The Internal Revenue Code contains a detailed list of the specific situations when federal income tax must be withheld. Application of the withholding requirement to gambling winnings appears in Section 3402(q) of the Code.

What Does H.R. 2140 Do?

The language of H.R. 2140 is designed to amend Section 3402(q) of the Code to eliminate the requirement that federal income tax be withheld on pari-mutuel winnings.  It would not change existing reporting requirements, currently set at $600 with odds of 300-1 or greater – the lowest threshold among all forms of gaming with an IRS requirement.

What Does the Bill Say?

ELIMINATION OF WITHHOLDING REQUIREMENT FOR PROCEEDS FROM PARIMUTUEL POOL WAGERS.

(a) In General- (1) Subparagraph (C) of section 3402(q)(3) of the Internal Revenue Code of 1986 (relating to winnings which are subject to withholding) is amended--
(A) by striking clause (ii),
(B) by striking ", or at the end of clause (i) and inserting a period, and
(C) by striking "(C) SWEEPSTAKES, WAGERING POOLS, CERTAIN PARIMUTUEL POOLS and all that follows through "(ii) a wager and inserting the following:
"(C) SWEEPSTAKES, WAGERING POOLS, AND LOTTERIES.—Proceeds of more than $5,000 from a wager.
(2) Paragraph (5) of section 3402(q) of such Code (relating to exemption for bingo, keno, and slot machines) is amended—
(A) by inserting "proceeds from a wagering transaction in a parimutuel pool with respect to horse races, dog races, or jai alai, and after "shall not apply to, and
(B) by inserting "CERTAIN PARIMUTUEL POOLS, before "BINGO in the heading thereof.

Changes that H.R. 2140 Would Make to Current Law

31.3402(q) Extension of withholding to certain gambling winnings

(1) General rule

Every person, including the Government of the United States, a State, or a political subdivision thereof, or any instrumentalities of the foregoing, making any payment of winnings which are subject to withholding shall deduct and withhold from such payment a tax in an amount equal to the product of the third lowest rate of tax applicable under section 1(c) and such payment.

(2) Exemption where tax otherwise withheld

In the case of any payment of winnings which are subject to withholding made to a nonresident alien individual or a foreign corporation, the tax imposed under paragraph (1) shall not apply to any such payment subject to tax under section 1441(a) (relating to withholding on nonresident aliens) or tax under section 1442(a) (relating to withholding on foreign corporations).

(3) Winnings which are subject to withholding

For purposes of this subsection, the term ''winnings which are subject to withholding'' means proceeds from a wager determined in accordance with the following:

A) In general

Except as provided in subparagraphs (B) and (C), proceeds of more than $5,000 from a wagering transaction, if the amount of such proceeds is at least 300 times as large as the amount wagered.

B) State-conducted lotteries

Proceeds of more than $5,000 from a wager placed in a lottery conducted by an agency of a State acting under authority of State law, but only if such wager is placed with the State agency conducting such lottery, or with its authorized employees or agents.

C) Sweepstakes, wagering pools, and lotteries

Proceeds of more than $5,000 from -

i) a wager placed in a sweepstakes, wagering pool, or lottery (other than a wager described in subparagraph (B)) .

 
(4) Rules for determining proceeds from a wager

For purposes of this subsection -
(A) proceeds from a wager shall be determined by reducing the      amount received by the amount of the wager, and
(B) proceeds which are not money shall be taken into account at their  fair market value.

(5) Exception for certain parimutuel pools, bingo, keno, and slot machines
The tax imposed under paragraph (1) shall not apply to proceeds from a wagering transaction in a parimutuel pool with respect to horse races, dog races, or jai alai and winnings from a slot machine, keno, and bingo.

(6) Statement by recipient
Every person who is to receive a payment of winnings which are subject to withholding shall furnish the person making such payment a statement, made under the penalties of perjury, containing the name, address, and taxpayer identification number     of the person receiving the payment and of each person entitled to any portion of such payment.

(7) Coordination with other sections
For purposes of sections 3403 and 3404 and for purposes of so much of   subtitle F (except section 7205) as relates to this chapter, payments to any person of winnings which are subject to withholding shall be treated as if they were wages paid by an employer to an employee.