The Israel Tax Authority is constantly looking for new targets in its struggle against unreported capital and tax evasion. After the real estate market, bank accounts in Israel and overseas, and Israelis who fly a lot and enjoy a lifestyle that does not correspond to their reported income, the gambling market is next in line, especially poker players. Sources inform "Globes" that several tax disputes with poker players who frequently fly to overseas competitions are currently being heard. The hearings concern how their income should be taxed and recognition of their expenses.
The potential income of several professional poker players varies from hundreds of thousands to millions of shekels a year. The players' winnings in their overseas competitions are likely to amount to hundreds of thousands of dollars or euros, and sometimes more. They also play informally in casinos and play poker online and in organized tournaments. Sometimes they lose, and sometimes they rake in the entire pot.
The Tax Authority has recently begun demanding a cut of their winnings. Before the struggle began, the Tax Authority conducted a comprehensive study of the gambling market and the poker rooms, and possesses comprehensive data about the dominant players, including the competitions in which they participated and the hypothetical amount of tax for which they can be assessed. Following the study, the Tax Authority began arresting those suspected of tax evasion and issuing non-criminal tax assessments for others.
Two weeks ago, the Tax Authority began investigations of gamblers, mainly poker players, on suspicion of not reporting millions of shekels in income. The investigations division and income tax investigation offices at the Tax Authority conducted intensive investigations over the past month of gambling in general and poker in particular. Among other things, shareholders and a director of the Israeli Poker Academy suspected of not reporting income obtained from participation in poker competitions all over the world were investigated. A person suspected of organizing games of chance, whose turnovers from gambling under his management are estimated in the millions of shekels, was also investigated. This activity, however, is not random. The Tax Authority marked Israeli poker players as a target several years ago, and began examining their gambling income in the years preceding the probe.
Business or gambling income?
The Tax Authority's campaign has accelerated during the past three years, during which tax assessment officers sent Israeli poker players demands for reports on their poker income from all formats: Internet, an Israeli tournament, overseas competitions, etc. Some poker players reported their income as income from lotteries, prizes, and gambling, which is taxed at a 35% rate (formerly 25%). The tax assessment officers, however, did not accept this interpretation, and made it clear to the players that the income won in tournaments was to be classed as income from business (a tax rate of up to 50%), not from competitions, prizes, and gambling. The next stage in the dispute between the Tax Authority and the players dealt with the question of whether their expenses would be recognized for "generating income;" in other words, whether the Tax Authority would allow them to deduct spending on flights, hotels, and any other expenses spent in the framework of their "poker business." The Tax Authority told them that they could, and this ostensibly settled part of the problem. Several poker players reached arrangements on the tax payments for their income, submitted receipts for their expenses, and deducted their losses, but that did not end the disputes. It emerged that while the Tax Authority had agreed to recognize some of the expenses spent on generating income, the gamblers assert that other expenses had not been recognized. The dispute involves payments that the gamblers claim to have paid to those who fund their participation in various tournaments around the world. In some of these tournaments, the gamblers are charged participation fees varying from tens of thousands to hundreds of thousands of dollars in some cases. Since many of them do not have this money, they resort to providers of funds, or the casino conducting the competition funds their participation. Payment for this funding is a percentage of the amount won, if any, at rates varying from 80% to 85% of the amount. The gamblers say that this is an additional expense they spend in order to generate gambling income, but the Tax Authority is unwilling to recognize this amount.
How much the players actually get
Sources inform "Globes" that there is currently a dispute between the Tax Authority and A., a poker player, who is arguing that this interpretation by the Tax Authority contradicts its ruling that his income from poker games is business income. He says that once the Tax Authority classifies the income as business income, it cannot rule that only some of the expenses spent can be deducted.
A. is a professional poker player who makes his living from poker tournaments in casinos in various countries. He started playing poker as a hobby 10 years ago, and became a more serious player, until it became his sole profession and business. He traveled abroad to take part in professional poker tournaments frequently in 2010-2012, including a series of tournaments that took place in a casino in Turkish Cyprus in 2010. It cost $25,000 to enter each tournament. During his stay at the casino, the tournament organizers offered to let him play without paying the entry fee, while if he won, he would get 10% of the amount won, after deducting the entry fee and 3% tax paid to the Turkish Cypriot tax authorities. If he won no money, he did not have to pay anything to cover the costs of the tournament. The casino asked him to participate because few participants had registered for the tournament, while the casino had undertaken in advance to pay the prizes to the winners. Since he did not have the participation fee, he accepted the casino's offer.
The Israeli player had a successful tournament, winning $207,000, but he says that he received only $17,000 – 10% of the amount he won, after deducting the participation fee and Cypriot taxes. He went on playing for a number of days, and says that he lost all his profits, plus $1,500 more that he brought from Israel.
As part of a comprehensive investigation of income from gambling by the income tax authorities, in which a large number of players participating in overseas tournaments were investigated, the player involved was questioned in the offices of the income tax investigative department for Jerusalem and the south on suspicion of failing to report income from his winnings in this tournament. He claimed that he cooperated fully with the investigators, and gave all them all the particulars necessary to verify his income and expenses, and said that the case was classified as non-criminal.
In August 2015, Tel Aviv tax assessment office no. 3 issued an assessment for him asserting that he had not reported his income from prizes he won in casinos in various countries in 2010-2012, did not report his salary income, and did not provide documents for the expenses he reported in his annual income reports submitted to the tax assessment officer. In addition, his expenses for tournament entry fees and overseas stays financed by the casino overseas were not recognized.
The Israeli player filed an objection to the entire first tax assessment, claiming that the he had never received the amounts attributed to him in the calculation for his assessment. He also objected to the ruling that his expenses in respect of tournament entry fees and overseas stays were not recognized as deductions. In the framework of his objection, he submitted a statement by the owner of the casino about the arrangement reached with him, and submitted the statement to the investigative department as part of his request for reducing his "ransom" payment. The investigative department sent the statement to the Tax Authority "ransom committee" for perusal, so that it would consider the effect of the statement on the summary investigative report and a reduction of the amount of "ransom" imposed on him. The Israeli poker player says that he nevertheless received a notice entitled "list of explanations of the tax assessment," which rejected his objection, while ignoring the statement, even before the "ransom" committee had made a decision. Through Advocate Sharon Fishman, who manages the criminal taxation department in the Doron, Tikotzky, Kantor Gutman, and Amit Gross law firm, the player appealed this ruling to the Tel Aviv District Court.
"Players were not dealt with for many years"
Meanwhile, while the case is outstanding, the court issued a ruling on another case of a professional gambler, Rafi Amit. The court ruled that income of a professional poker player is business income, not income from gambling and lotteries. The dispute between A. and the Tax Authority is currently being heard in court. Among other things, A. is arguing that he never actually received the money attributed to him in the assessments calculated for him. He further claims that even though a statement by the casino owner confirms this, the tax assessment officer elected not to recognize the arrangement with the casino, and ruled that A. owed tax on 100% of his winnings at the casino, while completely ignoring his actual income, which was at most 10% of his winnings at the casino. For example, the tax assessment officer ruled that A.'s taxable income from his winnings on August 18, 2010 was NIS 783,319, while his actual income was only NIS 56,670.
Fishman, who is handling several tax disputes involving this issue, says that the problem encountered by A. affects a large number of players, and concerns millions, and even tens of millions, of shekels that they earned in recent years.
Fishman comments, "The tax authorities did not deal with poker players for many years. An administrative decision was recently taken there to zero in on this segment of professional poker players. This is due mainly the accessibility of the information about them on the Internet, because there are now international websites that report who won international tournaments, who plays on the Internet, and who is traveling to overseas tournaments. They publish the names of the winners, where they come from, and how much money they earned, so the tax authorities suddenly have abundant evidence, and you can't tell them that you weren't there and didn't win." She adds that the case of A., who makes a living from games and tournaments, is no longer a dispute about whether his income will be taxed as a business. There is an important dispute about why all his expenses were not recognized, including payments to the casino and losses, in the framework of generating his income.
"Any other result is unjust, and contradicts the Tax Authority's own interpretation," she says.
The Tax Authority said in response, "Since an ongoing legal procedure is involved, we are unable to comment on the matter."
Published by Globes [online], Israel Business News - www.globes-online.com - on October 31, 2017
© Copyright of Globes Publisher Itonut (1983) Ltd. 2017