Gambling Winnings and Taxes: Why Casinos, the IRS, and Collections Are Watching You

Gambling Winnings and Taxes: Why Casinos, the IRS, and Collections Are Watching You

Gambling income is one of the most underreported and most aggressively enforced sources of taxable income in the United States.

At PRP Tax Law | Tax Representation Firm, we regularly represent taxpayers dealing with IRS audits, back tax filings, automated underreporting notices, and collections cases tied directly to gambling winnings. And one thing is consistent across nearly every case:

The taxpayer didn’t think the IRS was paying attention.

They were wrong.

Gambling Income Is Always Taxable, Even If You Lost Overall

Under IRC §61, all income from whatever source derived is taxable unless specifically excluded. That includes:

• Casino winnings

• Sports betting winnings

• Online gambling winnings

• Poker tournament winnings

• Slot machine jackpots

• Fantasy sports winnings

If you receive a Form W-2G, the IRS already knows about that income.

And if you don’t report it yourself, the IRS will report it for you.

The IRS Automated Underreporting Program and Gambling Winnings

One of the most common and damaging situations we see involves the IRS Automated Underreporting (AUR) Program.

Here’s what happens:

• Casinos issue W-2Gs to the IRS

• The IRS matches W-2Gs against filed tax returns

• If gambling winnings are missing or underreported, the IRS issues a CP2000 notice

• The IRS assumes 100% of the winnings are taxable income

The IRS does not assume you lost money.
The IRS does not assume offsets.
The IRS assumes you kept every dollar.

This is why we routinely see taxpayers with six figure tax debt tied to gambling winnings over multiple years.

Gambling Loss Deductions Are Limited and Getting More Limited

Gambling losses are deductible only to the extent of gambling winnings under IRC §165(d). You cannot create a net loss from gambling activity.

But taxpayers need to be especially cautious now.

Under recent legislative changes commonly referred to as the “Big Beautiful Bill,” gambling loss deductions are effectively capped at 90% of winnings, not 100%. That means even if you lost as much as you won, you may still owe tax on a portion of your gambling income.

This makes recordkeeping more critical than ever.

Poor Recordkeeping Is Where Everything Falls Apart

One of the biggest issues we see is a lack of proper gambling records. Many taxpayers:

• Don’t track sessions

• Don’t keep loss documentation

• Don’t separate gambling activity from personal finances

• Rely on memory instead of contemporaneous logs

When the IRS reviews gambling income, they expect documentation not estimates.

Without records, the IRS default position is simple:
All reported winnings are taxable.

Gambling Income and IRS Collections: A Dangerous Combination

Gambling activity becomes especially problematic when a taxpayer is already in IRS collections or attempting to resolve back taxes.

Here’s why:

• Revenue officers review bank statements

• Gambling transactions raise questions about ability to pay

• Claims of financial hardship are scrutinized

• Ongoing gambling activity undermines credibility

Trying to argue you can’t afford taxes while bank records show gambling activity is a major red flag in collections cases.

We see this derail payment plans, offers, and negotiations far more often than people realize.

Self-Prepared Returns and Gambling: A Common Recipe for Disaster

In our experience, 95% of gambling related tax problems start the same way:

• The taxpayer self-prepares or uses a basic tax preparer

• Gambling winnings aren’t fully reported

• Losses aren’t properly documented

• The IRS catches the discrepancy years later

By the time the IRS gets involved, penalties and interest have already compounded and the taxpayer is now dealing with multiple IRS departments at once.

Why Gambling Tax Issues Snowball So Quickly

Gambling tax problems rarely stay small because they often involve:

• Multiple tax years

• Multiple W-2Gs

• Underreporting penalties

• Accuracy related penalties

• Interest accrual

• IRS audits and collections simultaneously

What started as “just gambling winnings” becomes a long term IRS problem that doesn’t go away on its own.

Final Thought: The IRS Will Catch Gambling Income Eventually

If you don’t report gambling winnings yourself, the IRS will do it for you and they will do it in the most unfavorable way possible.

Between automated underreporting, limited loss deductions, aggressive collections scrutiny, and poor recordkeeping, gambling income creates some of the most complex and expensive tax problems we see.

At PRP Tax Law | Tax Representation Firm, we are highly experienced in representing individuals dealing with IRS audits, back tax filings, disputes, and collections involving gambling winnings.

If gambling income has created or is creating an IRS issue for you, it’s important to address it before it escalates further.