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IRS scammed with losing lottery tickets

Insider BuzzInsider Buzz: IRS scammed with losing lottery tickets
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Here's one way to dodge the taxman — buy thousands of losing lottery tickets.

It's true. Gamblers have concocted a scheme to repurpose the dud ducats to offset their winnings. A winner can go online and get $5,000 worth of losing lottery tickets to cover their $5,000 in gambling winnings. The lottery tickets serve as a sort of security blanket if the auditor comes calling.

Ads captured on Craigslist and eBay from Florida to California hawk the tickets so the potential lotto buyer can defraud Uncle Sam.

A Detroit-based seller was getting rid of $10,000 worth of scratch-off tickets for $500. "So ya don't look like a xxxxx :) come tax time," the ad reads.

One Jersey Shore seller snapped a picture of $1,100 worth of Daily 4 and Mega Millions game tickets with the pitch: "Good for tax writeoff for your 2014 taxes to offset your winnings."

And after an inquiry, a vendor in Los Angeles said of his $192 in lottery tickets, in denominations from $2 to $20: Yes, "you can use them for taxes."

"There is a gray market out there for these lottery tickets," said Reece Morrel Jr., an Oklahoma-based CPA who files taxes for some high rollers and oversees the online Lady Luck Diary website, where gamblers can get schooled on tax laws.

But hoarding stacks of scratchers or Powerball game tickets to prove that you suffered losses could very well land you in trouble with the IRS.

Possibly the first prosecution for this type of fraud was of none other than an accountant. Actually, he was a former IRS revenue officer named Henry A. Daneault.

In 1985, his client Phillip Cappella won a $2.7 million jackpot from the Massachusetts State Lottery Megabucks game.

When Daneault was retained to do Cappella's taxes, the pair got greedy.

The accountant decided to claim that his client had suffered $65,000 in losses for the year, and the IRS flagged the case.

Daneault had to think fast to substantiate the $65,000 write-off.

In a pinch, he paid $500 to a Massachusetts man named William Jenner to rent $200,000 worth of losing lottery and racetrack tickets for a month.

The accountant sent a few employees to load a pickup truck's bed with the tickets bound in stacks of 100 and gave his new partner a receipt and a promise to return the tickets.

Both Daneault and his lottery-winning client Cappella pleaded guilty to tax fraud charges and served time in prison.

Reached by phone, Cappella told The Daily Beast he's moved on. "It was a lot of crap and I just don't want to be re-experience it," he said.

Daneault's attorney, James Krasnoo, said the case was a first for him. "I never had one where it involved fake tickets, meaning losers being used to offset wins," he said.

The lotto rental ruse is still in play today.

Small-time businesses apparently rent losing lottery tickets to sneaky citizens, Morrel said. Some, he said, will lend them to a customer for three months. And in that time, if the taxpayer is audited, those lottery ticket investments are meant to justify a write-off.

"There's companies set up today to rent losing lottery tickets just for your audit," Morrel said.

He acknowledged that his gambling clients are often in the dark about the tax rules that govern their winnings. "A lot of gamblers are confused as to how much they can write off for federal purposes," he said.

The rule is this: Whatever losses you incur can be deducted from your winnings but "may not be more than the amount of gambling income reported on your return," according to the IRS.

So if you banked $100,000 and suffered losses of $10,000, you have to pay taxes on the difference, or in this case $90,000. So there is an incentive to write off a substantial sum in losses, thereby offsetting the taxes you pay. Ideally, you can write off, say, $50,000 in losses, and that would mean you only have to pay taxes on half of the winnings.

That's where some desperate schemers start dreaming up ways to increase their loss totals so that they can shell out less money to the taxman.

And they don't just stick to lottery tickets. Those horse racing tickets tossed on the ground without a second thought aren't trash. Some enterprising scavengers take pains to vacuum them up.

But any IRS agent doing any fact check will sniff them out. "On the ticket they will put the day and time and window," Morrel said. "A smart IRS agent will catch this and say to the person, 'You're faster than the thoroughbreds.'"

But the IRS isn't likely to make a fuss about lottery tickets, said Nelson Rose, a professor at Whittier Law School and author of several gambling books. "If the IRS or the FBI really cared, they could go after [all] the people buying and using them to evade taxes by saying they're losses."

And not every lottery-ticket seller on Craigslist is trying to collude in gaming the IRS. Many ads posted seem to be above board, including those selling tickets for memorabilia. Those vendors are pretty much in the clear, Rose said.

But if a paper pusher is aware of a buyer's scheme to shortchange the IRS, then like the getaway driver in a bank heist, he or she could face fraud charges. "If you sell something and there's no legitimate use or sell an excessive amount where there may be legitimate use, there is the potential for being guilty of tax fraud," Rose said.

Better to stay away from buying boxfuls of these game pieces.

"You are going to run into trouble explaining why you have $25,000 worth of losing tickets from another state," he said. "There's no legitimate use for them."

Keeping a diary can also end up being the difference between having a heart-to-heart with Ira the IRS man and enjoying Spring Break in Cabo San Lucas. "There's good reason to keep a diary," Rose said. "For tax purposes, if you come into big winnings in December, how are you going to remember what you lost in February?"

Alex Traverso, a spokesman for the California Lottery, the third-largest in the country, told The Daily Beast that the practice of stockpiling losing stubs and submitting them to offset winnings is harebrained. "Sure, every bit helps, but are people willing to go through the effort it takes to authenticate that the losses they're claiming were actually theirs and not someone else's?" he said. "Are people willing to risk an audit? My sense tells me that most wouldn't be."

He emphasized that his agency "strongly discourages" anybody from selling or buying losing tickets for tax purposes.

In terms of enforcement, Traverso said the onus is on the IRS.

North American Lottery Association President Terry Rich agreed. He told The Daily Beast that he advises against anybody trying to save money by buying and then writing off losing lottery tickets. "Whenever agencies like ours deal with big dollars, there is going to be people who take advantage of the system," he said. "We want to make sure people adhere to the law. In this case, we suggest people talk to their tax attorney or the IRS."

The Daily Beast asked the IRS to inform it about the lottery ticket loophole. As requested, this reporter promptly submitted a set of questions to the tax agency. In response, the IRS sent back bone-dry links to its website that barely touch on how to report gambling losses.

News story photo(Click to display full-size in gallery)

Thanks to w794728 for the tip.

Daily Beast

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32 comments. Last comment 2 years ago by RL-RANDOMLOGIC.
Page 1 of 3
noise-gate's avatar - images q=tbn:ANd9GcR91HDs4UJhjxO7cmeMQWZ5lB_FOcMLOGicau4V74R45tDgPWrr
Bay Area - California
United States
Member #136477
December 12, 2012
4102 Posts
Offline
Posted: April 6, 2015, 5:27 pm - IP Logged

" Uncle Sam" may be Old- but his not Stupid. Just ask Wesley Snipes, Nick Cage, Al Capone.That Old Man is an Enforcer.

People who say it cannot be done should not interrupt those who are doing it- George Bernard Shaw.

    haymaker's avatar - Lottery-012.jpg
    Egg Harbor twp.south Jersey shore
    United States
    Member #112968
    June 29, 2011
    3850 Posts
    Offline
    Posted: April 6, 2015, 6:08 pm - IP Logged

    And those race track tix better not have shoeprints on em LOL

    Extraordinary Popular Delusions & the Madness of Crowds    -- Charles Mackay  LL.D.

      Dead_Aim's avatar - canstock2002989

      United States
      Member #6363
      August 20, 2004
      4048 Posts
      Offline
      Posted: April 6, 2015, 8:57 pm - IP Logged

      If anyone is doing any scamming, it is the IRS!

      Isn't it about time they make another (star trek) instructional video for 60k like they did before?

      Or maybe they are just to busy harassing the tea party to do that anymore.

      The less you give them, the less they have to piss away on conferences that cost us 49 million dollars in just 3 years.

      More power to the ticket sellers in my book.

      Don't Chase... Compare and Narrow

      The Cheaper the Cost the Higher the Profit

      Many Winners to You.

      D_A

        Avatar
        Kentucky
        United States
        Member #32652
        February 14, 2006
        7295 Posts
        Offline
        Posted: April 6, 2015, 10:33 pm - IP Logged

        Most people don't understand to use the value of the losing tickets, they must give up the standard deductions. And depending on how much they are claiming as losses, the IRS could question where they got the money to buy those tickets.

          Dead_Aim's avatar - canstock2002989

          United States
          Member #6363
          August 20, 2004
          4048 Posts
          Offline
          Posted: April 6, 2015, 10:51 pm - IP Logged

          I am curious how they would treat a lottery pool? I run one for years. It was nothing for us as a group to have over $100 dollars per drawing (2 drawings a week) when the prizes were high.

          At the end of the year, I would have a substantial amount of losing tickets. One year someone asked me if they could have them. I told them yes, they were as much his as anyone else in the group. I only kept them if anyone wanted to check through them again for whatever reason. At the end of the year I generally just threw them away.

          Don't Chase... Compare and Narrow

          The Cheaper the Cost the Higher the Profit

          Many Winners to You.

          D_A

            Avatar

            United States
            Member #122691
            February 6, 2012
            330 Posts
            Offline
            Posted: April 6, 2015, 11:03 pm - IP Logged

            There's a guy here in town that plays $3,000 to $4,000 a day on 3 digit and 4 digit lottery tickets. I was always curious how much he wins, how much he loses and how much he is able to write-off? He has to get flagged every year when he files his taxes. 

              Avatar

              United States
              Member #113300
              July 6, 2011
              35 Posts
              Offline
              Posted: April 6, 2015, 11:23 pm - IP Logged

              Here's a suggestion. Everyone needs to LEARN that the income tax is an Excise tax and contrary to popular (the earth is flat understanding) income tax has nothing to do with the average guy. A better name for "Income Tax" would be "International Tax on Income" (in relation to the source and owner of the monies being transacted) 

              There's a book I have called Income Tax: Shattering the Myths by Dave Champion. Probably the best book I've ever read on the topic of what, whom, why and how the income tax is to be applied. 

              Just for the record. Most people, before you even respond with any mis-guided responses, just please, for the love of God, understand that the income tax is an indirect tax, specifically an excise tax (BRUSHABER v. UNION PACIFIC R. CO., 240 U.S. 1 (1916)) and that the 16th Amendment conferred NO NEW POWER of TAXATION (STANTON v. BALTIC MINING CO, 240 U.S. 103 (1916))and that the average guy, living and working in the private sector in anyone of the 50 States of the Union earning his/her own domestic US source monies has absolutely nothing to do with the income tax (contrary to what everyone thinks they know but never read one word of the law to prove or even understand, because after all, little ol' Mr./Mrs/Miss American can't understand the law according to tax professionals whom themselves NEVER read the law to determine whom is liable/upon whom the tax has been imposed).

              And NO, the definition of "Gross Income" under Section 61 (all income from whatever source derived) of Subtitle A (IRC: Income Taxes) does NOT impose the tax, it's a definition of what Gross Income is, WHEN one is actually liable for the tax or the tax has been imposed. One must actually read the words of the law, in the entire Subtitle A to actually understand what the tax is, whom it's upon and under what circumstances. Just because the earth used to be flat and apparently smoking cigarettes in the 1950s was considered healthy by Doctors (You know, authority figures that people look to for answers to life), DOES NOT MAKE IT SO. Conventional wisdom you know is in many cases, well, is just flat out wrong.

              Im sure Im gonna get the "but you go to jail if you don't pay it man" responses. And sadly, I can write 15 pages on just that topic alone and why that's the case. But, again, might equals right in the eyes of most people because simply that's the nature of most people, to be scared of what they have ZERO clue and understanding about and to be scared of the bully because he will do harm to you (in this case, financially). 

              In closing, the average guy whom actually wins lottery money has NO income tax duty even though they are forced to file W2-GAMING forms and what not before taking possession of what's left of the winnings. Which is one of the many reasons why I care so deeply about the mis-application of the Income Tax (knowingly by the US Govt).

              Remember, the income tax is one of MANY MANY taxes imposed. And it would be wise for people to know how the tax works and why the tax works the way it does.

              Thanks for your time.

                Avatar
                Seattle, Washington
                United States
                Member #121153
                January 3, 2012
                120 Posts
                Offline
                Posted: April 7, 2015, 3:15 am - IP Logged

                You know, if it's a huge amount of money being deducted & the IRS really wants to prove they're not deductible, all they need do is determine the time they were bought, make sure it's possible they were bought by one person only (ie - no buying of a bunch of tickets at 8:01am in Detroit, and another bunch at 8:05am in Los Angeles), and then subpoena the video of the places where the tickets were bought, to compare the visual of who bought the tickets to make sure they match (ie - comparing a 7 foot white guy buying tickets in 1 location at one time to a short black woman buying tickets at a later time). 

                In other words, it seems really easy to screw up & get in trouble with the IRS.  If you win the lottery, just pay your taxes & sleep better at night...

                  Coin Toss's avatar - shape barbed.jpg
                  Zeta Reticuli Star System
                  United States
                  Member #30470
                  January 17, 2006
                  10344 Posts
                  Offline
                  Posted: April 7, 2015, 11:10 am - IP Logged

                  Lottery Playa,

                  Find out what you can about Irwin Schiff.

                  The difference between tax avoidance and tax evasion? About 15 to 20 years.

                  Those who run the lotteries love it when players look for consistency in something that's designed not to have any.

                  Lep

                  There is one and only one 'proven' system, and that is to book the action. No matter the game, let the players pick their own losers.

                    Avatar

                    United States
                    Member #113300
                    July 6, 2011
                    35 Posts
                    Offline
                    Posted: April 7, 2015, 11:22 am - IP Logged

                    Coin Toss,

                     

                    I know all about Irwin Schiff. Irwin was a fan of filing ZERO income tax returns. 

                    If you have no income tax liability, you have NO REASON to be touching a 1040 form.

                    Since Irwin was a fan of commiting PERJURY on a Federal Tax form, he got what he got. 

                    On another note, they do treat Irwin, who was NOT violent worse than a rapist. I find that quite odd. Well then, again, it is the US Govt, so I don't find it quite odd.

                    Best if you actually research what I said instead of pulling the "Irwin Schiff" card

                      bigbuckswede's avatar - Riksbanken 2010000.jpeg

                      Sweden
                      Member #153629
                      March 20, 2014
                      128 Posts
                      Offline
                      Posted: April 7, 2015, 12:27 pm - IP Logged

                      This another good example to allow registered gambling, online or offline with player cards like here in Sweden. When I want to play in store or online I need to validate my bets in some way. I cannot transfer my made bets to another person.

                      Return of Investment, ROI 2014 20% | ROI 2015 20% | ROI 2016 14,45%

                        Avatar
                        Arizona
                        United States
                        Member #165073
                        March 24, 2015
                        220 Posts
                        Offline
                        Posted: April 7, 2015, 2:56 pm - IP Logged

                        Here's a suggestion. Everyone needs to LEARN that the income tax is an Excise tax and contrary to popular (the earth is flat understanding) income tax has nothing to do with the average guy. A better name for "Income Tax" would be "International Tax on Income" (in relation to the source and owner of the monies being transacted) 

                        There's a book I have called Income Tax: Shattering the Myths by Dave Champion. Probably the best book I've ever read on the topic of what, whom, why and how the income tax is to be applied. 

                        Just for the record. Most people, before you even respond with any mis-guided responses, just please, for the love of God, understand that the income tax is an indirect tax, specifically an excise tax (BRUSHABER v. UNION PACIFIC R. CO., 240 U.S. 1 (1916)) and that the 16th Amendment conferred NO NEW POWER of TAXATION (STANTON v. BALTIC MINING CO, 240 U.S. 103 (1916))and that the average guy, living and working in the private sector in anyone of the 50 States of the Union earning his/her own domestic US source monies has absolutely nothing to do with the income tax (contrary to what everyone thinks they know but never read one word of the law to prove or even understand, because after all, little ol' Mr./Mrs/Miss American can't understand the law according to tax professionals whom themselves NEVER read the law to determine whom is liable/upon whom the tax has been imposed).

                        And NO, the definition of "Gross Income" under Section 61 (all income from whatever source derived) of Subtitle A (IRC: Income Taxes) does NOT impose the tax, it's a definition of what Gross Income is, WHEN one is actually liable for the tax or the tax has been imposed. One must actually read the words of the law, in the entire Subtitle A to actually understand what the tax is, whom it's upon and under what circumstances. Just because the earth used to be flat and apparently smoking cigarettes in the 1950s was considered healthy by Doctors (You know, authority figures that people look to for answers to life), DOES NOT MAKE IT SO. Conventional wisdom you know is in many cases, well, is just flat out wrong.

                        Im sure Im gonna get the "but you go to jail if you don't pay it man" responses. And sadly, I can write 15 pages on just that topic alone and why that's the case. But, again, might equals right in the eyes of most people because simply that's the nature of most people, to be scared of what they have ZERO clue and understanding about and to be scared of the bully because he will do harm to you (in this case, financially). 

                        In closing, the average guy whom actually wins lottery money has NO income tax duty even though they are forced to file W2-GAMING forms and what not before taking possession of what's left of the winnings. Which is one of the many reasons why I care so deeply about the mis-application of the Income Tax (knowingly by the US Govt).

                        Remember, the income tax is one of MANY MANY taxes imposed. And it would be wise for people to know how the tax works and why the tax works the way it does.

                        Thanks for your time.

                        Before acting on what Dave Champion has written about taxes, I suggest reading up on United States v. David A. Champion.

                          Avatar

                          United States
                          Member #113300
                          July 6, 2011
                          35 Posts
                          Offline
                          Posted: April 7, 2015, 3:23 pm - IP Logged

                          Before acting on what Dave Champion has written about taxes, I suggest reading up on United States v. David A. Champion.

                          Know all about it.

                          Interesting case, because the IRS agents lied about their names and would not reveal their actual identities. Unless of course you believe the US Govt is somehow in the truth telling business.

                          And Judge Percy Anderson held that to be OK by the way, protecting the Agent's actual identities, which is absolute non-sense. And that's not all either.... 

                          The case was about "the List" of Dave Champion's clients. Because Dave himself was never prosecuted for NOT FILING A TAX RETURN (Gee, go figure, you think from your post that's what you are implying)

                          Secondly, don't know if you actually read the case, but it never stopped Dave Champion from writing the book and obviously he isn't in jail

                          So the question is, the information contained in the book, CAN U PROVE IT FALSE?

                          That's what it really boils down to. Everyone who has a brain knows the US Govt goes out of its way to do whatever possible to public figures relating to the income tax, and Dave is still standing. 

                          Again, what I need from all those who decide to respond, I need you to point out the error in the information contained in the book, Income Tax: Shattering the Myths, otherwise you are just using deceptive garbage to try and take away from the substance of the conclusion of what the Income Tax actually is.

                            Avatar
                            NY
                            United States
                            Member #23835
                            October 16, 2005
                            3471 Posts
                            Offline
                            Posted: April 7, 2015, 3:24 pm - IP Logged

                            I am curious how they would treat a lottery pool? I run one for years. It was nothing for us as a group to have over $100 dollars per drawing (2 drawings a week) when the prizes were high.

                            At the end of the year, I would have a substantial amount of losing tickets. One year someone asked me if they could have them. I told them yes, they were as much his as anyone else in the group. I only kept them if anyone wanted to check through them again for whatever reason. At the end of the year I generally just threw them away.

                            If you won would you be curious what everybody's share of the prize is? It works exactly the same way with the losing tickets. Everybody has an interest that's proportional to their interest in the pool.

                            If you knew the person was planning on using the tickets to commit tax fraud you're at least an accomplice, and possibly a co-conspirator.