As Legal Sports Gambling Grows, So Does Growth in W-2G Reporting

Jesse Rooney
March 15, 2019

With the NCAA basketball tournament approaching, the US is gearing up for its biggest gambling weeks of the year. And while most “March Madness” pools might technically be illegal, legitimate sports betting is sweeping the US following last year’s landmark Supreme Court decision allowing states to legalize sports gambling in casinos.  

As legal sports gambling grows, so does the need for casinos and other gambling-sanctioning organizations to make sure they’re compliant with IRS reporting regulations for gambling winnings and losses. Plus, developments in the evolution of gambling continue–and not all of them will necessarily lead to more wagering.

Sports gambling in new states

Before the Supreme Court decision, the only state with legal sports gambling was Nevada. Since the decision, many state legislatures have introduced bills to legalize sports betting. In nine additional states, those bills have passed. New states with legal sports gambling include: Delaware, Mississippi, Montana, New Jersey, New Mexico, Oregon, Pennsylvania, Rhode Island and West Virginia.

Effectively, casinos located in those states can now offer sports-betting services to gamblers who physically visit casino locations. (The fate of online sports gambling is far less certain at this point.) That means potentially millions more gamblers can place legal bets on sports than prior to the Supreme Court decision, when all legal bets took place only in Nevada.

The potential revenue for casinos is massive, and the tax information reporting burden for casinos is likely to be large as well. The form used for gambling winnings and losses is the W-2G. The IRS requires casinos to report W-2Gs for gambling transactions, and individual states often do as well.

Complications with sports-betting withholding

The threshold for reporting winnings on form W-2G for sports betting is actually fairly high: The winnings must total at least $600 or more and be at least 300 times the amount of the wager. Much of the reporting complexity involved lies within the withholding requirements for sports winnings. The federal threshold for withholding 24 percent of winnings from sports bets different from the W-2G threshold. The IRS withholds 24 percent if a transaction totals more than $5000 and is at least 300 times the amount wagered. States can also withhold at different rates.

Managing different thresholds both at the federal level and in state jurisdictions will be a lot for casinos to handle as form numbers jump with legalized betting in more states. The real challenge, though, for casinos will be ensuring that they have gamblers’ correct information for reporting purposes. This is where casinos could run into some real trouble with surprised and disgruntled customers.

Failure by a gambling winner to submit a correct tax identification number (TIN) to a casino triggers an additional 24 percent federal withholding on winnings. Yes, that’s 24 percent on top of the 24 percent withheld for the $5000/300 times threshold. (States can impose further withholding.) Some gamblers could be very surprised to find almost half their winnings withheld by the IRS. Casinos absolutely need to ensure that they have correct name-TIN combinations for gamblers, something they can achieve with real-time name-TIN matching. And, of course, they need to ensure compliance with IRS reporting requirements in order to avoid financial penalties.

Uncertain future for online sports gambling

Of course, all of those regulations apply to gamblers who physically visit casinos as opposed to betting online. In fact, the future, and arguably the present, of online gambling on sports is very much up in the air.

A Department of Justice memo from November made public in January that may threaten all online gambling. The memo essentially says that the DOJ considers interstate gambling of all types to fall under the Wire Act and thus be illegal. This is a reversal from the prior DOJ understanding that the Wire Act only made interstate sports gaming illegal. Effectively, this interpretation would close down online gambling.  

In the wake of the Supreme Court decision on sports gambling, the DOJ cannot prevent intrastate gambling. However, a broad interpretation of the DOJ memo leaves open that intermediate transactions that cross state lines could still be illegal, for example, when a New Jersey bettor places an online bet with a New Jersey bookmaker but that transacts through a Maryland bank or the bookmaker’s servers are hosted in Colorado.

The rules laid out in the memo will not be enforced before June 14, and legal challenges to the memo are already in process. In the wake of the Supreme Court’s decision, the DOJ’s decision to reinterpret the Wire Act makes for a very uncertain future on online gambling, including online sports betting.

March Madness as a reminder

So, recent developments in sports betting won’t all necessarily lead to more gambling. And illegal sports gambling is likely to come under greater scrutiny in states where sports betting is legal. For instance, a bill before the New Jersey legislature seeks to increase penalties for unlawful bets, including unlawful sports bets on events such as high school and college games.  

However, the run-up to March Madness is a reminder that casinos and other organizations that pay winnings to gamblers need to have strategies for staying in compliance with state and IRS W-2G reporting regulations. Reporting on sports betting is only going to pick up in volume and likely become more complex.

 

Take Action

Sovos has been helping organizations stay compliant with tax information reporting for more than three decades. Contact Sovos to find out how to stay compliant in the new world of sports betting.

Sign up for Email Updates

Stay up to date with the latest tax and compliance updates that may impact your business.

Author

Jesse Rooney

Jesse Rooney is a Tax Counsel at Sovos, focusing his research on AEOI, ACA and non-wage withholding reporting. He received his B.A. from Framingham State University and his J.D. from the University of Massachusetts School of Law. He is licensed to practice in Massachusetts.
Share This Post

Tax Information Reporting United States
May 14, 2019
How to Prepare for 1099 Reporting Changes to Come in the Gig Economy

There has been a lot of attention paid to “gig” economy workers lately, and that includes some scrutiny by state and federal tax authorities. The growing impact to tax revenue as a result of under-reporting of income and minimal payments of self-employment taxes from this ‘new’ sector of American workers has not gone unnoticed. Academic […]

EMEA IPT
May 9, 2019
The Cost of Getting it Wrong – The Benefits of Getting it Right

Premium taxes shouldn’t be overlooked as pressure mounts for insurers to protect profit margins. The UK insurance market in recent years has achieved on average a combined ratio of 95%, meaning that for every £100 of premium income written, the insurer makes an underwriting profit of £5. If you then consider that the standard rate […]

Tax Information Reporting United States
May 6, 2019
Best Practices for Coping with the IRS Crackdown on 1099 Backup Withholding

Background Generally, under Internal Revenue Code 3406(a)(1)(A), when a payer of US source income fails to collect a US tax identification number (TIN) in the manner required for the type of payment being made, 24 percent backup withholding is applicable at time of payment. Filers are required to remit those amounts to the IRS and […]

E-Invoicing Compliance EMEA LATAM Sales & Use Tax United States VAT & Fiscal Reporting
May 6, 2019
Shielding SAP Central Finance Migrations from Tax Compliance Mandates

With more companies focusing on global integration, cross-border supply chains and expanding ecommerce, governments across the globe are introducing new ways to enforce tax rules and close their tax gaps. The evolving global regulatory environment produces unique tax determination and reporting challenges in the United States and additional VAT and e-invoicing compliance challenges around the […]

EMEA IPT
May 2, 2019
Italian Prepayments Can Be Painful

Some insurance premium tax regimes operate a kind of prepayment mechanism, whereby insurers are required to pay an amount to the tax authorities in anticipation of future tax liabilities.  This credit is then drawn down on or adjusted as and when actual tax liabilities crystallise.  Prepayment should not, therefore, represent an additional cost to insurance […]