If you gamble a lot — like purchasing several-hundred-thousand dollars of chips during the year, the IRS might get suspicious if you report income that seems unusually low. Casinos are required to file “currency transaction reports” (CTR) with the IRS whenever someone purchases or redeems more than $10,000 worth of chips during a 24-hour period. A recent Tax Court case shows that the IRS can and does use these reports during audits.
In the Tax Court case, a couple filed joint returns for 2004 and 2005 showing just $16,450 of income in 2004 and $18,230 in 2005. Unfortunately for them, they had purchased nearly $800,000 of chips at a Connecticut casino during those years, and the casino had submitted numerous CTRs to the IRS. Of course, the IRS became suspicious about how the couple could afford to spend $800,000 at a casino while making such a small amount of income.
The IRS used reconstruction techniques to arrive at what the couple’s taxable income should have been — about $160,000 for 2004 and $251,000 for 2005. The couple will owe tax on that amount of income, plus accuracy related penalties were also assessed.