So I played the main and had a decent run in 2014, but I sold a good amount of myself. I filed my taxes and reported the profit I had of myself ([% of myself]*cash - [% of myself]*10k). I'm not sure if this is the way I was supposed to do it or not but that's over can't change that.

Fast forward to today and I got a letter from the IRS saying I incorrectly filed my taxes and are claiming I owe the amount on the W2-g from Rio.

So my understanding of the documentation I would need (although I figured it'd be during an audit not that they would send me a letter saying I owe it) is that if anyone profited over $600 I needed to fill out a 1099 form for them and keep it on file. This applied to one person, and although I didn't fill out the actual form, I asked this person for all information required for the 1099 and informed them it was for the 1099 before paying them. My assumption is they paid taxes on it. I'm assuming that'll be no big deal I'll fill a 1099 out and send it to the irs.

The problem is though that a lot of the action I sold was in 1% pieces, which didn't add up to a $600+ profit. I have records of each of these, but a lot of them are 2p2 screen names or just first names. Some I have paypal records of but some were done with cash. What kind of records are they looking for if they weren't for enough to require a 1099?

You can give them as much documentation as you can come up with. Start with a thorough letter of explanation as to how you reported the income shown on the W2-G. Then provide documentation such as records of the names and amounts you paid out to your backers; a full accounting; copies of emails or other communications with your backers; copies of the bank records corresponding to your payouts, etc. If they need more, they will let you know. For the accounting, don't use your "([% of myself]*cash - [% of myself]*10k)" formula. Instead, do it as: Net Win (cash-buyin) - total paid to backers. Should come out the same, but will make sense to the IRS.

By the way, did you report your poker income as a pro player, on Schedule C, or simply as gambling winnings on your Form 1040?

There are a number of issues here that may create a bunch of dust for you .. and your backers.

1) You must ALWAYS report the full amounts shown on W2/1099 forms on your tax returns. You can never 'net' these out in 'one' step. Depending on if you were filing as an amateur or Pro will determine where you can show the IRS 'all' of the transaction that took place, which will get you (hopefully) to paying tax on the proper net amount.

2) By not issuing and filing the 1099 you may now cause your backers to have filed incomplete returns themselves. Certainly they should've taken care of their own tax return, but it was your responsibility to report this information if the amounts qualified. This would be a 'new' (2nd) issue that you will have with the IRS. Even if your backer did report the income on their return, they may not have connected the income to you. Find out. It very well could be 'a very big deal' if you choose to pursue taking this aspect of it forward.

Although staking/swapping is very common you really need to think it through if there's a potential for large amounts to be won. Not working the tax implications into the agreement .. and in your case not following through .. may cause some rift in what was initially a 'happy' moment.

This was your mistake, not your backers. There may be penalty and interest due on top of the tax. You need to decide if the amounts in question are worth the journey you suggest you are about to take yourself (and your backers) on in order to reduce the amount you pay directly in lieu of maybe opening many more doors. GL