Penalties for not reporting gambling winnings: how to avoid IRS fines

He sold a winning lottery ticket worth $10,000 for cash and did not report the income, resulting in an additional tax due of $1,800.

This was a relatively small case—a slap on the wrist with just six months of probation and some fines. But in other cases, the consequences are far worse with criminal charges and even prison time. 

The IRS actively tracks unreported gambling income, and between 2018 and 2020 alone, nearly 150,000 individuals were caught, each of them failing to report over $15,000 in winnings, adding up to $13.2 billion in unreported income. ^[2]

Cases like these have only resulted in the IRS strengthening its controls even further, and now, the penalties for failing to report gambling income are more severe than ever.

If 150,000 individuals came to light, imagine how many more have been caught since. You don’t want to be one of them. The IRS has access to casino reports, online gambling platforms, and even your bank transactions, making it easier than ever to detect discrepancies.

To stay out of trouble, you need to know exactly what counts as taxable gambling income and what penalties you could face if you don’t report it. Let’s break it all down.

What gambling winnings do you need to report

The IRS requires all gambling winnings to be reported as taxable income, regardless of the amount. This applies to both cash and non-cash prizes, including:

• Casinos (slots, poker, table games)
• Lotteries and raffles
• Sports betting (in-person and online)
• Sweepstakes and prize contests
• Online gambling platforms
• Non-cash prizes such as cars, vacations, or other rewards (reported at fair market value)

For big wins, gambling institutions automatically withhold 24% in federal taxes before issuing your payout and report this to the IRS using Form W-2G^[3]. You also receive a copy to include in your tax returns. 

When you file your tax return, you may still owe more or less depending on your tax bracket.

If your winnings don’t meet the W-2G thresholds, you won’t be issued the form. However, this doesn’t mean you’re off the hook. 

The IRS can still track your winnings and failing to report them could trigger an audit, especially if your reported income doesn’t align with your financial activity.

While reporting gambling income is a legal requirement, it also comes with an important advantage: you can deduct gambling losses to offset your taxable winnings. 

For this, losses must be itemized using Schedule A (Form 1040) ^[4], and you’ll need to keep detailed records like receipts, tickets, and betting logs. This means that if you’ve had a rough year at the tables, reporting your winnings could actually help lower your overall tax bill.

Also read: Can you reduce your tax liability by reporting gambling income & losses?

Consequences of not reporting gambling winnings

The IRS enforces tax compliance through various penalties, interest charges, and legal actions, all of which can add up quickly if you don’t address them.

Here’s a full breakdown of all the penalties that can apply when you fail to report gambling income:

1. Back taxes (plus interest)

When you fail to report gambling winnings, you’re essentially underpaying your taxes. The IRS will demand those unpaid taxes, but it won’t stop there. You’ll also have to pay interest on what you owe, calculated from the date the tax was originally due. 

The IRS updates interest rates quarterly. The interest rate is based on the federal short-term rate + 3% for individuals.^[5] Interest is compounded daily until the balance is fully paid.

2. Accuracy-related penalty

If the IRS determines that you underreported your income, it can slap you with an accuracy-related penalty of 20% on top of the taxes you owe.

What triggers this penalty?

Negligence: Failing to make a reasonable effort to follow tax laws, such as:

• Not reporting gambling winnings shown on a Form W-2G or 1099-MISC.
• Claiming deductions or losses without proper records.

Substantial understatement of tax: If the underreported tax is more than 10% of the total tax owed or $5,000, whichever is greater. 

The IRS also charges interest on this penalty, which continues to accrue daily until the full balance is paid.

Also read: 1099-NEC vs 1099-MISC: Differences, deadlines, and how-to’s

3. Failure-to-file & failure-to-pay penalties

If you fail to file your tax return on time, the IRS imposes a failure-to-file penalty on any unreported gambling winnings. This penalty applies even if you do not receive a Form W-2G from a casino or sportsbook.

How much is the penalty?

• 5% of the unpaid tax per month (or part of a month).
• Maximum penalty: 25% of the unpaid tax.
• If your return is more than 60 days late, the minimum penalty is the lower of $510 (for 2024 returns), or 100% of the unpaid tax.

However, filing late is not the only issue. Failing to pay your tax bill on time also results in additional penalties. This penalty applies if you file your tax return but do not pay the tax you owe by the due date.

How much is the penalty?

• 0.5% of the unpaid tax per month (or part of a month).
• Maximum penalty: 25% of the unpaid tax.
• If the IRS sends a Notice of Intent to Levy and the tax is unpaid after 10 days, the penalty increases to 1% per month.
• If you set up an approved payment plan, the penalty is reduced to 0.25% per month while the plan is active.

If you fail to file AND fail to pay, both penalties apply. However, to prevent excessive penalties, the IRS reduces the failure-to-file penalty when both apply in the same month.

• Instead of charging 5% failure-to-file + 0.5% failure-to-pay, the IRS reduces the failure-to-file penalty to 4.5% per month.
• This means the total penalty is 5% per month for the first five months.
• After five months, the failure-to-file penalty maxes out at 25%, but the failure-to-pay penalty continues accruing until it also reaches 25%.

4. Civil fraud penalty

If the IRS believes you intentionally hid gambling winnings, things get even worse. You could face a civil fraud penalty of 75% of the unpaid tax amount. This isn’t for people who forgot to report winnings; it’s for cases where there’s clear deception, such as:

• Claiming gambling losses that exceed winnings
• Structuring transactions to avoid IRS detection
• Using third parties or offshore accounts to hide winnings

5. Criminal charges: jail time for tax evasion

Of these cases, 89 led to indictments, resulting in a 96% conviction rate and an average prison sentence of 23 months for those convicted.

These numbers show just how seriously the IRS takes tax evasion related to gambling. With nearly every case leading to a conviction, the odds of getting away with unreported gambling income are slim, and the consequences are severe. 

What may start as a failure to report winnings can quickly turn into a criminal investigation if the IRS suspects intentional tax fraud or concealment of income.

You may face criminal tax fraud charges if you:

• Deliberately fail to report large gambling winnings.
• Falsify records to understate your income.
• Structure transactions to avoid IRS reporting thresholds.
• Use offshore accounts or third parties to conceal winnings.
• Fail to file tax returns for multiple years.

If the IRS proves that you willfully evaded taxes, you could be facing:

• Tax Evasion (26 U.S.C. § 7201) – Up to 5 years in prison and fines up to $250,000.
• Willful Failure to File (26 U.S.C. § 7203) – Up to 1 year in prison per unfiled tax year and fines of $25,000 per year.

Bookkeeping services in Las Vegas can help you file your tax return timely and make sure you stay compliant with the IRS.

6. Audits & IRS investigations: a nightmare you want to avoid

Even if you aren’t hit with fraud charges, failing to report gambling winnings makes you a prime target for an IRS audit.

Here’s how the IRS flags gambling activity:

• Casinos & gambling platforms report winnings – Large payouts trigger automatic IRS reporting via Form W-2G.
• Bank transactions raise red flags – If your deposits don’t match your reported income, the IRS may investigate.
• Random audits – The IRS randomly audits thousands of tax returns each year, and gambling income is an easy area for them to check.

How to avoid penalties for not reporting gambling winnings

It goes without saying, but the easiest way to avoid IRS penalties is to report all your gambling winnings accurately and on time. 

However, simply reporting winnings is not enough. You must also ensure that your tax return is accurate, complete, and filed on time to avoid additional penalties. Here are the steps you should take to avoid getting into any legal trouble with the IRS:

• If you win a substantial amount, make quarterly estimated tax payments using Form 1040-ES ^[7] to avoid underpayment penalties.
  
• The failure-to-file penalty (5% per month) is far higher than the failure-to-pay penalty (0.5% per month). Even if you can’t afford to pay your tax bill in full, filing on time prevents excessive penalties.
  
• Set up an IRS payment plan if you owe taxes. An installment agreement lets you pay over time and reduces the failure-to-pay penalty to 0.25% per month.

• Without proof, you may be unable to claim deductions or defend your tax return in case of an audit. Keep a gambling log with details such as the date, location, type of gambling, amounts won and lost, and supporting documents like wagering slips, casino statements, and bank records.
  

Also read: How to Prove Gambling Losses on Taxes: Tips from Vegas Bookkeeping Experts

The bottom line

Failing to report gambling winnings can lead to back taxes, penalties, interest, and even criminal charges in extreme cases. To stay compliant, you must report all winnings, file on time, pay taxes owed, and keep detailed records.

Sounds like a lot? That’s because it is. Anything from a missed filing to an underreported amount can trigger IRS red flags. So, what do you do?

Well, you don’t have to handle everything yourself. If you have substantial gambling winnings, consider hiring a Las Vegas bookkeeper to maintain accurate records and ensure full tax compliance.

CoCountant does this job for you. Our expert team specializes in bookkeeping and tax preparation for individuals with complex financial situations, including professional gamblers and high-stakes winners.

We provide accurate Las Vegas bookkeeping services to track all gambling income and expenses, tax planning and compliance to ensure proper filing and estimated tax payments, and IRS audit protection with organized records to defend your returns if needed. We also assist with setting up payment plans if you owe back taxes or penalties.

Start at just $160!

FAQs

Also read: Schedule A (Form 1040): A guide to the itemized deduction