1099 MISC Social Casino - Can TurboTax Please Provide a Definitive Answer Once and For All?

[HelpMeLawd]

I have received at least 5 different answers from your staff, and I never know which is right.  Here is where I think the issues lies and what creates confusion:

Taxpayer A who itemizes taxes plays at a social casino; although he has total redemptions of $20,000, he spent $24,000 to purchase the currency needed to gamble online.  The social casino sends a 1099 MISC (which is diabolical to begin with - if you had to spend cash to get cash equivalent credits to play with, it's gambling, not "prizes") for the amount of $20,000 - this doesn't account for net earnings, just gross winnings.

Taxpayer A files this amount as part of their taxes using the "amount not received on a W2G" method.  Subsequently, TurboTax adds this amount to Form 1040, Schedule 1, Line 8b.  When Taxpayer A adds their losses to their total gambling losses within TurboTax, TurboTax adds this amount to their itemized deduction on Form 1040, Schedule A, Line 16.  All is well, right?  That is not clear.  

If Taxpayer A enters this same 1099 MISC onto the 1099 entry page within TurboTax, there is no option to deduct these losses.  TurboTax adds this income to Form 1040, Schedule 1, Line 8i "Prizes and Awards", even though this amount is neither prizes or awards.  If you scan through TurboTax replies on these forums and others, or if you chat with TurboTax, about 70% of people will tell you that this would not be the proper way to do it.  

Taxpayer A determines that the first option is fundamentally right, they have documentation to justify that money was risked and required to play on the social casino (i.e. gambling), they were net losers which enables the ability to deduct the full amount of losses (up to a maximum amount of their wins) if they itemize taxes, and file their taxes through TurboTax.  

Now comes the ultimate twist - Taxpayer A is fearful that filing with the first option poses a risk - they have accounted for the income on the 1099 MISC, but because they entered it as gambling, will the IRS know that part of the gambling total links directly to this 1099 - they didn't enter the Tax ID number from 1099 MISC because they entered the amount as "gambling winnings not on a w2g".  But wait, does TurboTax even report the tax ID numbers when they electronically file your taxes?  If Taxpayer A was filing by paper, they would NOT be required to provide a copy of a 1099 MISC, right?!  How would the IRS even know the tax ID numbers to correlate the numbers in that case?  Does the IRS correlate just the total amounts reported on all W2s, W2Gs, and 1099s to make sure you've reported everything?  If so, then Taxpayer A met that burden by reporting the income as gambling winnings, right??!  

[Opus 17]

I'm not sure you're going to get an answer at the level you want.  You need someone to inspect the raw XML file that gets transmitted to the IRS, or read the instructions for tax software providers for the modified e-file system at the IRS web site. 

https://www.irs.gov/e-file-providers/modernized-e-file-mef-user-guides-and-publications

While I don't know if the EIN is reported with the 1099, I suspect it is.  So the computer is going to see a 1099 in their system that does not have a matching entry on your tax return.  But the computer will also see an entry on a different line in the exact same dollar amount.  I have no idea how good the computer is at spotting this kind of situation, this can't be the only time that something is reported on the wrong line of the return.  It may be that if the gross income adds up right, it ignores line swaps.  What you really want to know is how clever is the IRS computer, and you probably won't get an answer on that unless you teach yourself COBOL (a dead computer language from the 1960s) and get hired as a programmer. 

As a practical matter, if taxpayer A did get a letter (automated) suggesting that they failed to report a 1099-MISC, they could reply by similar letter that the income was gambling, was reported as winnings, and an appropriate itemized deduction was taken.  Taxpayer A might send a letter, fax or email to the casino asking them to cancel the 1099 and issue a W-2G.  They would probably refuse (if they replied at all), but A could include that documentation with their letter as proof they tried to do the right thing.  The IRS is ultimately going to see the gambling winnings and losses properly reported, even if the computer sends an automated letter at first.  

[HelpMeLawd]

Thanks for your input.  This is an unnecessary mess.  This should be clear.  

[HelpMeLawd]

@turbotax are you going to chime in?

[Opus 17]

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@HelpMeLawd wrote:

@turbotax are you going to chime in?

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The payer should be using a W-2G.  That's where the mess is coming from.  What you are asking is (if I may reframe the question), "How will turbotax protect me if the IRS asks questions because the casino used the wrong form?"  You're putting the emphasis on the wrong party. 

[HelpMeLawd]

I agree that the shady casino used the wrong form.  At this point, all someone can do is contact their tax filer or representative and ask for support.  However, TurboTax has muddied the water by giving such a wide spread of answers.  I’d just like to see it clarified and narrowed down.  

[HelpMeLawd]

TurboTax please reply to my post ASAP.  

[HelpMeLawd]

TurboTax asked me to mark a response as a solution, but they haven’t answered yet!

[DaveF1006]

I would recommend taking this approach so that there is a clean paper trail reported in your return.

1. Enter the 1099-MISC exactly as received so the EIN and the $20,000 match the IRS records for "Prizes."
2. Now go to wages and income>less-common income>miscellaneous income>other reportable income
3. One you get to the description screen, you will describe this as "Reclassified to Gambling Winnings for Schedule A."
4. enter the amount of your losses as a negative number. (eg -20000)
5. Now go less common income>prizes, awards, and gambling winnings
6. Here you can enter your gambling winnings and record your losses. The winnings will now appear on line 8b in Schedule 1 and your losses will appear on line 16 on Schedule A.

Now to address your questions.

1. The answer to your first question is yes. it goes on Line 16 in Schedule A.
2. Yes, if you file by mail, you would not need to include a Tax ID number
3. As far as IRS correlating the numbers, maybe but we may be overthinking this.

In reality, you should have been issued a W2G but wasn't. The casino is not going to recant and send you a corrected W2G so this is the only avenue you can take to report this as gambling winnings and deduct your gambling losses. I can't say for sure if you will be examined for this but be sure to keep all your documentation for your gambling winnings and your losses in case if the IRS has questions.

@HelpMeLawd