IRS Issues Final and Proposed Regulations on Treatment of Gambling Winnings

Earlier this week, the IRS issued final regulations and proposed regulations governing the reporting and withholding obligations, respectively, associated with gambling winnings. The regulations are being seen as a win for the gambling industry, who desired the changes made by the final rule and proposed rule.

Final Regulations on Bingo, Slot Machine, and Keno Winnings

The final regulations, issued under Code section 6041, only affect payers and payees of $1,200 or more in bingo and slot machine winnings or $1,500 or more in keno winnings. The final regulations add a new section, Treas. Reg. § 1.6041-10, addressing reporting of such winnings, which requires every payer of “reportable gambling winnings” (a term defined in the new regulations) that is engaged in a trade or business to generally make a separate information return with respect to each such payment.  The payer must report by filing Form W-2G, “Certain Gambling Winnings” with the IRS.  However, payers may choose to report under an aggregate method that allows payers to aggregate multiple payments made within an “information reporting period” (either a calendar day or a gaming day) to the same payee onto a single Form W-2G if certain requirements are satisfied.  If a gaming day is used, such as 6:00 am to 6:00 am, the final information reporting period of the year must end at midnight on December 31.

The final regulations generally track the proposed regulations issued in March 2015, with several changes. For example, the final regulations dropped proposed special reporting rules for electronically tracked slot machine play, a process that typically involves cumulative tracking of a player’s winnings and losses at a particular casino through the use of an electronic card.  Commenters had explained the challenges associated with implementing controls necessary to use the electronic data for tax purposes and had expressed concern with customer responses to the proposed automatic electronic tax reporting.  In addition, the final regulations maintain the threshold for required reporting after the IRS’s request for comments on lowering the threshold in the proposed regulations drew fierce opposition from gamblers and gaming companies alike.  The IRS declined, however, to raise the limits as requested by some commenters.

The final regulations also loosen the requirements related to payee identification. Consistent with the proposed regulations, payees will no longer need to present identification containing their social security number, but may instead provide a completed Form W-9.  The final regulations also permit the use of tribal identification guides issued by federally recognized Indian tribes.  If presented at a casino owned by the tribe that issued the card, it may be accepted even though it lacks a photograph.

The final regulations are effective today.

Proposed Regulations

The IRS also issued proposed regulations under Code section 3402(q) related to winnings from horse races, dog races, and jai alai. Changes to the regulations were requested by commenters who explained that changes in the type of bets made on those events have resulted in scenarios where the amount withheld greatly exceeds the actual tax liability.  In response, the proposed regulations would alter the method of calculating the amount of the wager in the case of parimutuel wagers, a type of bet that differs from the typical straight wager, made on horse races, dog races, and jai alai to produce more accurate withholding.  Under the proposed rules, all wagers placed in a single parimutuel pool and represented on a single ticket are permitted to be aggregated and treated as a single wager. In determining whether the winnings are subject to withholding and reporting, the total amount wagered in a particular pool reflected on a single ticket is considered by the payer.

Comments on the proposed regulations are due by March 30.