- Attention Group/Pool Players -
This page is a MUST read for you!
All about using IRS Form 5754 For Collecting Your Winnings
Texas, Georgia & Wisconsin Lotteries Failing To
Seize Opportunities To Collect Past Due
Student Loans, Child Support & Back Taxes ...
Plus They're Filing Erroneous Winnings/Taxes Paid
To The IRS And Creating Hardships for Pool Players ...
Brought to you by
Posted - Monday, Oct 9, 2006 - 3:30 PM
June 26, 2007 - An Update -
The Texas Lottery will now accept IRS Form 5754
A Special Thanks
I want to thank the winners who brought this
specific matter to my attention so I could report this
very important issue to the People. I especially want to
thank you for all the help in obtaining and providing
me with writings from the lotteries, the legislature
and your communications with the IRS.
- IRS Form 5754 -
The purpose of IRS Form 5754....
Each person has his own paperwork to support his yearly tax return.
This form is a godsend for lottery players who pool and win larger prizes AND it's a godsend for states to collect outstanding child support, student loans and taxes owed.
The person collecting the prize is saying to the lottery, "Hey, this money is not really mine and I am not really paying all these taxes myself. And ... I don't want it reported to the IRS that it is all mine when clearly, it is not. I will be disbursing the funds in the manner shown on this form." All states EXCEPT Texas, Georgia and Wisconsin abide by the form when submitted by players.
The Form Itself
5754 - Part 2 - Lists the names, address, city, state, zip and tax payer ID number (social security number) of everyone in the pool, how much each person is receiving and how much in taxes was actually paid by each person.
The Outcome of Submitting IRS Form 5754
Without a W2-G, a persons life could be an expensive tax nightmare at the end of the year.
By law, everyone is suppose to report all monies received each year whether it's gambling winnings, inheritances, odd ball jobs paid in cash, gifts etc. Imagine showing an additional $50,000 or $100,000 on your tax return but have nothing to show that you did in fact, pay tax on that revenue. FYI - Any deposit in the amount of $10,000 + is reported to the IRS by your bank. The IRS knows that you received money and it had better be included on your return.
The lottery is not held responsible or penalized if the information submitted by the player on IRS Form 5754 is false. Lotteries are not responsible for verifying the information submitted.
They ARE responsible for making sure that the form is legible, that it contains social security numbers, names and addresses and they are "required" to issue W2-G's to each player listed either at the time of payment or by Jan 31st of the following year.
They ARE also required to check social security numbers of winners PRIOR to payment enabling them to collect back taxes, delinquent student loans and overdue child support.
Imagine, by refusing 5754's - Texas, Wisconsin & Georgia - are refusing to seize the opportunity to collect outstanding debts. With each pool win, their chances are FAR greater of collecting an outstanding debt that is owed by the taxpayer. How much more stupid can they be?
WHY Did The IRS Created Form 5754
IF someone in a high income bracket was a group/pool winner - conceivably he could hide his winnings and reduce his tax liability by having a low income person show he was the winner instead. The IRS wants to know this so they can collect their taxes based on his real income.
By the same token, the IRS recognized that they needed to cut the Lotteries red tape for tax payers. Many winners qualify for refunds - the IRS recognized that these people had no reasonable, easy way to prove their case and was resulting in taxpayers incurring additional expenses plus valuable time when filing their returns and forcing audits based on what was being reported.
They receive questionable tax returns where tax payers report that they paid taxes yet the IRS had no record that taxes were ever paid. This results in a letter from the IRS or an audit and the recipient must respond. This is wasted time and money spent by all parties not to mention the mental anguish caused to tax payers.
The IRS was seizing the opportunity to collect outstanding debts - child support, back taxes, and overdue student loans.
IRS Form 5754 was the IRS's solution for Lotteries to report the TRUTH on who won and how much each person actually paid in federal taxes while still allowing the lottery to recognize ONE winner and write ONE check per winning ticket.
The bottom line, the IRS didn't want states fraudulently reporting who won, how much was won, and how much was paid in federal taxes by each individual and they wanted a sure fire way for states to collect debts that were owed.
Example of a Group/Pool Win - Taxes Paid
Let's say you get lucky and hit $250,000 and let's say there were 5 of you in the pool.
From the $250,000 check, the lottery deducts 25% ($62,500) for federal taxes netting $187,500. Now that amount is divided 5 ways.
Each of you are expecting to clear $37,500.
Each of you REALLY did pay $12,500 in federal taxes from your winnings. Depending on your income and deductions, you may have monies coming back or you could owe more in taxes.
EXAMPLE: If you are in the $14,600 to $59,400 income bracket - Your total tax due for your win would be $6,770 yet you've paid $12,500.
But in Texas, Wisconsin and Georgia, the lotteries report that one person won all that money and one person paid all those taxes because they refuse to accept 5754 from their players. To overcome what has been fraudulently reported to the IRS, you have lots of work to do at the end of the year and the probability of it becoming a nightmare is very high.
IF the Lottery Refuses To Accept IRS Form 5754 - The IRS Suggests ...
One IRS agent suggested filing a lawsuit against the lottery for refusing to accept IRS Form 5754.
Simply put, it was apparent to me that the IRS didn't know that the lotteries were refusing to accept these forms from taxpayers. Obviously, they were caught off guard when I contacted them.
I'm mailing a form (3949-A) to report Texas but I would appreciate it if others would submit complaints as well. The more complaints we have from Texas, the better our chances of correcting this gross injustice will be. Same thing applies to those of you in Georgia and Wisconsin.
And let's not forget, it is to the states advantage to accept 5754's due to the opportunity to collect overdue debts!
Texas Pool Winners ... When It's Time To Do Your Tax Return And You Don't Have A W2-G ...
Of course, most tax preparers charge you according to how many forms they have to fill out so you can expect to pay more for your tax return. A very unnecessary expense when all the lottery had to do was to give you a W2-G to avoid the headaches in the first place.
I'm also quite certain the IRS would prefer to have this data reported by the lotteries rather than by the taxpayer.
Expect to be be audited ... especially if someone in the group did not claim his winnings or if someone claims that he's paid more taxes than the rest of you.
I see nothing favorable about playing in Texas pools (or Georgia and Wisconsin). Now I fully understand why pool players report financial disaster and broken friendships as a result of winning.
WARNING - GIFT Tax - One IRS writing states that IF a pool player did not submit Form 5754 to the state lottery at the time they claimed their prize, then each member who received a check from the person who did claim the prize would then have to pay a GIFT tax on the monies he received.
For 2006, anything over $12,000, the gift tax is 46% of the total prize amount. The gift tax is calculated on the total prize amount less $12,000, not the amount after federal taxes were withheld.
In the example above, instead of collecting $37,500, after paying a gift tax, one MIGHT clear $17,000 from the so-called $50,000 prize!
HOT TIP - If you communicate with the IRS about your tax situation and they tell you something - get it in writing so that when you are audited and the auditor asks you why you did something, show them the writing you received from the IRS. As you can see, you may get different answers so you'd better cover yourself!
Before I go into Texas' excuse for not accepting 5754's, let me express my shock regarding the TLC policy regarding not accepting 5754's in light of Executive Director Sadberry's BAD personal experience with the IRS.
Now, what excuse does Texas use in refusing to accept IRS Form 5754 from players?
First of all, 16 TAC 401.302 and 401.304 is the Rule. The TLC has full authority to change it however and whenever they see fit. They also have this way of interpreting things the way they want. The TLC does not have to go to the Legislature to have legislation written. Lord only knows how often they changes our games without approval from players or the legislature!
Anyway, here's what 401.302 and 401.304 says - .302 and .304 say the same thing ... "(8) The director shall recognize only one person as claimant of a particular prize. A claim may be made in the name of a person other than an individual only if the person possesses a federal employer identification number (FEIN) issued by the Internal Revenue Service and such number is shown on the claim form. Groups, family units, clubs, organizations, or other persons without an FEIN shall designate one individual in whose name the claim is to be filed. If a claim is erroneously entered with multiple claimants, the claimants shall designate one of them as the individual recipient of the prize, or, if they fail to designate an individual recipient, the director may designate any one of the claimants as the sole recipient. In either case, the claim shall then be considered as if it were originally entered in the name of the designated individual and payment of any prizes won shall be made to that single individual. Once a ticket is validated, it will not be returned to the winner, but will be forwarded to the lottery, along with the completed claim form."
My comments regarding the TLC's excuse and the written rule:
Speaking of spending monies for tax advisers and lawyers - should you win and should you attempt to ask the Texas Lottery who you should call for financial help - they are NOT allowed to refer anyone to you.
It has recently been alleged to me that a TLC staff member referred a winner to someone in Salado for help. This information surfaced because the winner found out that he paid far more in commissions than what other experts told him he should have paid. The winner is suspecting that there were kickbacks involved. I will be checking into these allegations SOON. So watch for this story ...
One lawyer in Houston voiced her opinion about the states refusal to accept 5754's - she said the TLC wouldn't accept them because they were too lazy to issue the W2-G's. She probably hit the nail on the head!
26 State Lotteries report that they recognize only ONE winner and will issue only ONE check. (Like Texas, Georgia and Wisconsin claim) But these 26 lotteries DO accept 5754's and they DO issue separate W2-G's to comply with IRS regulations. The remaining states recognize all winners and issue separate checks. I'd say they are consumer friendly and smart ... unlike Texas, Georgia and Wisconsin.
For the record, I did not ask Georgia or Wisconsin for their reasons. I feel certain that I already know why. Though I will say that a winner in Georgia reported to me that the Georgia Lottery "claims" they got a waiver from the IRS.
FYI - Georgia is NOT a state agency, they are a Corporation and CAN be sued. It is my understanding that suits are forth coming now. Did you know that Georgia is the only state that refuses to tell Mega Millions players what total sales were for each drawing. Apparently Georgia is not accountable to the people.
Additionally, I would suspect that lawyers who may be reading this see a golden opportunity to file class action lawsuits against Texas, Georgia and Wisconsin on behalf of ALL the players who may have had to pay higher taxes resulting from the lotteries refusing to accept 5754's.
Is Texas, Wisconsin, Georgia breaking the "law" by refusing to accept 5754's?
All but one agent I communicated with suggested completing 3949-A. (The whistleblower form explained above) The agents believed it IS a violation because the instructions for completing a W2-G says issuing W2-G's was "required" and anything required is an "IRS Regulation." They "thought" penalties would/could be involved for the three states ... though they were not sure. They emphasized the need for people to submit IRS form 3949-A.
I feel compelled to tell you about one IRS agent that I spoke with - only because it was humorous to me though in reality, it was sad. He was the last person I spoke with and after a 10 minute discussion, I told him I simply wanted to know what would happen to a state lottery who refused to accept IRS Form 5754 from a taxpayer.
He said, "Nothing." I said, "Great, I finally got a definite answer. Now, please, answer just one more question and I'll hang up."
He said, "OK."
I continued, "Is there a law against reporting false winnings and taxes paid by/for an individual?" There was stone silence on his end for a good 20 seconds then he, in anger, said, "Government entities do not do such things. They just won't do that. They have integrity and would never falsely report earnings and taxes paid by employees, winners and the such."
I was shocked at his naive, fairytale believing reply. Immediately, I said, "What state are you in?" He replied, "California."
I spent the next 10 to 15 seconds thinking ... Do I or don't I ask him what he thought about the California Lottery sending an impostor to a press conference, what did he think about the Abramoff situation, the cover ups in Washington, what did he think about the Texas Lottery cheating Lotto Texas winners from their rightful winnings and finally, what did he think about Mark Foley writing legislation to protect kids when obviously, he himself was guilty of preying on them?
I decided the conversation was over because he probably wouldn't have believed me if I had told him these things so I just thanked him for his help. I only spent about 10 minutes speaking to him and already had writings and verbal answers from the IRS. I was just determined to find someone who could say if accepting IRS forms was a choice or a requirement - all to no avail.
To see what your state lottery does, just scroll down to see the list of all states and how they handle group/pool wins. There are additional remarks below the list too.
Instructions for completing IRS Form 5754
Methodology Used To Identify States
First, we search the lotteries web site to see if
Below are the results from 39 lotteries. Be sure and read
IRS Form 5754
|New Hampshire Lottery||X|
|New Jersey Lottery||X|
|New Mexico Lottery||X|
|New York Lottery||X||10 winners or less
11 or more
FEIN - One check
|North Carolina Lottery||X||X|
|South Carolina Lottery||X|
|South Dakota Lottery||X|
|Texas Lottery||X||*Misleading response. Response
|Vermont Lottery||X||X||Prefers Issuing Separate Checks|
|West Virginia Lottery||X|
* Texas' response to player inquiry: "Thanks for your interest in the Texas Lottery. Yes, the Texas Lottery Commission will only issue one check. If you have paid a portion of the prize you claimed to one or more other persons and you think it is appropriate to issue an IRS Form 5754, then follow the instructions provided by the IRS. However, if you have further questions on how the winnings should be reported on your tax return, you may want to contact the IRS or a tax specialist."
Why is the Texas' reply misleading? Because IRS 5754 must be completed PRIOR to receiving the original prize payment from the lottery. The person who collects the money cannot issue form 5754 after he has received payment. The Texas Lottery told the player ... "If you have paid a portion of the prize you claimed to one or more other persons and you think it is appropriate to issue an IRS Form 5754, then follow the instructions provided by the IRS."
The "instructions" from the IRS is to submit Form 5754 to the Lottery at the time a player makes his claim. It cannot be done after the fact. Did the Texas Lottery "confirm the procedure" as requested in his original message? NO.
The players interpretation was that the Texas Lottery would accept IRS Form 5754 but I recognized that the TLC failed to answer the direct question. Most all other lotteries were very clear and precise with their answers - they did not require a second writing to obtain an answer to the question. But not good ole Texas! Imagine that.
** Wisconsin Response: "I do not believe so. In order to get the prize on a winning ticket split amongst a group of people, by Wisconsin law you must get a court order. Without a court order, we can only pay one person. Once that happens, every winner will receive a W2-G for their share of the winnings. Although I do not know the purpose of Form 5754, it is likely that the IRS is unaware of Wisconsin law regarding this matter. I would actually recommend talking to an attorney about it, as one would be necessary for the court order anyway. Wishing you GOOD LUCK playing Wisconsin Lottery games!"
Does anybody believe that the IRS is unaware of Wisconsin's state laws? <grin>
Can you believe that the Wisconsin Lottery does not know what IRS Form 5754 is? <grin>
An Interesting Observation
The vast majority of the states responded to our email question either the day they received it or by the next day. The only two states where I identified myself up-front when asking if they accepted 5754's was to Texas & Georgia.
Ironically, Texas took from Sept 11th until Sept 19th to just say NO they do not accept 5754's, then it took them another 3 days to tell me WHY. It took Georgia 3 days - (Tues, Wed, Thurs) to answer NO yet they are currently facing problems with their Legislature over this very subject as I write this story.
The point I'm making here ... I can assure you that if I had been a winner, Texas & Georgia would have answered YES or NO immediately regarding accepting 5754's like all the other states did ... including Wisconsin.
Clearly, I am not being treated in the same manner as all other people are treated.
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