From Russ Fox, EA, of Clayton Financial and Tax of Las Vegas, NV. All of the items below are for information only and are not meant as tax advice. Please consult your own tax advisor to see how each item impacts your own situation.
The extension to the Tax Cuts and Jobs Act (TCJA) is now in the Senate as the “Big, Beautiful Bill.” The Senate version will likely receive a final vote today (and pass); however, it is quite different in certain areas from the House bill (that earlier passed that chamber). And it is really ugly (or to use one of President Trump’s phrases, bigly ugly) towards gambling.
The Senate version would permanently change Internal Revenue Code Section 165(d):
Limit gambling losses to 90% of gambling winnings Limit gambling losses to 90% of the gambling losses incurred, and
For professional gamblers, the total of losses and business expenses could not exceedare reduced to 90% of gambling winningslosses and business expenses incurred.
Consider Joe, an amateur gambler who comes to Las Vegas once a year. He breaks exactly even, with $100,000 of gambling winnings (all on W-2Gs) and $100,000 of gambling losses. If he doesn’t keep a session log he’s going to owe tax on $10,000 of income.
Or consider Larry, a professional gambler, with $500,000 of gambling winnings on the poker circuit, but $440,000 of losses and $50,000 of ordinary and necessary business expenses; he’ll have to pay tax on $50,000 $59,000 of income rather than his $10,000 of net income.
UPDATE: This isn’t as bad as I initially reported (but it is bad–especially for professional gamblers). Most amateur gamblers lose. Let’s consider Lisa, an amateur gambler with $100,000 of gambling winnings. If she has $111,111 of gambling losses she will be able to fully offset her gambling winnings with losses.
However, many professional gamblers report winnings, and their total of business expenses and losses will be reduced to 90% of the actual number. In the example above for Larry, I initially had his taxable gambling income (under the Senate bill) as $50,000. It is $59,000 as his $490,000 of losses and business expenses will be limited to $441,000.
I do need to point out that these provisions are not in the House version (the House version simply extends the current TCJA limitations on business expenses causing a loss for professional gamblers). This is one of many areas where the two versions are not the same and will need to be ironed out (likely in a conference committee).
There are two inescapable conclusions if the Senate version becomes law. First, keeping a gambling log will be essential: If Joe had $100,000 of wins and $100,000 losses in the same session he would have $0 of gambling winnings. Second, this would be another big negative towards gambling and would definitely hurt tourism in areas like Nevada.
Enter the Missouri Department of Revenue. A client moved from Missouri a few years ago, and began filing returns in his new state (as he should); he filed a part-year return for his final year in Missouri. Missouri thought he remained a resident for the following year and asked our client to email his unmasked tax return to the state (he had mailed a copy via certified mail–which they did receive). We’re not going to email it. As the Missouri Department of Revenue correctly notes,
Only use a secure connection on the Internet when sending credit card numbers or other personal information. [emphasis added]
The Department of Revenue is absolutely correct about this: emailing personally identifiable information like a social security number should never be done. Yes, an email attachment is easier to work with than having to scan a paper return. But I will never email anything containing a social security number and I hope my clients won’t.
We are going to fax the return. Faxing, because it is analog, is generally secure. Yes, Missouri is going to again have to convert paper into a pdf, but unless they offer my client a secure upload facility that’s their problem.
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The 2025 World Series of Poker (WSOP) begins later today here in Las Vegas at the Paris and Horseshoe hotels (the hotels are linked). There are also several other tournament series that have either begun or will soon begin at the Venetian, Wynn/Encore, Aria, MGM Grand, Golden Nugget, and Orleans hotels. Very little has changed from 2018 (and 2023), but I am updating the post I did then with some new information.
One major change involves players from Russia and Hungary (and individuals who have “backers” from those countries). The US-Russia Tax Treaty has been suspended in regards to gambling. That means that Russian players at the WSOP will have 30% of their winnings withheld. Do not expect many Russians this year. Similarly, the US-Hungary Tax Treaty was completely suspended; Hungarians are also looking at 30% withholding.
Additionally, if you have backers (or friends) who share in your winnings, make sure you keep receipts of your payments to them. If you pay them in cash (or casino chips), get a receipt!. The IRS is an agency out of the 1950’s; you need to keep a paper trail.
And now on to the meat of the post: I’m covering the basics of the tax situation, backing, foreign (non-US) backing, and non-American winners and what they will face with taxes. This post will be somewhat long, so I’m going to break this into sections that you can click on to open. The focus is on tournaments where tax paperwork is issued. I’ve also added a section relating to anti-money laundering (AML) rules.
The Tax Basics
If you win more than $5,000 net you will receive a W-2G (if you’re an American) or a Form 1042-S (if you’re a non-American). If you’re an American and you provide your social security number to the casino, there will be no withholding. If you’re a non-American and you have an ITIN (an Individual Taxpayer Identification Number) and you are from a Tax Treaty country, there will be no withholding. Otherwise there will be tax withheld: 24% for Americans and 30% for non-Americans.
So what are the Tax Treaty Countries? As noted in Publication 515, “Gambling income of residents (as defined by treaty) of the following foreign countries is not taxable by the United States: Austria, Belgium, Bulgaria, Czech Republic, Denmark, Finland, France, Germany, Iceland, Ireland, Italy, Japan, Latvia, Lithuania, Luxembourg, Netherlands, Slovak Republic, Slovenia, South Africa, Spain, Sweden, Tunisia, Turkey, Ukraine, and the United Kingdom.” (Residents of Malta have a 10% withholding rate.)
But if gambling winnings of a resident of the United Kingdom isn’t subject to tax, why would a casino withhold? Because if there’s no ITIN, a casino must withhold. Most (but not all) casinos still issue ITINs. I go over the ITIN situation below.
Backing by Americans of Americans
Suppose Russ plays in a WSOP event and is backed by Scott. Scott has provided half of Russ’s buyin and Russ has agreed to give Scott 50% of his net winnings. Russ is lucky enough to win $10,000 net, so he will receive tax paperwork from the Paris Hotel and Casino (where the WSOP is played). What should Russ do?
First, before the tournament Russ should collect social security numbers from his backers. The IRS has a form for this: Form W-9. The backer completes the form (including signing it) and provides it to the individual he’s backing (not the IRS). The IRS also has a form, Form 5754, designed specifically for the situation where you have backers. You include the names, addresses, and tax identification numbers (social security numbers or ITINs) of the backers along with their percentage winnings or the exact winnings. The casino is supposed to issue multiple W-2Gs. Unfortunately, the WSOP will not issue multiple W-2Gs even though the instructions to Form 5754 specify that the casino is supposed to follow the form. Indeed, I am unaware of any Las Vegas poker room currently accepting Form 5754. However, it’s still a good idea to have the form completed if you’re playing (it’s additional backup that the IRS could request).
So what should Russ do when he cashes at the WSOP? Russ becomes the casino for paperwork issuing; he must issue his backer(s) paperwork to show their winnings. It’s a fundamental principal of US tax law that everyone pays tax on their income, not anyone else’s. Russ should issue Form 1099-MISC(s) to his backers showing their shares of his winnings. A couple of comments about Form 1099-MISC. First, you issue one 1099-MISC to an individual per type of income per year. Thus, generally you will wait until the end of the year to send out your 1099s. Second, it’s far easier to obtain backers’ tax identification numbers before you pay them. You should make receiving appropriate tax paperwork (W-9 for Americans, W-8BEN for non-Americans) a requirement for your backers to receive their shares of your income. Third, note that Form 1099-MISC cannot be downloaded off the Internet. If you file paper Form 1099-MISCs with the IRS, you mustorder the forms from the IRS. If you are going to paper-file your Form 1099s, you must also order Form 1096 (this is the cover page that you use to send 1099s to the IRS).
One other key point: Russ needs to maintain a paper trail showing he sent the winnings to Scott. This can be a cancelled check, wire transfer paperwork, etc. But what if Russ pays Scott in cash or casino chips? He needs a signed and dated receipt.
Backing: Non-Americans
What happens if an American is backed by an individual from a Tax Treaty country (such as Russia)? Under the US-Russia Tax Treaty, the gambling income of a Russian is not subject to US taxation. Second, what happens if an American is backed by an individual from a non-Tax Treaty country (such as Australia) or from Canada (the US-Canada Tax Treaty mandates withholding)? Finally, what happens if someone from a non-Tax Treaty country or Canada is backed by an American? For all three scenarios, let’s assume I’m entering the main event of the WSOP (the buy-in is $10,000); my backer is paying $5,000 and is receiving 50% of my winnings. I place in the event and win $20,000, so my backer is owed $10,000 (all numbers before withholding).
Scenario #1: US Player Backed by an Individual from a Tax Treaty Country. Let’s assume I’m playing and am backed by Ivan from Russia. I receive a W-2G for $10,000 (my net winnings). It would seem all I have to do is just pay Ivan his $10,000 share of my gross profit, right? Wrong. Even though Ivan is from a Tax Treaty country, paperwork is required or tax must be withheld. Ivan needs to provide you either a Form W-8BEN or a Form W-8ECI. The Form W-8BEN is used to note the benefits of a Tax Treaty. Ivan would complete the form, including his ITIN and note the Article of the Tax Treaty that specifies that there would be no withholding. As long as you receive the completed Form W-8BEN you can then pay Ivan his share. If you pay by cash or casino chips, make sure you get a signed receipt from Ivan acknowledging his receipt of the money.
What if Ivan doesn’t have an ITIN? Then you must withhold at 30% even though he’s exempt from withholding. You would need to complete Form 1042-S and depending on the amount withheld very quickly remit that money using EFTPS to the IRS. (EFTPS is now the only method available for making withholding deposits to the IRS.) Ivan can get the money back by filing a Form 1040NR following year-end. If Ivan has a business operating in the US, he would provide Form W-8ECI with either his Employer Identification Number (EIN) or his ITIN. This will allow you not to withhold to Ivan. Note: Even if no withholding is required a Form 1042-S must be submitted to the IRS.
We can see that even the easy scenario isn’t necessarily that easy.
Scenario #2: US Player Backed by an Individual from a Non-Tax Treaty Country This case is relatively straightforward. Let’s say your backer is Jon from Canada or Australia. (Although Canadians can get some to all of their money back by filing Form 1040NR after year-end, you are required to withhold on their income per the US-Canada Tax Treaty.) You must withhold 30% of their winnings. You would pay him all of his $5,000 investment and 70% of his $5,000 winnings ($3,500) for a total of $8,500. You would complete Form 1042-S with his information and note that $1,500 of his $5,000 of income has been withheld. Depending on the amount withheld, there can be very quick deadlines for remitting that withholding to the IRS; that withheld funds must be remitted using EFTPS.
Scenario #3: Non Tax-Treaty Player Backed by an Individual from the US This is the ugly scenario. Suppose Jon is backed by Russ from the US. Russ isn’t subject to any withholding on his money (he’s a US citizen, after all) and is more than willing to provide a completed Form W-9. Unfortunately, because Caesars will not issue multiple W-2Gs/Form 1042-S’s, all of the $10,000 Jon wins will be subject to withholding. So Jon will receive $17,000 (his $10,000 entry plus $7,000 of his $10,000 in winnings). Jon is left with two bad options. He could pay Russ $3,500 (half of the amount he has won). Russ will rightly be annoyed as he should receive $5,000. Jon has no way of telling the IRS that $1,500 of his tax withheld is for Russ [See Note 1 below]. Alternatively, Jon can pay Russ $5,000 and now he only has $2,000 of his winnings (rather than the $3,500 he should have). That method probably doesn’t appeal to Jon at all. Unfortunately, neither option is palatable to both individuals and these are the only two options available.
There is a solution: Americans should not back individuals from non-Tax Treaty countries. (The better solution, Caesars issuing multiple W-2Gs/1042-S’s, will have to wait until the IRS goes after Caesars on their policy.)
There are some other things that need to be pointed out. The participant will likely have to issue 1099-MISC’s or 1042-S’s to individuals. You probably don’t want everyone to know your social security number. If you’re a professional gambler, there’s a solution: Apply for an EIN. You can do this at no charge online at the IRS website.You must have an EIN if you are going to have to withhold funds. Next, if there’s a possibility you are going to be a withholding agent, you must have both an EIN and an EFTPS account. After you get the EIN, immediately enroll in EFTPS. Your passwords are mailed to you; this takes about 10-21 days from the date you enroll, so get this going now if you are going to be playing in the 2023 WSOP and this applies to you. Third, you can give Caesars a piece of your mind (nicely, though) and let them know about the ridiculousness of their policy. That’s especially true if you’re from Australia and you would like to be backed by an American (or someone from a country with a favorable Tax Treaty with the US).
Non-Americans and ITINs
When I wrote this article in 2018, it was very uncertain whether or not casinos would be allowed to issue ITINs. The WSOP should be able to issue you an ITIN in 2025. If you are from a country with a Tax Treaty with the US that covers gambling and are playing in a poker tournament at a different casino, you can (and likely should) check with the casino to see whether or not they issue ITINs. Let’s say you’re from the United Kingdom and are backing Russ. He wins $20,000 at the WSOP ($10,000 of it goes to you) and you don’t want him to withhold $3,000. If you wait to do something until Russ wins the money, he’s going to have to withhold. In that case, you will have to apply for an ITIN and file Form 1040-NR with the IRS the following year. It takes at least two months to receive an ITIN after applying. Form 1040-NR is released around February 1st (of the following year); it takes at least six months to receive a refund after filing Form 1040-NR. The refund is issued as a check mailed to the address on file.
There are three methods available to apply for an ITIN. No matter which method you use you will need to complete Form W-7 and have the required backup documents (generally, your original passport). You can apply by mailing your Form W-7 with backup documents to the IRS. This is generally done with the filing of a tax return. You can provide a prepaid courier envelope to receive back your passport. Your ITIN will be issued in about four to six months. You can also make an appointment at an IRS office. The IRS will review your backup documents for your W-7 and make “certified copies” and forward the W-7 to Austin, Texas (where ITINs are issued). If you have a Tax Treaty reason, you can obtain an ITIN. The last time I checked the wait time to get an appointment here in Las Vegas is two weeks. I was also informed by a local IRS Certified Acceptance Agent that the IRS has not cut them off (yet) from reviewing W-7 paperwork and forwarding paperwork and “certified copies” to Austin. This may be a good method for someone who is in Las Vegas to apply for an ITIN and has a tax treaty reason to obtain an ITIN. Also, if you use a local Certified Acceptance Agent you will not obtain an ITIN immediately; your ITIN will still be mailed to you in a few months. Thus, my strong recommendation for such an individual backing an American is to get your ITIN now!
But what if you already have a valid ITIN and are from a Tax Treaty country? Then there are no issues. You will just let the casino know your ITIN number when you cash. (You may be asked to provide other documentation and/or be asked to complete a Form W-8BEN.)
Anti-Money Laundering Rules
In the United States, casinos are considered financial institutions and must obey anti-money laundering (AML) laws and regulations. These are mostly promulgated by the Financial Crimes Enforcement Network (FinCEN) but some are issued by other federal agencies and regulatory bodies. The basic idea of all these laws is to be able to trace the money. (Do note that I am not an attorney; I’m a tax professional. For those who need professional advice about AML laws, seek an attorney who specializes in this area. This is just a brief summary and absolutely not meant as legal advice.)
Let’s say you have an account at the WSOP, funded by a cash deposit or wire transfer, and you take out $12,000 in casino chips to play in a high-stakes cash game. The cage will file a Currency Transaction Report (CTR) on the transaction. These (generally) aren’t a big issue. You do want to avoid Structuring your transactions. Let’s say instead of taking out $12,000 in one transaction you elect to take out $6,000 in two transactions (separated by an hour). That’s structuring, and that’s a felony. Additionally, a Suspicious Activity Report (SAR) would be issued. At a continuing education seminar a couple of years ago we were told by the head of IRS Criminal Investigation in Las Vegas that they investigate few CTRs but all SARs issued. The solution: Just go big and take out all the money you need at once.
Another area where a poker player can run afoul of the AML rules is by (a) wiring money to one casino, (b) cashing out a significant amount from that casino as casino chips, and (c) going to a second casino and using those chips as a buy-in or for obtaining that casino’s chips. There are multiple issues here. Let’s look at a specific hypothetical example. Ivan wires $50,000 to the Paris casino for the WSOP. Ivan leaves $35,000 on his account at the WSOP, and cashes out $15,000 in chips telling the cage, “I’m going to use these for buying in to big events at the Wynn/Encore.” As far as I know, there’s nothing illegal in Ivan doing this (Ivan is not trying to evade AML rules); however, he’s likely running afoul of the AML policies of the WSOP (Paris Hotel). Casinos want their chips used at their casino, and taking those chips out for use elsewhere almost certainly is against the AML rules that the Paris Casino has adopted and must follow (or they will get in trouble win FINCEN). The solution to this is simple: Wire money to each casino.
[Note 1]: It is likely the IRS would reject a Form 1040NR filed by Jon noting his extra withholding. The IRS won’t understand the issue given that there is no tax treaty issue (say, Jon is from Australia) and say, “Take it up with Caesars.” It’s a classic Catch-22.
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Today is April 15th. Besides being the 14th anniversary of “Black Friday,” it’s Tax Day in the US. If you haven’t filed your returns, file an extension NOW! That said, if you live in a federal disaster zone it might not be Tax Day for you. If you live outside the United States, your tax Tax Day is June 16th.
A couple of years ago, I received a visit from a member of the IRS’s Criminal Investigation unit. It turns out a client, call him Larry, had worked for a company that decided to not remit payroll taxes. The loss to the government just from Larry’s wages was more than $100,000 and Larry was far from the only employee of that company. As far as I know, the IRS investigates every case where payroll taxes are not remitted.
Of course, it’s easy for the IRS to find out. Every employee is going to be filing a tax return (like Larry) claiming his withholding. The IRS will quickly see that there isn’t any withholding. Sometimes it can be an honest issue (like the time where the IRS “helpfully” changed a client’s Employer Identification Number without telling him). Other times there’s an error within IRS systems. But a lot of these cases end up as just plain theft. This is a crime that has as close to a 0% chance of success that I’m aware of.
My business has employees and payroll, and I’m a check signer (and I’m an owner). I am personally liable for the trust fund taxes. We use a reputable firm for our payroll taxes because the only thing worse than paying payroll taxes once is paying them twice.
And it’s not just the IRS that takes a dim view of not remitting payroll taxes. Every state department of revenue (or taxation) has the exact same view.
If your business is having tough times, not remitting payroll taxes is absolutely, positively one of the worst possible choices (if not the worst) you can make. Don’t do it! But if you did, don’t say I didn’t warn you when two nice looking individuals in suits knock on your door and tell you that you have the right to remain silent.
That’s a wrap on our Bozo Tax Tips for 2025! Please, please don’t do these. Instead, be smart and remember (1) if it sounds to good to be true it probably is and (2) it’s almost always a whole lot easier to just pay your taxes correctly.
The goal of must businesses is to make money. There aren’t many businesses that can lose on each sale and make it up in volume. In fact, I don’t know of any. But I digress….
So let’s take Sam and Edna, two successful individuals who love horses. They decide to start raising horses. They remember their accountant telling them that if they had a business that loses money they can take the loss and offset some of their income. That’s true. They don’t remember their accountant telling them that the business does need to be structured to make money eventually.
Hobby losses are not allowed. Under the Tax Cuts and Jobs Act, the income from a hobby is taxable, but the expenses (up to the amount of income) are also not deductible! The IRS has a webpage noting the major factors used in determining whether or not your business is really a business or is a hobby:
To help simplify things, the IRS has established factors taxpayers must consider when determining whether their activity is a business or hobby.
The taxpayer carries out activity in a businesslike manner and maintains complete and accurate books and records.
The taxpayer puts time and effort into the activity to show they intend to make it profitable.
The taxpayer depends on income from the activity for their livelihood.
The taxpayer has personal motives for carrying out the activity such as general enjoyment or relaxation.
The taxpayer has enough income from other sources to fund the activity
Losses are due to circumstances beyond the taxpayer’s control or are normal for the startup phase of their type of business.
There is a change to methods of operation to improve profitability.
Taxpayer and their advisor have the knowledge needed to carry out the activity as a successful business.
The taxpayer was successful in making a profit in similar activities in the past.
Activity makes a profit in some years and how much profit it makes.
The taxpayer can expect to make a future profit from the appreciation of the assets used in the activity.
All factors, facts, and circumstances with respect to the activity must be considered. No one factor is more important than another.
If your business loses money year-after-year, and you’re not making any efforts to change it, and you get a lot of personal enjoyment out of the business, beware! Your “business” might be a hobby. Yes, circumstances can cause any business to fail (and the IRS knows this). But when your business is losing money every year and you make no effort to change your business, at least on the surface you’re looking like a hobby. The eternal hobby loss is a good way to head to an IRS audit.
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By far the worst tax schemes in the view of the IRS are offshore (foreign) trusts. In fact, trusts of all sorts—domestic and foreign—are regularly abused.
First, not all trusts are bad. Many trusts serve a legitimate purpose, such as family trusts. (Family trusts are a device to avoid probate, and are used in many states. For tax purposes, these revocable trusts are ignored.) Survivors’ trusts are another useful vehicle.
But trusts set up to avoid income tax are abusive, and very much Bozo-like. Individuals and businesses have spent thousands of dollars trying to avoid taxes (in some cases, mid five-figure amounts)…and many times these tax structures have been challenged successfully by the IRS.
And those are the domestic trusts.
Many foreign trusts are worse. These are usually organized just to avoid taxes and hide money. If you look at Schedule B on your tax return you’ll see that you are supposed to report your foreign trusts (the IRS has a special form for this, Form 3520). They work great until the IRS finds out about them.
Remember: If it sounds too good to be true it probably is.
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Here’s another Bozo Tax Tip that keeps coming around. The problem is, the Bozos don’t change their stripes. In any case, here are some signs your accountant might be a Bozo:
– He’s never met a deduction that doesn’t fit everyone. There’s no reason why a renter can’t take a mortgage interest deduction, right? And everyone’s entitled to $20,000 of employee business expenses…even if their salary is just $40,000 a year. Ask the proprietors of Western Tax Service about that.
– He believes that the income tax is voluntary. After all, we live in a democracy, so we don’t have to pay taxes, right?
– Besides preparing tax returns, he sells courses on why the Income Tax is Unconstitutional or how by filing the magical $2295 papers he sells you will be able to avoid the income tax.
– He wants you to sign over that tax refund to him. After all, he’ll make sure you get your share of it after he takes out his 50% of the refund.
– He believes every return needs at least three dependents, no matter whether you have any children or not.
— He refuses to sign the tax return (it’s listed as self-prepared). That’s a “ghost” return, and that’s not allowed (for tax professionals).
If your tax professional exhibits any of these symptoms, please do yourself a favor and find a different tax professional
Today is April 7th. The tax deadline is just eight days away.
What happens if you wake up and it’s April 15, 2025, and you can’t file your tax? File an extension. Download Form 4868, make an estimate of what you owe, pay that, and mail the voucher and check to the address noted for your state. Use certified mail, return receipt, of course. And don’t forget your state income tax. Some states have automatic extensions (California does), some don’t, while others have deadlines that don’t match the federal tax deadline (Hawaii state taxes are due on April 20th, for example). Automatic extensions are of time to file, not pay, so download the extension form and mail off a payment to your state, too. If you mail your extension, make sure you mail it certified mail, return receipt requested. (You can do that from most Automated Postal Centers, too.)
By the way, I strongly suggest you electronically file the extension. The IRS will happily take your extension electronically; many (but not all) states will, too. If you make an extension payment on IRS Direct Pay, the IRS will automatically file an extension for you.
But what do you do if you wait until April 16th? Well, get your paperwork together so you can file as quickly as possible and avoid even more penalties. Penalties escalate, so unless you want 25% penalties, get everything ready and see your tax professional next week. He’ll have time for you, and you can leisurely complete your return and only pay one week of interest, one month of the Failure to Pay penalty (0.5% of the tax due), and one month of the Failure to File Penalty (5% of the tax due).
There is a silver lining in all of this. If you are owed a refund and haven’t filed, you will likely receive interest from the IRS. Yes, interest works both ways: The IRS must pay interest on late-filed returns owed refunds. Just one note about that: The interest is taxable.
NOTE: If you reside in a federally declared disaster zone, you have an automatic extension of time to file and pay.
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Why in the world would anyone of sound mind and body declare more income than they actually earned? He or she would owe more tax, so there’s no reason to do this, right?
No, there are actually two reasons people do this. They’re both part of the Bozo contingent, and I strongly advise you not to follow their lead, but here goes:
The first (less common) reason is to qualify for a loan (typically a mortgage). Let’s say you found your dream home, but you need to show income of $100,000 a year…but you only earned $90,000. Simple solution: Declare an additional $10,000 of income! Now you qualify, and next year you plan on cheating on your taxes by that $10,000. Of course, the fact that you committed a felony by lying on your loan application doesn’t concern you. And the IRS is unlikely to come after you for the extra income; after all, if you do get audited in some future year you will simply admit the error. Some who practice this simply file an amended return a year or so later. You own the home, you’re making mortgage payments, so no one’s the wiser, right? (We’ll continue to ignore that felony you committed.)
The more common reason is the Earned Income Credit (EIC). This welfare program is part of the Tax Code. Let’s say you earn nothing; you’re not eligible for it. But if you have some income (but not huge income), you’re eligible for “free money.” (And we’ll throw in a phony child or two or nineteen so you can get the Child Tax Credit and, voila, you have even more “free money.”) Of course it’s not free—it comes out of our tax dollars. And you’re committing a crime (lying on your tax return). However, given how the Tax Code works and the monetary reasons for individuals to seek the Earned Income Credit, the Bozo contingent looks at it as “free money.”
(That’s the reason Congress requires tax professionals to conduct a mandatory interview for people who are claiming this credit. There are penalties on tax professionals who evade this requirement. Of course, if you’re running an Earned Income Credit fraud program, you’re probably more than willing to lie on the tax professional’s mandatory questionnaire.)
A tax return is supposed to show the exact amount of income you made: no more, no less. If you get caught adding income that didn’t exist to your return for one of the two reasons I’ve highlighted you’ve committed at least one crime. I’d like Congress to end Tax Code welfare (end the Earned Income Credit) but that’s not going to happen. But if you get caught adding phony income (especially if you’re a tax professional running an EIC fraud mill) you can be sent to a very real prison.
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