Obviously dealing with the IRS can be an extremely scary and confusing ordeal until you're familiar with the process.
After playing catch-up for the early years of my career, being audited, beating the audit and having the IRS owe me money, and finally being on top of my tax situation, I feel that I've gained a good amount of perspective on how to handle it all. A lot of pros who know I've beaten an audit ask me for tax advice, so I figured I'd just make a blog about it and put what I've learned out there for everyone's benefit (and so that I can stop wasting time repeating myself).
I don't think I need to tell you that you should be keeping good records of your play so that you'll have a clear picture of your wins and losses at the end of the year. You can backtrack and figure out how much you've won through online audits, live tournament receipts/payout slips, and your backers' records, but it's always best to try to keep tabs on this info throughout the year. The purpose of this blog is to help you with the other ins and outs of filing as a pro.
FILING AN EXTENSION
The first piece of advice I have, since it's less than a week before the April 17th deadline as I post this and a bunch of poker players are reading this, is that you can file an IRS Form 4868 extension form and have six months to get your paperwork -- and your paper -- together for Uncle Sam. There are no serious penalties for filing late as long as you send in your estimated tax liability (ballpark of what you think you'll owe for the year) and have filed the extension. You only pay a minimal amount of interest from the filing deadline until the time you actually send in your return and the late payment penalty (0.5% of the tax due per month late). 2012 marks the first year that I'm actually filing on time, as a matter of fact. Don’t forget to file an extension for your state tax, too, if that applies to you.
Make sure you get email confirmation of your flights, hotels, car rentals, and other travel expenses whenever you possibly can. Keep them in a separate folder in your emails. You'll be EXTREMELY glad you did come tax time. You should also try to always use the same debit/credit card for your travel expenses. That way you can use your statements as a back-up to your receipts, and to remind you of purchases you may have forgotten to get email confirmation of/put in the folder.
You should also have a designated place that you keep cash receipts when you're on the road, then put them in a folder for tax time whenever you're home. If you have an iPhone there's an app that automatically crops receipts after you take a picture of them, then saves them in your phone so you don't have to worry about misplacing cash receipts and losing deductions. Yup, there's an app for that. Or you can scan them all…but make sure you back up your hard drive or keep the folder as backup.
Save yourself a lot of time and effort trying to keep track of every receipt for every meal and entertainment expense while you travel the tour. The government allows you to write off a specified flat-rate daily amount for meals and entertainment when you're on the road. These "per diem" amounts vary by city, but are generally pretty high/fair in my opinion. You'd probably have to spend pretty lavishly on meals and business-related entertainment on the road, remember to save all of your receipts, AND tally them up at tax time to get more deductions than you would just going by the per diem rate.
You can't write off meals or entertainment in the city you live, so you obviously can't get per diems there, either (which sucks when you live in Vegas). However, when you spend half the year on the road, these really add up. Keep a record (iPhone note, email, whatever) of what dates you spend in what cities so that you can get credit from your per diems. But even if you don't, it's pretty easy to backtrack and figure it out based on your flights and tournament/cash game records.
Keep a written mileage log for any driving you do traveling to/from casinos, home games, business-related entertainment trips, etc. You get a standard per-mile deduction for all business miles as long as you keep a log to differentiate your business miles from your personal ones. Note that to take mileage the log must be written (ink), not an app.
HOME OFFICE DEDUCTIONS
If you play online poker from home or have an area that you primarily use for poker games, a corresponding portion of your rent/mortgage payment can be written off. You can write off a portion of your internet bill based on how much of your internet usage is business-related. Even a portion of your other utilities is tax-deductible. You do need a physically separate area to take the home office deduction (typically, a separate room).
LIVE CASH GAME WINS/LOSSES
Obviously you need to keep track of all of your online and live tournament wins/losses, but those have a paper trail or online reports that can be generated to help you proves those wins/losses, unlike live cash games. However, as long as you keep a written ledger of your cash game wins and losses, the IRS will accept this as proof. Note the date, time, game, table number, and win/loss amount in your cash game ledger.
Staking or being staked doesn't make your tax preparation nearly as complicated as you think it may. All you need to do is keep good records (or make sure your backers do, at least), and issue IRS-1099 MISC forms when necessary to show proof of payouts to backers. THESE NEED TO BE FILED WELL BEFORE THE APRIL DEADLINE, EVEN IF YOU'RE FILING YOUR TAXES LATE, SO THAT THE BACKER/INVESTOR CAN REFLECT THESE 1099's ON THEIR TAX RETURN UNDER "OTHER INCOME."
Don't immedately look for the nearest object to bludgeon yourself to death with if you get that big dreaded envelope that informs you that you're being audited; everything will be fine. I still have scars from the rock I used. Anyway, the IRS is not nearly as evil and brutal as they're often made out to be. As long as you keep at least decent records and can show how you arrived at the number you paid to the IRS, you probably won't owe any additional money to the IRS unless you made a mistake or deducted something that isn't deductible.
One thing that also made me feel a lot better when I was being audited was that I didn't need to be present when they were reviewing my case. Your accountant can go to the IRS's office and represent you in the audit by himself.
In my case, the IRS audited me for a few reasons. First, they thought that they ~20k business miles I claimed for one year was absurd. I agree that it was absurd, but it was in no way illegitimate! I drove to almost every stop I played early in my career. I was living in NJ and would drive to Niagara Falls, Foxwoods, Tunica, etc. I even drove to the WSOP and back that year, putting about 6k of those miles on my car by itself.
Second, they didn't believe the extremely high amount I claimed for travel expenses (hotel + airfare) the following year when I stopped driving so much. Once again, albeit a tad ridiculous, I really had spent the ~$25k I claimed on travel...and I had an email folder full of hotel and airline receipts to prove it, even though the audit wasn't until 3 years after the fact..
The final point that apparently triggered my audit was six figures worth of W-2's from cashes in live tournaments that they thought hadn't been accounted for when my return was filed. They had been, though, and all my accountant had to do was show them that they were included in the win/loss numbers that had been broken down by state for them already.
In the end, the IRS determined that THEY OWED ME just over $1,800 for the two years ('08 and '09). Even after paying my accountant for the audit, I made out with a nice little profit for my troubles. Needless to say, this was a pretty exciting victory for my accountant and I.
CHOOSING AN ACCOUNTANT
A lot of accountants will tell you that they can handle your taxes even though they're not a specialist in gambling. IGNORE THEM because they just want another client and may not know about some of the differences between filing as a *normal* person and filing as a professional gambler. Find out if they have other clients who are professional poker players, and if you're staked you may also want to ask if they're prepared tax returns for other professionals who are staked before.
I couldn't recommend my accountant, Russ Fox, more highly. He's extremely knowledgeable about filing as a poker player (including staked) and even plays poker himself. He's even written columns for Poker Player magazine. His rates are VERY fair despite the complexity of filing my taxes, which often include winnings from several states and countries as well as online poker.
He never seems to have to look anything up when I ask him questions over the phone. He just rattles off a details answer to complex questions off the top of his head. He recently moved to Las Vegas, but it doesn't really matter if you live in Vegas or not. I didn't actually meet Russ until long after my audit because he does a great job of staying on top of things by email.
You can contact Russ at firstname.lastname@example.org. Please mention that you were referred by me, so that maybe one year I can squeeze him for a free return. 😉
Hope this helps you all out.