Originally posted on 06/23/2012:

The IRS is concerned that you didn't pay taxes on the 5k and any legal trouble you may or may not get into will be for not reporting your income properly on your tax returns...that is what the IRS is concerned with and what they can get you in trouble for and something that you can easily remedy by paying the taxes on the 5k and whatever penalties they charge you for the mistake.

Online gambling is not technically illegal, but they have no idea if you sold a jet ski to a guy in the Bahamas, run a prostitution ring in Guatemala, or place a few bets online...the IRS just knows/believes that you failed to properly report your income on your taxes...since the money isn't from being a waiter or by some other transaction that cannot be traced they can point to you the discrepancy between your actual income and reported income as the 5k wire because a record of it exists.

Meaning your problem is not HOW you obtained the 5k but that your failed to report the 5k.

If it were me I would try to minimize the IRS looking into my fiances any more than they already have, apologize for the accidental oversight and ask how I can fix the problem as quickly as possible. If that wouldn't satisfy them and make them go away I would then talk to a tax expert and use them as a resource to find the easiest/least painful way to make them go away. I would never offer to the IRS that the 5k was gambling related or offer any explanation as to how you obtained it and instead focus on it being an accident, and oversight, or a regrettable mistake that you want to make right.