This article originally ran in October 2000 Casino Player

Shirley and I were visiting some friends who live in Las Vegas. Although we met these people playing high limit video poker, they are not video poker pros. Calling them "knowledgeable amateurs" would be more accurate. They generally only play $5 and higher machines, and never play when the casino has the edge, but video poker is a small part of their life.

"Pete" was giving me a tour of the room in his house he used for his office. He showed me two different safes --- one locked and one unlocked. He told me that if I was ever going to rob him (!) that all of his money was kept in the locked one. The unlocked one only contained records and were useless to anybody except him in case of an IRS audit. I was welcome to LOOK at these records, but please, for Pete's sake, don't take anything out of there.

I was flabbergasted that anybody would say to me "if you steal from me, steal this and not that." When I got home I called "John", who I figured also probably had a tour of the same house and to ask if he had received the same spiel. Sure enough. He did too. John and I are still both trying to figure out whether or not we should be insulted. We ended up concluding that Pete figured that he never knew who was going to rip him off and so he told everybody. That way, his bases were covered. (We also concluded that Pete's real money wasn't in the locked safe. He probably had another one somewhere that was used for the valuable stuff. It's sad that we live in a society where you have to secure your valuables, but sad or not, it's smart to take sensible precautions.)

Once we got past the "how do you keep your cash secure" discussion, the subject of "what records do you need for the IRS" was on the table. Playing for $5 and higher, Pete and his wife generate hundreds of thousands of dollars of W2gs per year. Accurate records are vital. For one particular year, they might well have W2Gs totaling $250,000 and a net win of $5,000. Other years they win more. Some years they lose. But not often. Video poker is, after all, a player advantage game when you know what you are doing. In our example year, the $5,000 would be taxable (along with whatever income they earned from other sources.) But without records, the full $250,000 could be taxable. Pete keeps careful records, as should you.

Pete's records include, for each play, the date, the casino, the machine number, denomination, game type, net result, and any W2gs generated. When he plays in states that withhold part of jackpots for state taxes, he has a column for that too. Pete includes his scores whether he has won or lost, whether he has received a W2G or not. This is proper. There are people who do not report video poker income on jackpots where W2gs were not generated. These people are breaking the law.

One trick Pete uses that he shared with me might well be useful for you too. Let's say Pete was playing at Caesars Palace during some promotion. He would go to the ATM machine there and pick up a receipt that somebody had dropped on the floor. That ATM receipt would have Caesars Palace's name on it and the date. On the back of this receipt, Pete records which machine number(s) he played, how much he won or loss, and all W2Gs that were generated. When he gets home he carefully records that information in his annual log, but he SAVES THE RECEIPT. Four years from now when he is being audited, if the IRS agent asks about what he did on April 7, 1999, he goes into his records and pulls out the ATM receipt with that date on it. He would never claim that he used an ATM machine in a casino (after all, those charges are outrageous. No player intelligently seeking to win would consider using one of those.) But the receipt proved that he was IN THAT CASINO ON THAT DATE. And he has corresponding receipts for every other date.

Does that receipt prove that the numbers he entered were 100% accurate? No, of course not. But Pete has found that IRS agents are impressed with his conscientious effort to keep records that they accept the numbers he does write down. This is a very important thing. The IRS knows that many people apply some sort of "fudge factor" to their IRS records. They tend to be skeptical of your records about cash winnings because they are so easy to alter and you have many incentives to do so (albeit with serious penalties if you are caught lying and they can prove it). So finding a way that leads IRS agents to have more faith in your records is a very good thing.

I meet people all of the time who find keeping records way too tedious. This is fine as long as they never hit a jackpot. But most people reading a column about video poker probably at least hope they someday hit a jackpot. Without records they pay taxes on the entire jackpot. With records they only pay on the "winnings minus losses" amount.

Keeping gambling records suitable for the IRS is analogous to building fire hydrants. You need to build the hydrants BEFORE you have the fire. Waiting until you have the fire is way too late to build the hydrant. And certainly you hope to never use the hydrant. With records for the IRS, you need to document your winnings and losses BEFORE you hit the jackpot. Records hastily constructed afterwards tend to look suspicious and having a suspicious IRS auditor who wants you to prove the unprovable is something to avoid at all costs.

And as important as this is to video poker players, this is even more important to slot players. Why? Because slot players lose most of the time! Good video poker players have a reasonable chance to win most years, but not so with slot players. If slot players do not keep records then they have the double whammy of not only losing but also having to pay taxes! If they could document their losses, however, they would not owe any taxes.

There are other reasons to keep records, of course. Knowing your accurate history is the best way to take control of your future. Most people who don't keep records and lose, say, $10,000 or so a year in casinos, think they have lost a lot less. If they faced the fact that they were losing that much they might either play less or figure that it makes sense to learn how to do it more intelligently. (Of course, others do not want to know and don't want anybody else to know either.)

That's it for this month. Until then, go out and hit a royal flush.

Bob Dancer is America's best-known video poker writer and teacher. He has a variety of "how to play better video poker" products, including the software "Video Poker for Winners," Winner's Guides, strategy cards, his autobiography Million Dollar Video Poker, and his two novels, including Sex, Lies, and Video Poker. Dancer's products may be ordered at www.bobdancer.com or by telephone at 1-800-244-2224 M-F 9-5 Pacific Time.