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OAKLAND PARK, Fla (Gambling911.com) - People are purchasing losing lottery tickets on eBay for hundreds of dollars. In fact, a search for "losing lottery tickets” via eBay will typically result in stacks of worthless lottery tickets being sold for as little as $10 for Pennsylvania tickets to just shy of $600 for a jaw-dropping 90,000 Florida losing tickets.
These are sold as "vintage" or "collectibles" and sometimes they'll be described as "rare".
One professor of accounting at the University of North Carolina’s Kenan-Flagler Business School and research director of the UNC Tax Center offers another description: Tax Fraud
“This is a way to offset your taxes—clearly tax fraud,” Professor Jeffrey Hoopes tells Fortune. “There’s lots of ways to commit tax fraud. This is just an interesting one, and usually you don’t buy it on eBay, so it’s an interesting example.”
Indeed, deeper searches on eBay do reveal descriptions such as "tax write offs" or "tax deduction" in the listing titles.
Fortune's Catherina Gioino points out that all earnings from lotteries, raffles, sports betting, horse races and casinos are fully taxable and must be reported on a return. Thanks to a narrow provision in the tax code, IRS Topic 419, people can offset the taxes from their gambling winnings.
Offering such losing lottery tickets for sale is not a violation of eBay policy however.
"There are people who collect all sorts of random pieces of paper for whatever reason that don’t necessarily have to do with fraudulent tax documentation," Hoopes says. "So I do not doubt that even if you couldn’t deduct gambling losses for taxes, that somebody might be willing to buy these stacks.”
But as Hoopes states, claiming someone else's discarded or purchased tickets is tax evasion and a severe audit trap.
If you thought this was some cool new scam evolving from the internet, you'd be mistaken.
Knowledge of the scam dates all the way back to at least the 1980s.
Reece Morrel Jr., an Oklahoma CPA who files taxes for gamblers and runs Lady Luck Diary website, explained the extent of the ruse to the Daily Beast.
“There is a gray market out there for these lottery tickets,” said Morrel. “There’s companies set up today to rent losing lottery tickets just for your audit."
One doesn't go rummaging through neighborhood trash containers to obtain these losing tickets to sell on eBay. Instead, sellers obtain losing lottery tickets in bulk typically by collecting discarded slips from convenience store trash cans or recycling bins near lottery terminals.
An eBay spokesperson confirmed their policy to Fortune: “Expired lottery tickets with collectible value may be listed on eBay as long as the listing clearly states the item is expired and is permitted for sale under local law. Listings that promote potentially improper uses of these items are not allowed and will be removed.”
Listings that include such wording as "Tax Write Offs" are often removed by eBay.
Creative loopholes exist nonetheless.
“EBay just facilitates transactions between two people. They never take hold of the inventory,” Hoopes said. “I don’t see eBay really ever being liable, but I’m not a lawyer.”
The IRS knows about this trick (especially being that it is nothing new) and has rules to stop it. The losing lottery ticket claims will stick out like a sore thumb. The odds of an audit are much greater.
To claim a loss, the IRS requires a daily log. This log must show the exact dates, times, and places of the bets. A taxpayer must prove they were the one who bought the ticket. Bank statements, credit card receipts, or loyalty rewards cards are used for proof.
Purchasing losing tickets after the fact to manufacture a deduction could provide evidence that the deduction was intentional rather than an innocent recordkeeping mistake.
There are two broad levels of exposure:
Civil tax fraud: The IRS can assess the unpaid tax, interest, and a 75% civil fraud penalty on the portion of the underpayment attributable to fraud.
And even more serious....
Criminal prosecution: A willful attempt to evade federal income tax can constitute felony tax evasion under 26 U.S.C. §7201, carrying up to 5 years in prison and a fine of up to $100,000 for an individual, plus prosecution costs.
There is some precedence for this as well.
In the Phillip W. Cappella case, Cappella had won a $2.7 million Massachusetts lottery jackpot. Prosecutors said he and his tax preparer, former IRS employee Henry Daneault, obtained roughly 200,000 losing lottery tickets from a collector. The tickets were reportedly “rented” for $500 and were then used to substantiate a phony $65,000 gambling-loss deduction, saving Cappella about $20,150 in federal taxes.
Both men pleaded guilty to federal tax-related charges, and later accounts of the case report that both served time in prison.
What's striking is that the alleged tax savings—about $20,000—wasn't enormous compared with the jackpot.
- Aaron Goldstein, Gambling911.com
