“The Income Tax Only Applies to Government Entitiies, Foreigners & Foreign Corporations”

A friend of mine received an email that states, in part:

“I do not agree with your synopsis though that gamblers of the 50 staets have any obligation whatsoever for the withholding of Federal income tax on lottery winnings. Why? Because subtitle A and subtitle C only relates to Government entities, foreigners and foreign corporations.”

I’m leaving out the name of the individual (protecting the guilty) who sent this missive.

Every so often, I get an email like this, from someone who says there’s no such thing as an income tax, it was never passed, etc. When this happens, I refer them to the Tax Protester FAQ. There, we read:

The claim that “United States citizens and residents are not subject to tax on their wages or other income derived from sources within the United States, as only foreign based income or income received by nonresident aliens and foreign corporations from sources within the United States is taxable, and similar arguments described as frivolous in Rev. Rul. 2004-30, 2004-1 C.B. 622” has been identified by the IRS as a “frivolous position” that can result in a penalty of $5,000 when asserted in a tax return or included in certain collection-related submissions. Notice 2007-30, 2007-14 I.R.B. 883.

The gentleman appears to make two claims: there is no right to withhold on lottery prizes, and US citizens don’t have to pay income tax on gambling.

Withholding rules are regulations, enacted after Congress specifies that withholding will occur in certain situations. One of these areas is certain gambling prizes. Lottery winnings are subject to 25% federal tax withholding if the amount won is $5,000 (or more).

Additionally, all income earned in the United States is subject to the income tax, unless Congress specifically exempted it. Gambling income has not been exempted. If you don’t pay the tax, you are violating the law. And if you ignore a W-2G that’s issued (and if you’ve won a substantial prize in a lottery, a W-2G will be issued), the IRS will catch up with you. And if you make that argument in Tax Court, you will find yourself potentially paying a financial penalty (e.g. a $5,000 fine) for making a frivolous argument.

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