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March Madness fans, don't forget the IRS

Any Berkshire Hathaway (BRK.A) employee lucky enough to win $1 million per year for life in Warren Buffett's "Ultimate Office Bracket Contest" shouldn't waste their time hiding from the IRS.

Indeed, Buffett's staff will notify Uncle Sam of the winner's identity soon after verifying that the person defied steep odds and picked all the winners of the first two rounds of the NCAA Men's Basketball Tournament correctly. But even March Madness fans who don't hit it nearly that big need to worry about Uncle Sam because they're required by law to declare all their income -- including pool winnings and other successful bets.

While the IRS gets lots of flak for poor customer service, failing to protect taxpayers' data from hackers and what critics call politically motivated decisions, experts say it excels at matching information on paper or digitally. Once it arrived at the IRS, the Berkshire employee's return would be immediately flagged if information about the jackpot was omitted or didn't match IRS records.

Serious consequences could follow. Richard Hatch, the first winner of "Survivor," was sent to prison after he failed to declare his $1 million prize on his tax return.

According to the American Gaming Association, about $9.2 billion will be wagered on March Madness this year, an increase from $9 billion in 2015. These figures include everything from office pools, which are widely tolerated by U.S. businesses, to offshore bookmaking operations. March Madness lags only the Super Bowl in popularity with bettors.

Many gamblers may not realize that even illegal sources of income must be reported. Daily fantasy sports players need to take note because the game's legality is unclear in some states. It's a big issue. According to the Fantasy Sports Trade Association, about 57 million people in the U.S. and Canada have participated in daily fantasy sports, and overall spending on the games is expected to surge to $14.4 billion in 2020 from $2.6 billion.

One the flip side, losers get a break. The IRS allows gamblers to declare their losses as well as their winnings when they itemize deductions. However, tax expert Mark Luscombe of Wolters Kluwer noted that taxpayers need to make sure they have the right paperwork to back up their claims. And the IRS won't allow your gambling losses to exceed your winnings.

Wolters Kluwer offers some tips for March Madness gamblers including:

  • Winnings from gambling and contests are reported on line 231 of IRS Form 1040.
  • For gambling winnings of $600 or higher, special tax reporting is required.
  • Taxes may be withheld for gambling winnings of $5,000 or higher.
  • Regular gamblers must report gambling losses and wins separately, not only the difference.
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