The Difficulty of Proving that You Are a Professional Gambler

A taxpayer from North Carolina had more than $15,000 in gambling expenses disallowed by the IRS after the taxpayer tried claiming the expenses as business deductions.  The case went to Tax Court, and the Court sided with the IRS.  The case shows that it’s hard to be classified as a “professional gambler” for tax purposes, even if you gamble a lot.

The Internal Revenue Code and Treasury Regulations require most taxpayers to report gambling winnings as “other income” on the front side of the 1040.  Taxpayers can take an itemized deduction for wagering losses, but the itemized deduction is limited to the amount of gambling winnings.  For people who can prove that they are professional gamblers, the gambling winnings are claimed on Schedule C (Profit or Loss from Business).  Wagering losses can be deducted as a business expense up to the amount of winnings.  Traditional business expenses such as mileage, supplies, etc., are also deductible as business expenses.

In this case, the taxpayer, a Mr. Moore, reported more than $25,000 in gambling income on  Schedule C for 2006.  He also reported nearly $41,000 of expenses on this Schedule C, creating a business loss of more than $15,000 for the year.  The IRS audited the return and determined that Mr. Moore was not a professional gambler.

The Tax Court sided with the IRS.  The Court ruling is good reading for anyone who wonders if they might be a professional gambler.  The Court went through each of the nine tests under the income tax regulations for determining if an endeavor is carried on with a profit motive.  In the end, they determined that Mr. Moore was not a professional gambler.  The ruling means that Mr. Moore could take approximately $25,000 as an itemized deduction, but the remaining $15,000 of expenses were not deductible.

Mr. Moore now owes additional taxes, plus an accuracy related penalty.  From the Court ruling:

Moore lacked both reasonable cause and good faith for claiming to be a professional gambler.  He made little effort to determine the proper tax treatment of his gambling activity….He determined that he was a professional gambler in 2006 merely because he had seemingly large gross winnings.