IRS Criminal Investigation Warns Illegal Gambling Isn’t A Safe Bet For Taxpayers
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My fantasy football season is not off to a good start. In week two, I lost by 50 points—to my daughter, who does not watch football. Fortunately, we don't play for cash in our league, we only play for bragging rights.
It is not, however, unusual for adults to gamble, even if it's only occasionally. Approximately 85% of U.S. adults have gambled at least once in their lives, and 60% have gambled in the past year. Making it easy? Some form of legalized gambling is available in 48 states plus the District of Columbia. The two states that do not have legalized gambling are Hawaii and Utah.
From friendly wagers to jackpots, gambling winnings are reportable by individuals for federal income tax purposes. When the numbers are big enough, those winnings are also reported to the IRS on Form W-2G, Certain Gambling Winnings. Form W-2G is issued when gambling winnings other than those from bingo, slot machines, keno, and poker tournaments are $600 or more if the amount is at least 300 times the wager amount. The number jumps to $1,200 or more for bingo or slot machine wins, and $1,500 or more for keno payouts. Form W-2G will also be issued if winnings are subject to withholding, including backup and regular gambling withholding. For 2023, gambling withholding is the same as backup withholding: a flat 24%.
While the IRS keeps a watchful eye out for taxpayers who may underreport their winnings, IRS Criminal Investigation (IRS-CI), the criminal investigative arm of the IRS, has its sights set on slightly different stakes: when the game of chance turns into illegal criminal activity. According to IRS-CI, illegal gambling is often linked to a range of other criminal activity ranging from money laundering to tax evasion.
What makes illegal gambling a particular draw for criminals? Cash. IRS-CI Chief Jim Lee says that any time large amounts of money are moved without a reportable transaction, the potential for criminal activity increases. The U.S. government, he says, depends on transaction reports, including those issued for transactions that enter the country (via a FinCEN 105), are deposited or exchanged at banks or other financial institutions (via FinCEN 104), or are received in the course of a trade or business (via Form 8300).
Transaction and related reports ensure that dollars are properly reported and taxed. Money that is "dirty," meaning that it was from illegal sources, is more difficult to circulate and exchange for "clean" money if it’s been reported. Similarly, it's easier to ensure that funds are reported to tax authorities, if appropriate, when taxpayers are aware that the feds know that the money exists.
Gambling necessarily means that large amounts of cash are moving around. That’s true on all levels from office pools to online betting platforms to casinos. Legitimate gambling establishments typically work to ensure proper reporting because illicit cash can otherwise be a threat to their financial systems.
Illegal gambling establishments are a different ballgame. Illegal gambling tends to be tied to other offenses, like money laundering. In comparison to legal gambling, illegal bookies don't follow the rules. As a cash-intensive business, an illegal bookie may encourage customers to skirt reporting requirements without offering any protections. The illegal bookies may then use the cash they collect to engage in other crimes.
Between 2021 and 2023, CI initiated more than 100 investigations into illegal gambling, totaling more than $178 million. Of these, 89 cases resulted in indictments, with a 96% conviction rate for prosecuted cases. The average prison sentence for adjudicated cases was 23 months.
According to the Department of Justice, Vincent Delgiudice, also known as "Uncle Mick," ran an illegal gambling operation in the greater Chicago area from 2016 to 2019. Delgiudice retained a company in Costa Rica to operate a website, Unclemicksports.com, that gamblers used to place wagers on professional and collegiate sporting events, including Major League Baseball.
Court records indicate that Delgiudice worked with more than 20 agents and sub-agents who recruited and managed more than 1,000 gamblers and shared the profits from the gamblers' losses. He often made bets at casinos to cover potential losses if his customers won, and laundered his gambling profits through cashier's checks and cash investments in businesses.
Delgiudice eventually pleaded guilty to conspiracy and gambling charges. He was sentenced in March 2022 to 18 months in federal prison and ordered to forfeit $3.6 million for money laundering and operating an illegal gambling business.
The money laundering charge isn't surprising to Lee. "At the end of the day," he says, "those bad actors need to get it [cash] into the financial system."
How can taxpayers protect themselves? Lee jokes, "KYB, Know your bookie," making a play on the often recited phrase, "KYC," which stands for know your customer. The idea is the same: identifying the players in a transaction is essential, especially when cash is involved. If you want to take your chances with Lady Luck, legitimate gambling opportunities like casinos and legal betting sites are your safest bet.
If you patronize legitimate gambling sites and locations, you should receive tax forms, as noted above, to assist you with reporting. You’ll also want to keep good records of how much you win and lose—losses may be deductible against your winnings. If you're unsure about your tax obligations or have questions about reporting gambling income, consult your tax professional or visit the official IRS website for guidance. of the tax law does not exempt you from your responsibilities.
I love to travel with my family and spend much of my time explaining to the kids why we can’t move to Europe—this week.
