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Tax Scam That’s Made Loser Lottery Tickets a Commodity on Craigslist

People are buying and selling loser lottery tickets in apparent effort to cheat.

— — There’s no escaping death and taxes, but some people may be trying to lighten their burden this tax season through a scheme that uses dud lottery tickets.

Some folks appear to be buying and selling old, losing lottery tickets on Craigslist with the intention of writing them off on their tax returns as gambling losses, tax experts say.

The premise is that people who’ve earned gambling winners want to offset some of the taxes owed on those earnings with a gambling loss. Kelly Phillips Erb, a tax attorney who writes for Forbes as the “Tax Girl,” says taxpayers have to report all their income, including gambling winnings. Conveniently, lottery and racetrack tickets often come without a paper trail, unlike gambling losses at a reputable casino. So people could potentially find old tickets on the floor or in the garbage and claim them as a loss when they file their taxes.

In one Craigstlist ad in the Detroit area, a seller lists $1,100 worth of losing lottery tickets for $70. The ad states: “Good for tax write-off for your 2014 taxes to offset your winnings.”

Another Craigslist ad from a user in Knoxville, Tennessee, simply requests to buy “loser lottery tickets.” The buyer states, “I would like the ones your [sic] tossing in the trash.” These sellers and buyers did not respond to requests for comment from ABC News.

Craigslist has not responded to a request for comment and the Internal Revenue Service declined to comment on this issue.

Nelson Rose, a professor at Whittier Law School and author of gambling books, told The Daily Beast some tickets could be sold online as memorabilia, which won’t get you in trouble with the IRS. One Craigslist user who posted a “wanted” ad for unwanted lottery tickets in California told ABC News that he simply wanted to double-check the lottery numbers online to see if they were winners.

Erb, the tax attorney, called the fraud scheme “silly.” She said the scheme is not “terribly widespread,” and the most famous case was a giant one from the 1980s that involved the winner of a $2.7 million jackpot winner. He and his accountant tried to use $200,000 worth of losing lottery and racetrack tickets to offset his lottery tax burden. They were caught, pleaded guilty to tax fraud charges and served time in prison.

“It’s oddly clever, but the potential offset and the potential for getting in trouble is not worth it,” Erb said.

The people who are attempting this are itemizing their tax deductions, which the IRS monitors. And if you happen to have losses that are the same amount as your winnings, it will likely raise the eyebrows of the IRS, she said.

Plus, if you’ve made some winnings in gambling and you’re not a professional gambler, you’re ahead of the game, she said.

“I know no one likes to pay taxes. If I win $10,000 on a scratch-off ticket, going to the trouble to manufacture losses is ridiculous and it’s tax fraud,” she said.

There’s no escaping death and taxes, but some people may be trying to lighten their burden this tax season through a scheme that uses dud lottery tickets.

Powerball Losers Make Lemonade By Selling Losing Lottery Tickets

Everyone wants to win, but if you don’t, at least you don’t have to pay taxes. On the other hand, can you deduct all your losses? Usually, the answer is no, since gambling losses are generally only deductible to the extent you have gambling winnings. You can deduct your gambling losses on Schedule A to your Form 1040. That’s where all your itemized deductions go. But your deduction is limited to the amount of your winnings. You must report your winnings as income and claim your allowable losses separately.

You cannot reduce your winnings by your losses and report the difference. However, if you win $100 but spend $50 on tickets, you really only have a $50 profit. From that simple rule, a business idea was born to straddle the gap between lottery winners and lottery losers. This ‘business’ is a controversial cottage industry that helps lottery winners dodge taxes. The idea was to gather up and sell losing lottery tickets. Just go on on Craigslist and eBay.

A customer holds a handful of Powerball tickets at Kavanagh Liquors on January 13, 2016 in San . [+] Lorenzo, California. Dozens of people lined up outside of Kavanagh Liquors, a store that has had several multi-million dollar winners, to purchase Powerball tickets in hopes of winning the estimated record-breaking $1.5 billion dollar jackpot. (Photo by Justin Sullivan/Getty Images)

Perhaps you might help winners offset the profits with what might look like real gambling losses. But beware, these losses are phony. Large volumes of losing tickets are worthless, but in an odd tax-shelter way, not necessarily to everybody. Someone out there might want to buy them! And what about the flip side of this anything-goes marketplace? Some advertisers want to buy winners, not losers. This is also pretty clever. Say you have a winning ticket, but you don’t want to step forward to claim it. You know it’s a surefire winner, but to stay in the shadows, you might be willing to sell it at a discount.

That way, the reasoning goes, you won’t have to pay tax. And the person who buys it will have to claim it and get taxed. In fairness, it’s not just the taxes that these closet winners are trying to dodge. There could be court orders like child support or spousal maintenance, or other types of legal debts. Sometimes the ads are explicit, indicating willingness to buy a $1,000 ticket for $750 and take care of the taxes.

Some people call these underground buyers “Ten Percenters.” For a fee, they’ll cash in your winning ticket so you can stay on the down low. But be careful. For all parties, there could be criminal violations here. The state or federal government might even be able to add a conspiracy charge. To be clear, being—or dealing with—a Ten Percenter is not wise.

The fact that the lotteries themselves are unhappy about this may be the biggest warning sign. Some claim that no one is doing enough to discourage this. In Massachusetts, the Attorney General’s office is said to be stirring the Ten Percenter pot. If someone cashes hundreds of winning tickets, what are the odds?Arguably, though, buying losing tickets is a more nuanced strategy. Losing tickets seem to be easy to find to generate phony losses.

If you had to prove you bought them when they still had a chance to win, that could mess up any tax strategy, no matter how misguided. So how big is this problem? It’s not clear, and much of the juice may be in small but repetitive dollars. That could mean the IRS won’t look too hard. Conversely, Ten Percenters in the horse racing industry–or in more big time lottery payments–could face tax evasion charges and jail.

But what’s legal and what’s not can be debated. It is evidently legal to buy or sell used tickets, though not for the purpose of tax evasion or fraud. A run for the state border with your cash isn’t likely to work either, however tempting it may sound.

Remember, you can be taxed even if you split the money with family, friends or charity unless you are careful. Lottery winners frequently make tax mistakes. In Dickerson v. Commissioner, an Alabama waitress won a $10 million jackpot on a ticket given to her by a customer. The Tax Court held her liable for gift tax when she transferred the winning ticket to a family corporation. Maybe you shouldn’t do tax planning in a waffle house.

The moral? Plan your tax moves carefully. Tax problems can snowball–not unlike Powerball jackpots.

Your losing lottery tickets might just be worth something after all, in the great free-for-all post Powerball drawing.