related worksheet. For people using tax software, the stimulus payment amount will be needed as part of the return preparation process.

2. Incorrect or Missing Social Security Numbers

Make sure you are entering the correct Social Security numbers on the return. Double check them against you and your dependents Social Security Cards. If you incorrectly enter a Social Security number, the IRS will reject your return and ask for the corrected number.

3. Incorrect or Misspelling of Dependent’s Last Name

When you enter your dependent’s last name on the return, be sure you are entering it the same as it appears on their Social Security card.

4. Filing Status Errors

Make sure you enter your correct filing status on your return. It will be either single, head of household, qualifying widow, married filing jointly or married filing separately.

5. Math Errors

This is a pretty obvious one. Just be sure to double check everything on your return, especially if you are filing by hand. Get out that handy dandy calculator! Keep in mind that when you file electronically, the software takes care of the math for you.

6. Computation Errors

Take your time when doing these. Many taxpayers are making mistakes when figuring the taxable income, withholding and estimated tax payments, Earned Income Credit, Standard Deduction for age 65 or over or blind, the taxable amount of social security benefits, and child and dependent care credit. Be sure to double check these and also be sure you are utilizing the IRS forms.

7. Incorrect Bank Account Numbers for Direct Deposit

This is a really important one! If someone else is filing your return, make sure you double check to make sure the numbers are correct. I actually heard of a man who put the wrong account number on his return and then the individual that received his refund spent the money. He is now working with the IRS to try and get back his refund.

8. Forgetting to Sign and Date the Return

How obvious is that one?

9. Incorrect Adjusted Gross Income

Taxpayers filing electronically must sign the return electronically using a personal identification number. To verify their identity taxpayers will be prompted to enter their AGI from their originally filed 2007 federal income tax return or their prior year PIN if they used one to file electronically last year. Taxpayers should not use an AGI amount from an amended return, Form 1040X, or a math error correction made by IRS.

You also use your 2008 AGI to calculate many other things on your return. Making sure that this amount is correct can save you a ton of money!

Related posts:

1. Reporting Gambling Winnings and Losses

According to the IRS, there are around $1.3 billion in unclaimed refunds from the 2005 tax year. These unclaimed funds are for individuals who did not file a tax return in 2005. Due to the three-year look back, individuals have until April 15th, 2009 to claim these refunds or they may be gone for good.

IRS Commissioner Doug Shulman says, “especially in these tough economic times, people should not lose out on money that is rightfully theirs. People should check their records, especially if they had taxes withheld from their paychecks but were not required to file a tax return.  They may be leaving money on the table, including valuable tax credits that can mean even more money in their pockets.”

The IRS estimates that half of those that could claim these refunds for the 2005 tax year would receive more that $581. Many of the individuals in this category had too little income to file a return but had taxes withheld from their wages or paid quarterly estimated taxes. There is no penalty assessed by the IRS for filing a late return qualifying for a refund.

Many low-income workers may not have claimed the Earned Income Tax Credit (EITC) or even knew about it. Unmarried individuals that earned less than $35,263 in 2005 and had more than one qualifying child are eligible for the credit. Keep in mind that you must have earned income and not be able to be claimed by someone else in order to qualify for the credit. If you are single with one child the threshold is $31,030. If you are single with no children and at least 25 years old, you can qualify for the EITC with less than $11,750 in income. The rule on being claimed as a dependent also applies. These numbers are slightly increased for individuals filing married filing jointly.

Double check your 2005 taxes and make sure you filed if you were due a refund. If you didn’t file, get those returns in by April 15th of this year to get what you are owed!

Related posts:

1. Nine Common Mistakes Made on 2008 Tax Returns
2. Reporting Gambling Winnings and Losses
3. Mental Note: Don’t Bribe IRS Agent With Pizza and Cash

Every so often, I will be looking at a different person who has been in the news (past or present) for tax troubles. Maybe they forgot to file, felt entitled not to pay or skipped town. Either way, they have been careless with their taxes and had to face the wrath of the IRS.

Willie Nelson

Willie Nelson is an American country singer-songwriter and actor. He is known for his songs during the ‘outlaw country’ movement of the 1970s. He still remains very popular today. He continues to tour, sing, and act. He is also well known for his advocacy of legalizing marijuana.

Back in 1990, Nelson was hit with a tax bill of $16.7 million. Since it was such a large bill and Nelson could not pay, the IRS froze his banks accounts and auctioned off many of his possessions in order to satisfy the bill. According the to IRS, the tax problems began for Nelson back in the late 1970s when he was making it big. The IRS claimed that from 1978 to 1982 he did not pay $6.5 million in income taxes. Add on $10.2 million in penalties and interest and you have a hefty sum. Luckily for Nelson, many of his fans bought his possessions from the estate sale and later returned them to him.

Nelson later filed suit against Price Waterhouse Coopers in the amount of $65 million. He stated that it was their fault because they set him up with certain tax shelters that were later struck down by the IRS. The IRS later came back and said that Willie owed over $30 million in back taxes but later settled for $17 million. Willie later released an album titled The IRS Tapes: Who’ll Buy My Memories?. This was released in conjunction with the IRS to help relieve his tax burden.

Nelson has also gone on to poke fun of himself in commercials for H&R Block. You can check this one out below.

Next: Richard Hatch

Related posts:

1. Nine Common Mistakes Made on 2008 Tax Returns

One of the most frequently asked tax question is how long you must keep tax documents. You want to know the answer? It depends. Isn’t that the answer to everything these days? Anyway, here are some general rules for keeping your records straight with the IRS.

Three Years Might Be Enough

Most tax documents can be shred after three years. Why? Three years is the statute of limitations for tax audits at the IRS. That means that come April 15th, 2009, the IRS can no longer audit you for your 2005 tax return. Why don’t you invite your friends over that day and have a shredding party? You can even have them bring over their papers! However, don’t shred them if you filed for an extension for your 2005 return. You must hold onto those papers until three years after the due date of the extension.

Things to Keep Beyond Three Years

Wait! Step away from the shredder! There are some things that you should keep beyond three years. First, you should keep any records you have on appreciable assets that you currently own. That would include stocks, bonds, antiques, real estate, land, jewelry, etc. Chances are, you will sell these one day and having these documents will be crucial in making sure you are paying the right amount of tax. For example, if you do improvements to your home, it adds to the basis of it. This will end up helping you in the end and may lower your tax on the asset. Make sure you keep all of the documents that shows the costs of the improvements. The IRS is all about showing the appropriate documentation backing your calculations.

Another thing to remember is that if you “forget” to report income, the IRS can go back up to six years. Also, if you plan committing tax fraud, you might as well get used to metal bars because the IRS will find you and they can do that whenever!

Where to Put Your Documents

Now that you know what to keep, where should you keep it? The best place to keep your files is a bank safe deposit box (which is tax deductible if you itemize by the way). If there is no way you can have a safe deposit box, invest in a fireproof safe. Make sure the fireproof safe can take a few hours of heat that way you know it will survive almost anything.

I know it’s a pain to keep all of these records, but believe me, it’s much better than having to pay penalties and interest on taxes that you have to pay due to not having proper records.

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