new to both taxes and poker

"Burden of proof is on the tax payer." I only paid taxes before once and I don't understand it very well, can anyone clarify. Specifically, if I buy a car next spring the IRS will say "hey where did that money come from?" Is it true that they can just make up some insane income figure and demand payment? If this, or some variation of it, IS possible, how does the "burden of proof" rule apply. If they said I earned 500k and I think i only really made about 50k, how do I prove non-earnings? Unless you give an an explanation of how every hour was spent in a year, how could you ever disprove a bad earning estimate?

If I say "look I made 50k on party." they can say "and live? and pstars? and empire? and dont you cut grass in the summer? dont you baby sit on the weekends? etc" Do they just leave you alone after you report any reasonable ammount? If so, it seems like all OTHER earnings after something reasonable (between 30-100k) is tax free, right?

This year is my first year where I plan to pay taxes as a professional poker player. What consitutes proof of income? I think I remember hearing someone say they just wrote down their net earnings daily and totaled it up at the end of the year. It boggles my mind that you could just write your own record out and they take it on good faith. But if they do accept this sort of thing, I don't see why this wouldn't be enough.

I don't have anything like this and it is not possible for me to find this info. Like most people, I play live sometimes, different sites, different computers, etc. Once I figure out how to, I'm going to do it right next year, but what do I do for now? Would the formula below suffice?

WorkingCapital + cashedout - Deposits = TotalEarnings

Start the year with WC = $0
(Otherwise use the change in WC)
"working capital" = All the money still in your account(s) at years end
"cashouted" = total ammount cashed out in a year
"deposit" = all the money you deposited in a year

What will the IRS do to me if I report this? I'll worry about doing it better in the future.

For simplicity's sake you report no live play.

[lozen]

[ QUOTE ]
Burden of proof is on the tax payer

[/ QUOTE ]

Another way of putting it "Guilty till proven innocent" Tax law is the only law were this applies.

I appriciate the response, but I cant tell if you read beyond the first sentence. Im not confused about the symantics, I'm confused about the application. I dont like this use of hyperbole in something that is so vague and confusing to begin with.

The IRS has to have some basis in fact to say you have more income than what you earned. After all, if you contested hard enough by taking it to court, the IRS will have to have their ducks in a row, and normally, they aren't in the business of making themselves look foolish in court.

The burden of proof isn't as drastic as you make it out to be. If the IRS thinks there's unreported income, they'll send you a notice of proposed changes, and ask you to provide any additional information. If they don't hear anything, they'll issue a notice of deficiency, which will give you 90 days to file a protest, which just means that somebody within the IRS will review whether the notice is correct or not.

The whole "burden of proof" issue usually is invoked for people who do nothing to respond to these notices and think that they don't have to do so in order to win a fight with the IRS.

(For disclosure purposes, I'm a low-level grunt for my state's income tax authority, and our procedures pretty much mimick those of the IRS.)

lol
Kind of like for Jury duty...you get a notice and if you ignore it, they send you it again, and then a 3rd time (so you can't use the excuse - "I never got it!").

I don't think anyone is anal enough to report every single thing on their taxes (i.e., that 1 night you babysat and got 20 bucks, or that time you shoveled snow for a few of your neighbors for 10 bucks ea., etc.

What if you were walking down the street and found a $100. bill on the ground?
Is your first instinct, oh, "I better go home and record this income."
Technically should you? Add up and report all of these "little" things?

What about when the vending machine eats your 75 cents and doesn't give you your M & Ms? Can you deduct this 75 cents as a loss?
how far do you/should you go is my point...
(according to the letter of the law AND in actual practice).

And what is to stop a winning poker player (who, as I understand it can deduct up to the very amount of his net "winnings" on his tax return) from saying he got $50,000. in deductions from dumping it on some casino game tables over a few nights/weeks?
I know this it 100% illegal and fradulent (tax evasion), but what is to stop one from doing this?
Is it very likely you'll be audited if your deductions are always as high as your winnings?
(I don't even know how this all works, so please correct any of my statements if wrong, lol).

[daryn]

i wonder this too.. for instance, say i go to the bank, withdraw $10k cash, then go to foxwoods and lose like $8k or so.. i tell the IRS i lost $8k at foxwoods. but there's no record of it. so what do they do, take my word for it? also, what if i just withdrew the $10k and threw it into a safe and SAID i lost it at foxwoods. what is the difference?

[Ed Miller]

[ QUOTE ]
i wonder this too.. for instance, say i go to the bank, withdraw $10k cash, then go to foxwoods and lose like $8k or so.. i tell the IRS i lost $8k at foxwoods. but there's no record of it. so what do they do, take my word for it? also, what if i just withdrew the $10k and threw it into a safe and SAID i lost it at foxwoods. what is the difference?

[/ QUOTE ]

Ultimately, yes, they take your word for it. But your word has to be presented in a sufficiently convincing form (i.e., a detailed diary kept on a daily basis).

So just having a spiral bound copybook and "pen and inking" in the date, how much you started your session with, and how much you ended your session with is enough (as a bare minimum...?).
Anything else you'd recommend keeping
in your
"Record Book?" (time of day, place you played, the limit, etc. - anything else?)

And Can a "session" be a whole day? Or is a session every time you get up and sit back down? (i.e., if
you sit down
at the tables and play for a couple hours, then break for lunch, and go back, does this count as a new session? And does counting it as such
give you any type of tax advantage/dis-advantage?)

[ QUOTE ]

And what is to stop a winning poker player (who, as I understand it can deduct up to the very amount of his net "winnings" on his tax return) from saying he got $50,000. in deductions from dumping it on some casino game tables over a few nights/weeks?
I know this it 100% illegal and fradulent (tax evasion), but what is to stop one from doing this?


[/ QUOTE ]

I think the problem with this trick isn't so much that it wouldn't work as that you'd probably want to eventually use the money for something. If you put it in the bank, the IRS could see you had $50,000 in undeclared money. Also, any cash transaction over $10,000 that you make has to be reported to the IRS by the merchant. So you couldn't use it to buy a car, make a down payment on a house, or any kind of investment. So when you start thinking about tax evasion, its not just a matter of "will the IRS believe this [censored]," you also have to consider what you will do if you get audited down the road and have $1,000,000 in assets and only $20,000 in reported income every year.

Of course if your plan is to just blow through the $50,000 at strip clubs and fancy restaurants, you'd probably be fine.

I can't imagine that it would be cost-effective for a poker professional to take the time to learn tax law to a sufficient level to gain the expertise necessary to apply the best tax policy to their profession. Although tax rules may seem cut and dried, there is a lot of gray area in the interpretation and application. Proper tax policy must take into account the specifics of your given situation, including risk tolerance, propensity to keep quality records, family situation, etc. Anyone making a decent amount of money fairly consistently doing anything paid other than on a W-2 should probably get a tax advisor. Not that you can't learn the rules, but much like in poker, it is the nuances and the "feel" for the game that can make the difference. You don't want to overpay, but you also don't want to lose your house, wife, and spend a few years behind bars. It costs relatively little to get good tax advice and you are likely to get some business advice that will make the whole thing a net savings for you. Just look at people from Al Capone to Richard Hatch who underestimated the importance of tax policy. For 35% of your earnings it's probably worth spending some time/money to get things right.