Lottery winner tax evasion thwarted by IRS

Pennsylvania State Lottery

The Pennsylvania State Lottery pays big, if you’re lucky. But the IRS is watching. Image: Gerry Dincher/Flickr/CC BY-SA

Taxes and the lottery have both been prominent in the financial news recently.  A recent story touched on both. A man was indicted Wednesday for trying to hide lottery winnings from the IRS, proving, once again, that tax evasion is a risky proposition at best, and a bad idea for sure.

Man failed to report lottery income

Sherman W. Friend, a 69-year-old man from McClellandtown, Pa., was indicted before a grand jury April 4 for hiding about $481,000 in lottery winnings from the IRS.

The IRS estimates he evaded paying about $132,000 in income taxes between 2009 and 2010. According to the indictment, Friend attempted to sidestep his tax obligation by enlisting his friends to cash in the winning tickets for him. He faces two counts of tax evasion, and is scheduled to be arraigned on April 26.

Bucking the odds

Although it is not specified in the indictment how often Friend won, an unnamed lottery official told the AP that the Pennsylvania State Lottery was Friend’s main source of income for 2009 and 2010. A Bloomberg Rankings report last month concluded that state-run lotteries are the most often-played form of gambling in the nation, as well as the least likely to pay off.

[Playing the lottery gets costly. Installment payday loans are a sure thing.]

Spreading and hiding the wealth

According to court documents, Friend earned about $102,000 from lottery winnings in 2009, and another 379,000 in 2010. By enlisting others to cash in small winning tickets separately, their tax burden was unaffected. And Friend went tax-free. Or so he thought, for a time.

It was not specified whether the people cashing in tickets for Friend received a percentage of the winnings for their help.

A 5,000-to-one payoff

The official went on to say that the bulk of the winnings came from playing a multitude of 50 cent daily Big 4 game tickets. Winning numbers are drawn twice a day for the game. Players can invest any amount between 50 cents and $5 a shot. The odds of winning are about 10,000 to 1, but the game pays off 5,000 to 1. The payoff on a 50 cent bet can be as high as $2,500.

Lowering the odds

The chance of winning the Big 4 game can be dramatically increased by “boxing” combinations of four digits. By betting on 24 numeric combinations, the odds can drop to as low as 417-to-one. Those winnings pay off at a lower rate, yielding only 200 times the investment.

A sucker’s bet

Friend’s scheme seems, on the face of it, to be nearly fool-proof. But his case is yet another reminder that cheating at the tax game is a sucker’s bet. The IRS does not forgive, rest or leave a stone unturned.


Pittsburgh Live 
Beaver County Times
The Republic

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