The High Stakes of Tax Compliance in Gambling: Why the IRS Needs to Raise the Ante

Gambling winnings have long been a contentious issue in the realm of tax compliance. Gamblers, a demographic typically characterized by risk tolerance, often roll the dice on reporting their winnings and losses accurately. The implications of this behavior extend far beyond individual tax returns—they contribute to a staggering annual tax gap and demand a more stringent response from the Internal Revenue Service (IRS).

The Risk-Taking Nature of Gamblers and Tax Compliance

At the core of the challenge lies the inherent risk, both in gambling and tax compliance. Gamblers are often self-selected for their propensity to take chances, making them less likely to rigorously adhere to tax regulations. The IRS’s challenge is twofold: not just to encourage compliance but to instill a clear understanding among gamblers that failing to report their winnings is ultimately a losing bet.

According to a recent report from the Treasury Inspector General for Tax Administration (TIGTA), an alarming number of gamblers fail to report substantial winnings. This not only skews data but also denies the IRS significantly needed revenue, particularly from high-income earners who are typically affected by higher tax brackets.

The IRS’s Current Approach to Gambling Winnings

The IRS is aware of the substantial gambling industry’s expansion and the resultant compliance challenges. When a gambler wins significant amounts, gambling establishments are required to report that information through forms like the W-2G, which records substantial winnings. However, the TIGTA’s findings revealed a troubling inconsistency in enforcement. For instance, over 148,000 individuals who won more than $15,000 in gambling from 2018 to 2020 did not file a tax return reflecting those winnings—a staggering $13.2 billion in unreported income, contributing to an overall tax gap larger than $688 billion.

Currently, the IRS audits a mere 0.2% of individual income tax returns, a paltry figure that suggests many gamblers are gambling on the odds of not being audited. This environment, coupled with the lack of aggressive enforcement, encourages a culture of non-compliance.

The Need for Enhanced Compliance Measures

For the IRS to curb this trend, it must implement strategies that make gambling winnings a near-certain predictor of tax audits. This could include a more robust correlation between reported winnings and individual taxpayer rates. To achieve this, the IRS would need to allocate significant resources towards improving data matching systems. While such a commitment represents a substantial investment, it is crucial to uphold the integrity of the tax system in light of the expanding gambling landscape, especially as online gambling and sports betting continue to gain traction.

The report indicates that the IRS is taking steps to address compliance issues. However, progress appears inconsistent, particularly in new sectors of the gambling industry, such as online sports betting. By bolstering enforcement in these emergent markets, the IRS can send a clear message: gambling may be a risk, but failing to report winnings is a double risk—one that can lead to serious consequences.

High-Income Gamblers: An Overlooked Demographic

A worrying trend highlighted in the TIGTA report is the high proportion of non-filers among high-income gamblers. These individuals represent a significant source of uncollected taxes, potentially amounting to as much as $1.4 billion. This demographic is particularly concerning as their winnings place them in higher tax brackets, amplifying the potential revenue loss for the IRS.

The findings imply that the IRS not only has a moral imperative to enforce tax compliance among all gamblers but also a fiscal one. By focusing specifically on high-income, high-winner gamblers, the IRS could significantly reduce the tax gap it faces.

Conclusion: A Call to Action for the IRS

As online gambling and sports betting continue to proliferate across the United States, the challenge for the IRS to ensure compliance will only grow. Implementing proactive measures will require a strategic approach that leverages data from gambling establishments and reinforces audit protocols for individuals who win substantial amounts.

In summary, for the IRS, raising the ante on compliance in the gambling sector is not merely an administrative obligation—it represents a crucial step in ensuring the integrity and sustainability of the nation’s tax system. The message is clear: the house may always win in gambling, but the IRS can take control of the game by ensuring that gambling winnings are consistently reported and taxed. Failing to do so is indeed a gamble, and one that the IRS can no longer afford to take.