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Imagine receiving a letter from the Wisconsin Department of Revenue (DOR) asserting you owed more than $1 million in individual income taxes for gambling winnings. An unwelcome quagmire a DeWitt client of tax law attorney Douglas Frazer recently faced.

Fortunately for his client, Frazer was able to negotiate a “Petition for Compromise of Taxes for the Inability to Pay,” reducing the individual’s liability to less than two percent of the more than $1 million the department said was owed. According to Frazer, while the petition process may take a long time to resolve there are factors that can weigh in one’s favor and the attempt could be worth the “gamble.”

Individuals who are retired or have reduced income, who are involved in divorce or are facing bankruptcy may have more promising outcomes with their petition depending on the circumstances. A significant consideration that affected the outcome in this matter was that the client stopped gambling. That fact, added to the fact that the client was retired and had limited income all weighed in the client’s favor with the DOR.

But how did the client end up with such a huge tax liability to begin with? The client had failed to keep meticulous and contemporaneous “session” records and for this reason was unable to demonstrate that the losses exceeded the winnings.

Wisconsin uses the "gambling session" method of determining gains and losses for tax reporting purposes.  In Wisconsin, a "gambling session is a period of continual play with only a short break in play (restroom break, beverage break, table/machine change, game change, etc.),” as outlined in the DOR’s Gambling Fact Sheet 1104. For example, if one walked into a casino with $500 and after playing slots for several hours walked out with $700 that would be a “win” of $200 for that session. Conversely, if they walked out with $300 that would be considered a “loss” of $200. The “catch” is that the taxpayer must document the activity for each session. Absent such documentation, the department will not allow a taxpayer to net losses against winnings. The department will treat each payout as subject to tax.

Federal law requires casinos to issue a Form W-2G “Certain Gambling Winnings” that reports winnings of $1,200 or more from bingo and slot machines. It does not require the casino to withhold taxes. The client had accumulated many W-2G’s but failed to keep sessions records that would show the offset of losses against winnings.

Many casinos make available win/loss statements for players who track their playing using casino Players Club cards. Those records help—but are not a substitute for the detailed session records each player must maintain.

According to Global Industry Analysts, Inc. the U.S. gambling market in 2021 was estimated at $262.4 billion. Wisconsin receives tens of millions in tax revenue each year directly related to gambling, and it is not shy about pursuing those it feels have not paid taxes on their winnings. It is important to “play it smart” and maintain detailed and accurate session records to prove your wins and, more importantly, your losses.

Additional information about what is needed to pursue a Petition for Compromise of Taxes for the Inability to Pay can be found by reviewing the Wisconsin Department of Revenue’s Petition for Compromise brochure. If you have immediate tax needs, please contact attorney Douglas Frazer at 262-754-2850.