IRS Statement Clarifies Tournament Reporting Requirements
While a number of other poker news sources reported that big changes were afoot relative to withholding taxes on tournament winnings of $5,000 and above, a recent IRS press release mostly just clarifies the withholding requirements already in place.
Players with proper identification and a tax payer code (a social security number for US players) will not have any of their tournament winnings withheld. Players will receive W2-G forms from the hosting casino and must report their winnings on their subsequent tax return. If the tournament fails to provide the required tax documentation, players must still report their winnings. If a player fails to provide proper identification when cashing out, the casino is required to deduct federal taxes at a rate of 28%. This deduction is applied to the player's income taxes and can be refunded to the player based on the status of their earnings and tax burden in their subsequent tax return. For players, this is pretty much what it has always been or at least should have been.
The parties perhaps most affected by the IRS's clarified rules will be tournament sponsors. In the past, there has been a wide interpretation by hosting casinos about what tournament distributions they had report to the IRS and when they had to issue W-2Gs.
According to the IRS press release, "tournaments completed during 2007 and before March 4, 2008, casinos and other sponsors of poker tournaments will not be required to report the winnings to the IRS or withhold tax on the winnings. But beginning March 4, 2008, the IRS will require all tournament sponsors to report tournament winnings of more than $5,000, usually on an IRS Form W-2G." The biggest change will be how the IRS enforces their clarified rules. If any tournament sponsor fails to report tournament distributions of $5000 and above and does not withhold taxes from players without a tax payer code, they casinos will be required to cough up the money that should have been withheld at a federal tax rate of 25%.
In many ways the "new" IRS requirements relative to tournament poker are the same as they always were. The real change is assigning a financial burden to those casinos that fail to comply with the reporting and withholding rules. Although the players' tax reporting and withholding rules have not changed, players will start to receive more W-2G forms as casinos will have more of a financial incentive to provide them.