The IRS trusts tournament poker winners to pay income taxes on their winnings as much as it trusts other gamblers. That is, it doesn't trust them at all.
In a recently issued Revenue Procedure, the IRS is requiring tournament operators to withhold 25% of poker winnings if the proceeds are more than $5,000 over the entrance fee. Information reporting to the IRS about such payments are also required. Rev. Proc. 2007-57, 2007-36 IRB 547.
Gamblers shouldn't feel slighted –Congress really doesn't trust the average U.S. wage earner either, per its continued retention of the wage withholding system. However, some believe that the wage withholding system is not based on a lack of trust but on a belief that the U.S. taxpayer will be more accepting of higher income tax rates if their employers pay the taxes( instead of the wage earner writing a check out of his or her own bank account).
This has not been a good tax year for tournament poker players. Earlier this year, the Tax Court held that tournament poker is a wagering activity, losses from which are subject to the limits of deduction under Code Section 165(g). Under Section 165(g), such losses can only be used to offset winnings – losses in excess of winnings are disallowed. Tschetschot, TC Memo 2007-38.
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