Inadequate Gambling Records Lead to Foreclosure

Time after time after time I have emphasized the importance of maintaining a diary of gambling activity for tax purposes.

In a recent case out of Minnesota, the failure to do so by taxpayers Eugene and Brenda Rivetts has resulted in a nightmarish result: Home foreclosure.

Over the years the taxpayers regularly played slots at casinos in Illinois, Indiana, Minnesota, and Wisconsin. When you play slots regularly for an extended period, chances are you will win some jackpots. A casino is required to issue to you (assuming you are a U.S. resident) and to the IRS a Form W-2G each time you win $1,200 or more from a slot machine.

In 2001 and 2002, the taxpayers had some big slot machine wins, but they failed to file their income tax returns. So, the IRS prepared for them substitute for returns, and then sent notices for the balances due. Interest and penalties continued to accrue, and as of January 31, 2012, the taxpayers owed $200,066.34 for 2001 and $2,197.15 for 2002.

In court the taxpayers argued, among other things, that they incurred gambling losses during these years, but they were not reported to the IRS. The burden of proof to demonstrate such losses exist is on the taxpayer. Unfortunately, the taxpayers admitted to not maintaining an accurate record of gambling winnings and losses for each of the years in question (1999, 2000, 2001, 2002, and 2005). Although the taxpayers offered to provide the court an estimate of the losses, the court said a request to discount five years of tax documents implies they were not candid in filing their taxes.

The Government commenced the action seeking to reduce the tax assessments to judgment and foreclose tax liens on the taxpayer’s property in Minnesota. The court granted the Government’s motion for summary judgment. In other words, the Government now may take steps to order a foreclosure sale of their home in order to collect on the outstanding liabilities.

It’s extreme for the government to seek foreclosure on a home to collect on a tax liability. In general, the IRS has 10 years to collect on outstanding liabilities. The IRS typically won’t strongly consider foreclosure unless the 10 year period is close to expiring. Before the IRS may proceed with foreclosure, a court will exercise judicial discretion on such efforts by taking into account “both the Government’s interest in collecting delinquent taxes and the possibility that innocent third parties will be unduly harmed by the collection effort.”

In this case, the taxpayers share their home with several family members, including a son, a daughter, a granddaughter, and a niece. In addition, the husband taxpayer’s parents live nearby, and the family regularly helps attend to his father’s health problems. Despite these circumstances, the court held in favor of the Government, noting that “being removed from one’s home can carry with it an inherent indignity and inequity,” but “[t]hat indignity and equity, though, is not sufficient to tip the scales in favor of Defendants and their family.”

It’s not clear from the opinion what efforts the taxpayers took to address their outstanding liabilities before the foreclosure action commenced. An Installment Agreement, Offer in Compromise, or other collection alternative could have prevented this unfortunate result.

Had the taxpayers kept good records as required, this outcome possibly could have been avoided.

Case: United States v. Rivetts, Civ. No. 11-556 (RHK/LIB) (D. Minn. 2012).