11/21/2003 12:00AM

Taxes, not clerks, hurt players

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There are two ways to look at the guilty pleas entered this past week in a Saratoga County courtroom by two more New York Racing Association mutuel clerks.

If you're a strict law-and-order type or a booster of state Attorney General Eliot Spitzer's all-but-official gubernatorial ambitions, the pleas are another notch in Spitzer's crime-busting belt and yet more evidence of rampant criminality at New York's tracks. The clerks were nailed for forgery in what prosecutors described as an identity-theft scheme to defraud the federal government of rightful tax revenue.

If you're a customer of horse racing who has ever been both lucky and unlucky enough to hit a four-digit exotic bet payout, you probably know that what these clerks were doing was offering an illegal but common service that can be secured at any track in the country.

It is a practice born of the antiquated and unfair federal laws about reporting and withholding gambling proceeds. The victim is not the poor old Treasury Department but the collective horseplayers of America.

What the clerks were doing was running a "10-percenting" service, in which customers could duck filling out W-2G forms reporting proceeds on payoffs that meet two criteria - odds of at least 300-1 and amounts of $602 or higher - in exchange for 10 percent of the payoff. A customer who hit for $4,000 would settle for $3,600, paying $400 out of his rightful proceeds to avoid reporting this as income to the government, which otherwise would come looking for further taxes on these "winnings" at year's end. If a customer were unlucky enough to hit for $5,000, triggering an automatic 28 percent withholding tax of $1,400, he might pay an additional $500 to bury the ticket, getting back only $3,100 of his $5,000.

The only victim here is the horseplayer giving up such a huge slice of a rare score. In theory, the government might be entitled to more money at year's end, but in reality the vast majority of players lose for the year and not only have no further tax liability, but also are entitled to a refund on anything that was withheld from them. If anything, the government makes out like a bandit on the whole deal, creating tax obligations where none exist and confiscating money from people who are too overwhelmed or confused to ask for it back.

The requirement to report payoffs at such a low level in a game where well over 95 percent of the players do not show a profit for the year is an absurd waste of everyone's time and money. It is also inconsistent with the lack of requirements for other and frequently larger gambling proceeds. If you win $5,000 playing craps or blackjack in a casino, you walk away with a pocketful of cash and no tax forms. If you bet $1,000 to win on a 5-1 shot, same deal. But if you have a crummy dollar on a $1,500 trifecta, you have to report to the government before you get the $750 that might not even get you out for the day. Is it any wonder some players are instead willing to pay a clerk $75 to avoid an argument with the government months later over whether they owe up to 28 percent of that $750 in taxes?

Obviously tracks cannot sanction falsification of tax forms, but they have virtually condoned 10-percenting over the years. It is about as difficult to find someone willing to cash your IRS tickets at the track as it is to find a bookmaker who will take your Super Bowl bet at the corner bar.

Horseplayers use 10-percenters out of fear and ignorance. Many people have an irrational if understandable terror of dealing with the Internal Revenue Service, or perhaps of a spouse who doesn't understand that the $750 "score" was not an invitation to home improvements but something that was gone three races later. Many players also don't believe or don't understand that if they keep complete and accurate gambling records, they can offset winnings with losses and owe nothing, and even get a refund on withholdings.

One small thing tracks could do under the current situation is to educate their customers on how reporting and withholding really work. When a customer fills out a W-2G, he should be offered a booklet explaining the tax situation and perhaps a diary to record his wagers. Account-wagering services should offer their customers statements of actual net profits and evidence of losses to offset reported winnings.

A bigger thing the industry should do is to prioritize the reform or abolition of the W-2G system, raising the thresholds for any paperwork to $10,000 or more and ending a charade that robs the customers and makes 10-percenting more of a necessary service than a heinous crime.