Rakeback, taxes, and an argument for the IRS
 

This is not a post for those of you who intend to break the law. Trolls and your stupid comments are not appreciated here.

I have been thinking about rakeback, and I think it is not taxable income. I believe it is arguably a purchase price adjustment, much like a mail-in rebate. A discount on goods and services if reasonable and still within the boundaries of fair market value for that good or service is not taxable income.

I am not a CPA, but I did consult a tax attorney on this point. I suggest to those of you that try to comply that you account separately for your rakeback and exclude it. Even if the IRS audits you and calls it income, the argument is reasonable enough to avert penalties in my opinion.

This does not apply to bonuses, which are pretty clearly income IMO.

Re: Rakeback, taxes, and an argument for the IRS
 

Believe whatever you want, and pay your taxes accordingly.

I consider it income - I pay on everything I take from Neteller to my checking account. Makes it pretty simple for me.

Dogmeat [img]/images/graemlins/spade.gif[/img]

Re: Rakeback, taxes, and an argument for the IRS
 

Rake has already been deducted from your income. Rake back is income.

Re: Rakeback, taxes, and an argument for the IRS
 

If rakeback doesn't count as income, then rake doesn't count as a deduction, and you should pay tax on the full amount you made.

That is to say, if you win $10,000, but pay $6000 in rake, then your account balance only goes up by $4000. Feel free to pay tax on the full $10,000, since you think rake doesn't count.

Re: Rakeback, taxes, and an argument for the IRS
 

I worked for 2nd largest CPA firm in the world.

While I am no longer in the industry and I focused on audit, from an accounting perspective as far as I can tell you really couldn't be more wrong.

Re: Rakeback, taxes, and an argument for the IRS
 

Tilt,

Your understanding is wrong, in the USA, Canada (if you are taxable), and pretty much anywhere in the world where (i) GAAP is employed, and (ii) winnings are taxable.

Any first year accounting student.. pretty much anywhere in the world, can and would tell you the same. It is so obvious, I think it unlikely any auditor with half a brain will let you off easy.

Re: Rakeback, taxes, and an argument for the IRS
 

it is taxable.

it is possible that it is taxable at a greater rate then regular income. i will ask my tax attorney.

Re: Rakeback, taxes, and an argument for the IRS
 

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from an accounting perspective as far as I can tell you really couldn't be more wrong.

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Re: Rakeback, taxes, and an argument for the IRS
 

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I consider it income - I pay on everything I take from Neteller to my checking account. Makes it pretty simple for me.

Dogmeat [img]/images/graemlins/spade.gif[/img]

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Re: Rakeback, taxes, and an argument for the IRS
 

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This is not a post for those of you who intend to break the law. Trolls and your stupid comments are not appreciated here.

I have been thinking about rakeback, and I think it is not taxable income. I believe it is arguably a purchase price adjustment, much like a mail-in rebate. A discount on goods and services if reasonable and still within the boundaries of fair market value for that good or service is not taxable income.

I am not a CPA, but I did consult a tax attorney on this point. I suggest to those of you that try to comply that you account separately for your rakeback and exclude it. Even if the IRS audits you and calls it income, the argument is reasonable enough to avert penalties in my opinion.

This does not apply to bonuses, which are pretty clearly income IMO.

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Rakeback is often called rake rebate. It has all the characteristics of a rebate. I think you have an argument.

That being said, it's still a risk you're taking. If you get audited, you have to convince a single IRS worker that what you're doing isn't illegal. If that fails, you have a supervisor you can appeal to. [Neither of these people is guaranteed to have a basic grasp of the actual tax code.] If that fails, you're f'd and you're going to tax court.

The problem with that is that you'll be forced to spend a fortune defending yourself.

P.S. Anyone saying the OP's treatment is wrong because it doesn't follow GAPP...please never talk about accounting like you know what you're doing. GAPP has absolutely nothing to do with the tax code.

Re: Rakeback, taxes, and an argument for the IRS
 

Good luck with that.

Re: Rakeback, taxes, and an argument for the IRS
 

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I have been thinking about rakeback, and I think it is not taxable income. I believe it is arguably a purchase price adjustment, much like a mail-in rebate. A discount on goods and services if reasonable and still within the boundaries of fair market value for that good or service is not taxable income.

I am not a CPA, but I did consult a tax attorney on this point. I suggest to those of you that try to comply that you account separately for your rakeback and exclude it. Even if the IRS audits you and calls it income, the argument is reasonable enough to avert penalties in my opinion.

This does not apply to bonuses, which are pretty clearly income IMO.

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Rakeback is often called rake rebate. It has all the characteristics of a rebate. I think you have an argument.





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If you consider rakeback a rebate of rake, then it still increases your taxes.

Example: You won $10,000, but your account balance only went up $4000, because you paid $6,000 in rake. Do you want to pay tax on the entire $10,000? No, you want to deduct the rake.

So if you get $1500 in rake back, then you will have to deduct that from the $6000 rake deduction. You made $10000 - ($6000-$1500), or $10000 - $4500, which = $5500.

Or, you can decide the rakeback is income, in which case you made (10,000 + 1500) - 6000, which again = $5500.

You made the same amount either way.

Re: Rakeback, taxes, and an argument for the IRS
 

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Rakeback is often called rake rebate. It has all the characteristics of a rebate. I think you have an argument.


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So if my boss gives me a "Time spent working rebate" instead of a bonus, I don't have to pay tax on it? Word games are fun on the internet, but they are not going to help you in a court of law. Even better I am pretty sure that you are supposed to pay income tax on some rebates/rewards (like credit cards and airline miles) but no one does. Somethings (like car rebates) are explicitly exempted.

People have been trying to do this type of tax avoidance since the law was inacted. All the easy shelters (like this) have long since been closed.

Re: Rakeback, taxes, and an argument for the IRS
 

I tried to twist rakeback in my mind to make it like a volume discount, which is not taxable.

However, for volume discounts (like when Costo buys a zillion bars of soap for less per bar than mom&pop), the discount is a function of how many/much you bought.

For rakeback, it is not typically increased or decreased for volume. Its pretty much a straight-line payment, so I couldnt make it work. But i'm tryin.

Help me.

Re: Rakeback, taxes, and an argument for the IRS
 

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Rakeback is often called rake rebate. It has all the characteristics of a rebate. I think you have an argument.


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So if my boss gives me a "Time spent working rebate" instead of a bonus, I don't have to pay tax on it? Word games are fun on the internet, but they are not going to help you in a court of law. Even better I am pretty sure that you are supposed to pay income tax on some rebates/rewards (like credit cards and airline miles) but no one does. Somethings (like car rebates) are explicitly exempted.

People have been trying to do this type of tax avoidance since the law was inacted. All the easy shelters (like this) have long since been closed.

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I'm not saying that his interpretation is correct. I haven't looked up the relevant sections of the tax code and it sounds like you haven't either. Therefore, neither one of us has any clue if this is a legitimate treatment or not.

There's probably nothing specifically about rake rebates in the code. Therefore, there's probably room to argue that they fall into one of several existing categories. For example, when you get the 5th cup of coffee free, it's not earned income. So, I still think there's probably an argument that could be made.

Re: Rakeback, taxes, and an argument for the IRS
 

I have to say, I think you made a VERY good point. In fact I am going to ask my CPA on that

Re: Rakeback, taxes, and an argument for the IRS
 

Disclaimer: I am a CPA and have had 3 clients audited for online gambling in the last 5 years, two for sports betting and one for poker and sports betting.

The IRS did consider bonuses and rake rebate as a part of income in all 3 situations. Their reasoning is that play is required to qualify for a bonus or rake rebate. The play is a taxable event, therefore any payment received as a result of this play is taxable. The IRS equated bonuses and rakeback to comps, which are taxable and have been upheld as taxable in multiple tax court cases.

A purchase point discount would be a different scenario, but if the underlying event is taxable, then the discount has an effect on taxes. Lets say you buy your poker laptop for $1,000, but receive a $100 rebate. Your depreciable basis for the computer is $900 because the rebate reduced your cost to place the asset in service. If the computer was personal use only, then the $100 rebate has no impact on your taxes whatsoever as the underlying purchase was not taxable.

My thought is that the tax attorney didn't have all of the information in order to make a correct analysis of the situation. I know that people come on here every month and try to argue that rakeback and bonuses are not taxable, but they never have any proof or reason that stands up in their defense. I would be interested in seeing what the tax attorney used as his basis for the decision that rakeback is not taxable. Not trying to be a jerk here, but I need hard evidence to change my opinion, especially since I have dealt with the IRS in 3 circumstances on this matter. The poker player's return included rakeback as income and we would love to amend his return to reduce that income since it was more than 15% of his income for the year.

Re: Rakeback, taxes, and an argument for the IRS
 

This is a bit off topic, but I don't think it is worthy of a whole new thread, since it is about internet poker and taxes.

Does cocaine sales constitute "income?" Internet poker, according to the US federal government, is illegal. The IRS works for the US federal government. Drug dealing is illegal, just like internet poker is. Do convicted drug dealers face income tax evasion charges?

This is one thing that completely boggles my mind. The federal government cannot, on one hand, deem something illegal, and on the other hand, expect people to pay income tax on it, as if it were a legitimate form of income. It seems that logically, it would have to be one or the other.

Re: Rakeback, taxes, and an argument for the IRS
 

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This is a bit off topic, but I don't think it is worthy of a whole new thread, since it is about internet poker and taxes.

Does cocaine sales constitute "income?" Internet poker, according to the US federal government, is illegal. The IRS works for the US federal government. Drug dealing is illegal, just like internet poker is. Do convicted drug dealers face income tax evasion charges?

This is one thing that completely boggles my mind. The federal government cannot, on one hand, deem something illegal, and on the other hand, expect people to pay income tax on it, as if it were a legitimate form of income. It seems that logically, it would have to be one or the other.

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Al Capone is the perfect example of this. He went to jail solely for tax evasion because he didn't pay taxes on his illegal income.

Re: Rakeback, taxes, and an argument for the IRS
 

It seems to me that paying taxes on his illegal income would have gotten him thrown in jail for admitting to doing something illegal.

I haven't played poker online long enough to worry about paying taxes on it yet, but that time is rapidly approaching.

What is keeping the IRS from taking a list of people that claimed some income (or even a loss) from online gambling on their tax returns, and turning it over to the Justice Department for some mass raiding? Is their own laziness the only thing protecting poker players?

Re: Rakeback, taxes, and an argument for the IRS
 

The reason that the IRS doesn't send info to the Justice Department on illegal activities is the conflict that they would have with the Fifth Amendment. I think that there may be an old case about this, but that is a vague memory off of the top of my head. If the IRS gave tax return info to the Justice Dept., you would be able to claim Fifth Amendment rights and not file a tax return. The IRS has their own lawyers to try any cases resulting from tax return related issues in order to avoid any conflict.

Re: Rakeback, taxes, and an argument for the IRS
 

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Rake has already been deducted from your income. Rake back is income.

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I did not say that my proposed position was internally consistent with the spirit of the tax code. There are many instances where the treatment of income is inconsistent. Take the treatment of gambling winnings as income vs. gambling losses as an itemized deduction subject to the phaseout. That makes no sense from a transactional perspective. I think its possible that the transaction doctrine does not apply here.

Re: Rakeback, taxes, and an argument for the IRS
 

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Disclaimer: I am a CPA and have had 3 clients audited for online gambling in the last 5 years, two for sports betting and one for poker and sports betting.

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Thanks for weighing in. I apppreciate your perspective. I am a CFP who is trying to figure out how to handle my gambling winnings. I have consulted with a few CPA's that I work with in this business but there seem to be very few who have at this point actually interacted with the IRS on this particular point (namely volume rakeback discounts for online poker).

The attorney I consulted with has looked at the comps case and found it should not apply to rakeback that is classified as a rebate. She did not determine that rakeback is clearly excludable from income, only that it reasonable/arguably excludable. There is case law on the treatment of rebates that is favorable to taxpayers under similar situations. I caveat that with the statement that most of these cases are corporate taxpayers.

The question is not whether the IRS will agree with you, but whether it is arguable excludable or indeterminate. If audited I am sure I would just fork over the taxes for the rakeback rather than fight it. The real question is whether excluding it prior to an audit is reasonable or whether such an exclusion would be subject to penalty. If it is reasonable I would rather just exclude it and be aggressive.

Re: Rakeback, taxes, and an argument for the IRS
 

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If rakeback doesn't count as income, then rake doesn't count as a deduction, and you should pay tax on the full amount you made.

That is to say, if you win $10,000, but pay $6000 in rake, then your account balance only goes up by $4000. Feel free to pay tax on the full $10,000, since you think rake doesn't count.

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Let me put it another way. Gambling winnings have a definition. Rebates on goods and services have a definition. If I comply with both definitions then I am complying with the tax code. Those definitions do not have to be consistent with one another.

Also, I don't even have to be right for the strategy to be a good one. I only have to be arguably correct (i.e "have reasonable cause grounds").

It might not be a good idea, but its worth discussing/researching.

Re: Rakeback, taxes, and an argument for the IRS
 

The IRS auditors that I have talked to consider the rake rebates to be a rebate in name only. Their opinion was that, since amount of play determined the size of the payment, rake rebate programs and bonuses are effectively the same thing. My research at the time led me to believe that the IRS would see comps, bonuses, and rake rebate as different names for the same thing. I think that the use of the word rebate in the description is what causes people to argue the taxability of the payment. The IRS looked at how the payment was generated at made their own assessment. The auditor stated that the company can call it a charitable donation or a grant, but that doesn't mean that you can get that kind of favorable tax treatment.

We weren't arguing the point with the IRS because the income was claimed on the tax return in question. Our goal was to try to see if we could get the income removed to lessen the audit change coming from other areas. We were trying to find a way to legally reduce the taxpayer's liability through a discussion of various grey areas. I will add that all 3 of the taxpayers were "fudging" on their taxes in different areas. We, as the CPAs referred by a tax attorney, were the middle man in the process.

I can tell you that my research found many corporate cases regarding rebates, but very little for individuals. This seems consistent with the tax attorney. I looked into the comps case because my gut feeling was that the IRS would use that as their guideline and I needed to be prepared for that.

I would agree that, under examination, it is much cheaper to pay the tax assessed when compared to the cost of attorneys and accountants to fight the change.

Re: Rakeback, taxes, and an argument for the IRS
 

Great info/background. Thanks. Posters like you are a reason for contributing to 2+2, despite the stream of snide idiots thrusting their e-penises as many did in this thread.

Based on your research/experience, do you think its "reasonable" to exclude the rakeback as a rebate? Or do you think the auditors would argue for penalties in an audit? The attorney and I suspect it is reasonable. In any case in my situation rakeback isn't likely to trigger a substantial underpayment penalty. What I wonder is whether an exclusion could be deemed a Sec 6701 abuse (or in your case aiding and abetting) violation. With no "on-point" reg, case or PLR I suspect it would not be.

Re: Rakeback, taxes, and an argument for the IRS
 

You're welcome. I'm always up for a good discussion on tax related issues that pop up.

I don't think that the exclusion of this income would generate the substantial underpayment penalty. The IRS, in my experience, tends to look at that penalty in terms of tax impact of your position. Unfortunately, there is no solid rule on what any auditor will use as their magic number to assess such a penalty. The only cases that I can remember with these penalties involve outright fraudulent tax returns

I would add that the IRS is even more lenient on the preparer based penalties. The preparer based penalties seem to be held for preparers that do ridiculous things on tax returns. The only local cases that I can think of involve preparers that were using fraudulent deductions and documentation.

Re: Rakeback, taxes, and an argument for the IRS
 

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The reason that the IRS doesn't send info to the Justice Department on illegal activities is the conflict that they would have with the Fifth Amendment. I think that there may be an old case about this, but that is a vague memory off of the top of my head. If the IRS gave tax return info to the Justice Dept., you would be able to claim Fifth Amendment rights and not file a tax return. The IRS has their own lawyers to try any cases resulting from tax return related issues in order to avoid any conflict.

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Correct. The IRS is bound by the "silver platter" doctrine, which basically means that they can not give information to the local or state law enforcement agencies.

A quick Google search brings this up:

In 1952 Congress created a special tax, which acted like a trap for illegal gambling operators. Bookies who did not pay the tax were charged with tax evasion. Bookies who did were charged with violating federal anti-gambling laws. The U.S. Supreme Court knocked that out as a violation of the Fifth Amendment's protection against self-incrimination. So the Feds starting turning illegal operators, and their tax returns, over to state law enforcement agencies as if they were on a silver platter. In 1968 the U.S. Supreme Court said this maneuver also was unconstitutional.

http://rose.casinocitytimes.com/articles/14500.html

If you are running an illegal operation, like drugs or stolen property, you must report the income and pay taxes on it. But the IRS can't just fax your 1040 form to the cops and say "Hey, check out Joe Smith."

Re: Rakeback, taxes, and an argument for the IRS
 

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Believe whatever you want, and pay your taxes accordingly.

I consider it income - I pay on everything I take from Neteller to my checking account. Makes it pretty simple for me.

Dogmeat [img]/images/graemlins/spade.gif[/img]

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That surely does make it simpler for you, but it doesn't make it correct. Whether your income (winnings, bonuses, rakeback) is kept at a poker site, at Neteller, or in your checking account doesn't affect its categorization as taxable income.

Re: Rakeback, taxes, and an argument for the IRS
 

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There's probably nothing specifically about rake rebates in the code. Therefore, there's probably room to argue that they fall into one of several existing categories. For example, when you get the 5th cup of coffee free, it's not earned income. So, I still think there's probably an argument that could be made.

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Yes you can make the argument. But if you look at the past cases for things like comps, airline miles, and the like it is pretty clear that you are not going to win. The arugment then comes do you have a good enough case to just have to pay taxes and not get major penalities (I think you still owe interest on underpayment no matter what but it has a been a while since I researched this). I have a feeling that will probably come down to scale. If you have 200K of rack back I have a feeling that is treated differently than if you had like 5k

Re: Rakeback, taxes, and an argument for the IRS
 

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Believe whatever you want, and pay your taxes accordingly.

I consider it income - I pay on everything I take from Neteller to my checking account. Makes it pretty simple for me.

Dogmeat [img]/images/graemlins/spade.gif[/img]

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That surely does make it simpler for you, but it doesn't make it correct. Whether your income (winnings, bonuses, rakeback) is kept at a poker site, at Neteller, or in your checking account doesn't affect its categorization as taxable income.

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I hope this isn't a dumb question but how does a tax auditor know about your neteller account? It's not like neteller sends a form reporting what you have every year. I probably will not pay taxes until I make a decent amount. I work and goto school full time so what I make isn't much.

Re: Rakeback, taxes, and an argument for the IRS
 

They may or may not know about Neteller. Neteller, essentially being an offshore bank account is not required to give your information to the US government and by keeping that money in your Neteller account you may be able to avoid paying taxes on that money since the IRS would have no idea how much money is in question.

As soon as you bring that money into your US bank account your auditor will know all about it. It seems to me that if you ever wanted to access that money in the US it would show up in an audit. If you leave it in Neteller you might be able to get access to this using your Neteller debit card, but since I am not sure what information the banking systems record the IRS may be able to track your purchases and withdrawals with that as well.

Re: Rakeback, taxes, and an argument for the IRS
 

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I consider it income - I pay on everything I take from Neteller to my checking account. Makes it pretty simple for me.

Dogmeat [img]/images/graemlins/spade.gif[/img]

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Me too... makes it easier, and my accountant agreed with me on this method. (I'm in Canada, though)

Re: Rakeback, taxes, and an argument for the IRS
 

I believe that we had this post before and he said that his accountant said that rake back is tax dect.

Re: Rakeback, taxes, and an argument for the IRS
 

GAAP and Tax Code are two different animals. Although, I am sure Tilt's logic is seriously flawed as some others have pointed out, you certainly can't base any argument regarding the issue on GAAP. He is attempting to avoid claiming rakeback on his income taxes not his financial statements.

Re: Rakeback, taxes, and an argument for the IRS
 

The very fact that you posted means you don't belive your own logic. You were given very precise explanations on why it is income but you still argue your point.

If you honestly belive your logic then go work for KPMG in their tax shelter division. I am sure you will fit right in.