There is money to be made in poker tournaments – tax money. Apparently, someone at the Internal Revenue Service has figured out that a lot of people in America are playing poker. And – this will come as a shock – some are not paying taxes on their winnings.
So, the IRS has changed the law.
Internal Revenue Bulletin 2007-36, issued September 4, 2007, tells everyone who sponsors a poker tournament that they have to file reports on big winners with the IRS. And they have to withhold part of the prize money and send it on to Washington D.C.
The IRS makes it clear this includes casinos, card clubs and any other “business taxpayer” who sponsors a poker tournament that charges an entry fee and a buy-in. This probably even covers charities that run poker tournaments.
The IRS is limiting the new rule to anyone who has “proceeds” of more than $5,000. Proceeds means amount won, after subtracting entry fees. So, if a tournament costs $1 to enter, a prize of $5,000 is not enough. That would result in proceeds of only $4,999. In fact, a prize of $5,001 is still not enough, since the proceeds have to be more than $5,000.
But once the proceeds are large enough, watch out. The IRS now requires that winners fill out a form, under penalty of perjury. This will usually be a Form W-2G, “Certain Gambling Winnings.” The cardroom is required to not only put down information about how much was won, but also to get two forms of identification from the lucky winner and forward that information to the IRS. And a copy goes to the state taxing authority.
Rarer is Form 5754, “Statement by Person(s) Receiving Gambling Winnings.” This is designed for partnerships, more common when buying lottery tickets than entering poker tournaments. Still, any time someone buys a piece of a player and that investor’s proceeds are more than $5,000, a Form 5754 goes to the IRS.
But filing the form is minor, compared to the new horror of income tax withholding. The cardroom is required to take 25% off the top before paying all winners of more than $5,000. So winners of typical medium sized tournaments will now receive only 75% of what they won.
Besides the headaches for cardrooms, players, bookkeepers and everyone involved, what other impact will this new rule have? Think of satellites: A player pays $1,000 and an entry fee to enter a 10-person-game, where there will be one winner of a $10,000 seat in the WSOP. Now, the winner cannot receive a $10,000 seat, because 25% has to be immediately withheld.
And think of the impact on the multiple tournaments that take place in large cardrooms. A $100 buy-in that should give the winner, say $6,000, now gives that player much less than $5,000. The player does not have $6,000 to enter other games. More than $1,000 has been taken out of circulation.
The most bizarre part of all this is that the IRS is wrong. It declared that a statute covering “sweepstakes, wagering pools and lotteries.” includes poker tournaments. Even if a “wagering pool” should include tournaments, why only poker? More importantly, the term “wagering pool” is found in other parts of the tax code, and clearly means what we all know it means: pool selling on races. The U.S. Supreme Court once said, in passing, that the excise tax on wagering pools is suspect, because it so clearly does not cover other forms of gambling, specifically poker.
But, unless someone wants to spend a lot of money fighting the IRS, cardrooms have no choice but to start harassing their big poker tournament winners.
© Copyright 2007. Professor I Nelson Rose is recognized as one of the world’s leading experts on gambling law. His latest books, Gaming Law: Cases and Materials and Internet Gaming Law, are available through his website, www.GamblingAndTheLaw.com.