State lottery officials are cracking down on schemes involving fraudulently cashing in winning tickets in ways that help some evade paying taxes, child support and even spouses.
The effort comes as a recent review by the Office of Legislative Audits reported more than 360 people claimed high-dollar prizes 20 or more times in calendar year 2020. John Martin, director of the state lottery, told lawmakers that in many cases, the claims are part of a scheme known as “discounting.”
“I want to be clear that nothing in the OLA finding had anything to do with the integrity of our lottery games, ” Martin said in testimony this month before the Joint Legislative Audit Committee. “Our drawings are secure, and the results are always random. The prizes won were legitimate, and all were validated within our system. Again, the issue is about excessive cashing activity, not repeat winners.”
The lottery offers both scratch-off and daily draw games. Prizes range from $1 dollar to millions of dollars. Legitimate repeat winners can and do happen as some players will purchase multiple tickets, said Martin.
“Some players may win dozens of times throughout the year,” said Martin.
Of the 362 repeat winners identified in the report, auditors found eight who “won a high-dollar prize.” Each of those winners claimed prizes 200 or more times — a total of 2,035 claims totaling $4.5 million.
“After conducting a number of interviews, we believe that several of the frequent winners identified are the actual ticket purchasers,” he said. “However, we also believe that some actual purchasers are discounting.”
Martin said purchasers “engage in this activity to avoid their tax obligations while others potentially want to avoid a spouse finding out about their prize winnings.”
Martin explained the scheme.
State lottery officials are required to collect information on winners of prizes of $600 or more. Those winners are required to provide photo identification and a valid Social Security number.
That information is cross-checked against a database of people with outstanding debts, including child support, back taxes and criminal restitution.
“As a state agency, we are obligated to intercept these prizes for several state agencies, such as the Maryland Department of Human Services and the Central Collections unit,” said Martin.
In order to avoid having the winnings taken or otherwise detected, the actual purchaser will use a strawman to claim the winnings.
“For example, a $5000 prize that may have been offset by a $2,500 tax bill now becomes a a discounted prize of $4,000 to the original purchaser with the person who claims the winnings taking a $1,000 cut,” said Martin. “The state debt is still unpaid but the prize has been claimed and the report for income tax purposes and the Social Security number of the individual who claimed the winning ticket.”
Martin said the scheme is common in all states with lotteries and called it an “unethical and illegal” practice.
The agency now uses software to track high-dollar prize winners and look for patterns that might point to the scheme. Martin said gaming regulators would also take action against any of roughly 4,400 lottery sales outlets if they are found to be knowingly participating in the evasion scheme.
“Our agency is not a criminal enforcement agency, and we have no police powers,” he said. “There is nothing in our statute that would allow us to refuse payment to these claimants, though we have delayed some in order to conduct our own investigations. If we find enough evidence against an individual or individuals, we pass that information on to the proper authorities.”