The Internal Revenue Service (IRS) is apparently ready to go after daily fantasy sports (DFS). A memo from the taxman states that it is considering applying the standing sports gambling tax to DFS and, if this decision is approved, there are serious implications for how DFS operators set up the boards.  However, there’s no need to start worrying yet, especially since the IRS may not be able to follow through with its wish.

Wagering Excise Tax Applied to DFS?

The recent memo announced by the IRS says that the federal excise tax on sports wagering should be applied to DFS, as well.  However, at this point, it is very soon to know if any action will be taken by the IRS against operators like DraftKings and FanDuel.

In the event the threat is headed for enforcement, it could mean millions in taxes on DFS entry commissions, and could possibly be retroactive, which would make things even worse.  At this moment, the federal excise tax rate on sports wagers in 0.25%, which is still a low amount compared to revenues these sports make every year.  FanDuel and DraftKings are the most important DFS operators in the country, and they still have not made any remark on the IRS internal memo released on Thursday.

Under the command of the “Office of Chief Counsel Internal Revenue Service Memorandum,” the document was released on July 23 and announced to media on August 10.  The memo was written by Holly Porter, an IRS associate chief counsel for Passthroughs & Special Industries, and has a subject line that reads, “Daily Fantasy Sports and the Excise Taxes on Wagering.”

A New Bill May Have Caused The IRS To React

Representatives Dina Titus (D-Nevada) and Guy Reschenthaler (R-Pennsylvania), are co-presidents of the Congressional Gaming Caucus.  They introduced a bipartisan bill in July to try to end the 0.25% tax, calling it outdated.  However, they may have inadvertently opened a can of worms, and it’s possible – but not confirmed – that the bill may have brought the subject of the tax and DFS to light.

The excise tax has been in effect for more than 50 years in order to fight illegal gambling. The thing is that DFS games have been virtually active for more than ten years, and it has never been considered gambling.  As a matter of fact, DFS were removed from the Unlawful Internet Gambling Enforcement Act, which establishes this as a game of skill.  But, now, the IRS wants to change the panorama of these games and grab a piece of the action.

DFS Are A Fan-Favorite

Actually, DFS games are available in almost every state of the country, with many in the process of legalizing it or having legislation to make it legal (New York is an exception). So, the point here is that some want to put taxes on a division of sports that traditionally has been given an exemption.

The decisive point of the IRS memo has addressed some issues that might come up in the process as well as some conclusions, but these won’t be considered in the present article because they are irrelevant.  The question here is what the ruling could mean to DFS and tax.  This depends on what the IRS does with the internal memo.

It also depends on whether Congress decides to pass the legislation that would eventually get rid of the excise tax.  As the law requires, businesses that pay the sales tax must also comply with an annual $50 per-employee tax for those who work in sportsbooks. Either way, the IRS is now paying attention to DFS, and DFS operators need to be prepared for the worst.