Updated on 09/16/2011 9:49AM

Keep records, shun ten-percenters

Email

WASHINGTON - Few aspects of racetrack life are so odious as the Internal Revenue Service rules that require reporting certain gambling winnings. Some horseplayers find it so burdensome and annoying to fill out Form W-2G that they will take money out of their own pockets to avoid any dealings with the IRS.

Yet there is now something positive to be said about the hated Form W-2G: Because of it, the racing industry will be able to identify and pay the bettors who were cheated in the Breeders' Cup pick six fix. At least, most of them will get their rightful payoff. The ones who tried to evade the IRS may have cheated themselves out of their money.

When suspicions arose about the pick six, Arlington Park withheld payment of more than $3 million to New York's Catskill Off-Track betting, where all six perfect combinations had been purchased. An investigation revealed the details now familiar to every horseplayer in America: Chris Harn, an employee of Autote, entered that company's computer system and altered the wager of his friend Derrick Davis after four pick six races had been run.

The $3 million is being kept on ice, in an interest-bearing account, until the case is resolved. When this happens, the Illinois Racing Board will have jurisdiction, and it will certainly decide to distribute the cheaters' money to the bettors who picked five winners in the Breeders' Cup wager. Each of them will be entitled to a proportional share of $39,331.

The cheaters also used the same scam to win more than $100,000 on a pick six at Belmont Park in early October, and this injustice ought to be rectified, too. Any money that the government can recover from Harn and his associates should go to bettors shortchanged after picking six winners at Belmont.

In both cases, bettors have indisputable evidence that they deserve the money because they had to fill out Form W-2G in order to collect their payoff.

The IRS rules require horseplayers to identify themselves when they receive more than $600 on a wager that returns odds of 300-1 or more. The rule was created in an era when most betting was to win, place, and show, and such large payoffs were rare. But in the modern age of trifectas, superfectas, pick threes, pick fours, and other exotica, they are regular occurrences. On Sunday's nine-race card at Aqueduct there were 10 such payoffs, known at the track as signers. As a result, every horseplayer who bets exotic wagers is now burdened by extensive paperwork. He also may feel Uncle Sam's hand in his pocket, because the government withholds 28 percent of the winnings when a 300-1 payoff exceeds $5,000.

Because horseplayers don't like dealing with the paperwork and fear dealing with the IRS, some employ the services of so-called ten-percenters, who will cash - for a fee - tickets above the IRS threshold. In some cases the ten-percenters may have so little income that reporting some winnings won't affect their tax status. In most cases, they file tax returns showing the winnings from W-2G forms and offset that income with losses (which they might document with losing tickets).

Because of this practice, savvy racing fans wonder just how many rightful winners of the Breeders' Cup pick six turned their tickets over to a ten-percenter. When racing officials pay out $39,331 per ticket based on the names on the Form W-2G, some phony winners may be among them. There should be some interesting behind-the-scenes drama involving gamblers who picked five winners and those who cashed tickets for them.

I suppose that a fellow horseplayer should feel compassion for somebody who deserves to collect $39,331 and finds himself in this predicament. But I have little sympathy, and the Breeders' Cup pick six offers the perfect context in which to make this point: Employing a ten-percenter is a stupid practice under any circumstances.

Playing the horses is a difficult game, and even an ace handicapper is happy if he can grind out a profit of a few percent on his total investment during the course of a year. The best chance of achieving a profit comes from making big scores in exotic bets. If a horseplayer is fortunate to hit a few blockbusters, it is self-defeating to lower his return by paying somebody to cash the ticket. Over the course of time, those commissions will eat up his profits.

While no rational taxpayer wants to wave a red flag at the IRS, my own anecdotal evidence suggests that the IRS targets horseplayers' returns much less often than it used to. Agents are busy enough with corporate criminals that they don't need to expend too many resources investigating $5,000 trifectas. But even if a tax return showing gambling wins and losses does attract IRS scrutiny, a horseplayer has no reason to be terrified if he has kept a reasonable set of records during the year. He should record his daily profit or loss on his racetrack program, and save the programs. He enters the numbers in a notebook or computer and, at the end of the year, tallies the bottom line.

If a horseplayer has signed for $25,000 on 1099 Forms but has shown a net loss at the end of the year, he shows $25,000 in winnings on his tax returns and claims $25,000 as an offsetting loss.

The start of a new calendar (and tax) year is the perfect time for a horseplayer to begin keeping daily records of wins and losses. The effort takes only a minute or two a day, and with it a bettor can cash his own tickets and avoid the financial drain of paying ten-percenters. He will also be an honest citizen.

(c) 2002, The Washington Post