It is easy to see winning the lottery or leaving a weekend in Vegas with a bit of extra change in your pocket as extra cash. We may dream of using the money to splurge, to buy something we wouldn’t normally consider purchasing, but it is wise to take a moment to think it through before spending it all.
Although the winnings are a pleasant bonus, the tax authorities still treat them as income.
How much will I owe?
The exact tax bill will vary depending on your annual income and how much you won. It is also important to note that paying a bill with the Internal Revenue Service (IRS) is just one part of the equation. State taxes may also apply.
Depending on how much you won, the winnings could even bump you into a higher tax bracket.
Could I go to jail if I do not report my winnings?
Between the large initial tax bill and the potential to get bumped into a higher tax bracket, it is no surprise some try to avoid disclosing their winnings. If not made public, would they still have to report the winnings? Or would the winner face serious consequences?
The reality is a failure to report winnings to the tax authorities can come with serious consequences. People have tried some creative methods to get out of reporting their winnings. One example of avoiding reporting lottery winnings is the use of ten percenters. Ten percenters is a term that refers to people who cash in the winning lottery ticket on the winner’s behalf. The ten percenter takes a portion of the winnings in exchange for keeping the winner’s name out of the limelight.
The option is tempting as the ten percent fee can be much less than the bill from the IRS, but the IRS will pursue tax evasion charges when it becomes aware of the winnings. If successful, prison is likely. In a recent example, the jury convicted a father and son involved in a ten percenter scheme of conspiracy to defraud the IRS, filing a false tax return, and conspiracy to commit money laundering. The court sentenced the father to five years and the son to fifty months imprisonment.
The case serves as a stern warning: do not try to hide assets from the IRS. It is wise to seek legal counsel if you have lottery, gambling, or other assets that may not comply with tax reporting requirements. The attorneys at Goldburd McCone are familiar with these types of cases and can review your situation and discuss your options to mitigate the risk of potential consequences.