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IRS Lays Out New and Proposed Rules on Gambling Winnings

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Jan 18th 2017
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The IRS has won a standing ovation from the thoroughbred racing and gaming industries for its recently proposed rules for the withholding and reporting of parimutuel winnings, as well as a final rule for reporting on winnings from bingo, slot machines, and keno.

The National Thoroughbred Racing Association (NTRA) and the American Gaming Association – the latter with an assist from 17 legislators representing 11 states – respectively hailed the proposed and final rules as actions that will keep more winnings in gamblers’ wallets – and inspire them to bet more, of course.

Proposed Parimutuel Regulations
The proposal, “Withholding on Payments of Certain Gambling Winnings,” seeks to amend the employment tax regulations under Section 3402(q) of the Internal Revenue Code that concern withholdings from gambling winnings for horse races, dog races, and jai alai.

Section 3402(q)(1) mandates any person or entity that wins at gambling to withhold taxes at the third-lowest tax rate applicable. For 2016, that’s 25 percent, the proposal states.

The last time Section 3402(q) was amended was in 1983. Since then, a growing number of bets placed at horse races, dog races, and jai alai have involved exotic bets, like trifectas. These bets provide greater odds and bigger payoffs, the proposal states. That has resulted in withholdings that far exceed what’s necessary to cover a gambler’s ultimate income tax liability “and creates an unnecessary burden on the bettor and the horse racing, dog racing, and jai alai industries,” the proposal states.

So, the proposal amends Section 31.3402(q)-1(c)(ii) by allowing “all wagers placed in a single parimutuel pool and represented on a single ticket to be aggregated and treated as a single wager for purposes of determining the amount of the wager. The proposed rule allows a payer to take into account the total amount wagered in a particular pool as reflected on a single ticket to determine whether the winnings are subject to withholding and reporting.”

Comments on the proposal are due by March 30.

“It is believed that the proposed changes will result in tens of millions of dollars in additional parimutuel wagering annually,” the NTRA said in a prepared statement. “If adopted, the new regulations will not only promote greater compliance and more accurate reporting and withholding by taxpayers, but also reduce burdensome and needless paperwork system-wide.”

Final Rule for Bingo, Slot Machine, and Keno Winnings
The final rule, “Information Returns; Winnings from Bingo, Keno, and Slot Machines,” updates the existing requirements under Code Section 6041 regarding the filing, form, and content of such information returns; allows for an additional form of payee identification; and provides an optional aggregate reporting method.

The gaming industry succeeded in at least retaining current winnings thresholds after the IRS had considered lowering them. The final regulations affect people who pay winnings of $1,200 or more from bingo and slot machine play, and $1,500 or more from keno, as well as the recipients of those payments.

Key takeaways of the final rule include the following:

  • An earlier proposal for electronic player systems for tax reporting was dropped after complaints that it would affect customer relations.
  • The aggregate reporting method rules in Section 1.6041-10(g) of the final regulations have been modified so that the period during which reporting may be aggregated is referred to as the “information reporting period” rather than as a “session.”
  • Under Section 1.6041-10(b)(2) of the final regulations, an “information reporting period” is either a “calendar day” or a “gaming day” as long as that period is applied uniformly by the payor to all payees during the calendar year, the rule states. A payor may adopt a different information reporting period from one calendar year to the next, but may not change the information reporting period in the middle of a calendar year. Changes to a payor’s information reporting period from one calendar year to the next must be implemented on Jan. 1.
  • Section 1.6041-10(b)(1)(i) of the final rule provides that reportable gambling winnings for bingo and slot machine play are not determined by netting the wager against the winnings, but reportable gambling winnings for keno are determined by netting the wager in that one game against the winnings from that game.
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