A debtor hit it big in a poker tournament and promptly squirreled away the prize money. Now, when the creditor asks about the winnings, the debtor’s response is, “Poker? Sure, I play for fun, but I’ve never won any real money at it.”
Like lottery winnings, which we wrote about here, all gambling income must be declared to the IRS. If you have access to the debtor’s tax returns, gambling winnings should be reported as part of his gross income. Professional gamblers should report their winnings as business income. Your debtor is only a professional if his “gambling activity is pursued full time, in good faith, and with regularity, to the production of income for a livelihood, and is not a mere hobby.” Commissioner v. Groetzinger, 480 U.S. 23 (1987).
When a gambler wins at a casino, the casino sends him (and the IRS) a W2-G reflecting the amount of the win. If the gambler does not report the winnings, he may be prosecuted in tax court. Tax court records, which we always review as part of any asset search, may reveal the amount of his winnings. The picture is murkier in the case of offshore online gambling sites, which exists in a sort of regulatory limbo. The IRS will not receive a W2-G from the online gambling site, so, although the gambler is still required to report the income, he is essentially on the honor system.
If you have access to financial records, look for evidence of travel to gambling destinations like Las Vegas or Atlantic City. Also, pay attention to purchases that the debtor made while on his trip. A luxury impulse buy or a lavish dinner may be clues that the debtor celebrated a big win, even if he has hidden the winnings.
Litigation searches can also reveal a debtor’s gambling activities. In the course of one of our investigations, we found court records showing that the COO of a major corporation had tried to avoid his gambling debts at an Atlantic City casino by arguing that he did not have to pay because he was not a New Jersey resident. Unsurprisingly, he lost the case, but the court records gave us a window into his gambling habits.
Finally, never underestimate the human need to brag. Chances are, if a casual gambler beat the odds in Vegas, he’ll tell his story to anyone who will listen. Talk to friends, family, co-workers or, better yet, gambling buddies. Also check social media outlets to see if the debtor has been boasting to his friends.