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Any specific wagers that require the generation of a W-2G are reported to the government. (As garyscpa indicated, the ADW would also need to notify the bettor of that as well.).
ADWs are only going to report to the authorities the minimum they are required to report, which means normally they do not send the government a bettor's yearly win/loss statement. Technically, a person is supposed to report all income they receive in a given year, including any income that comes from a profitable year handicapping (even if that income does not qualify to be reported on a W-2G). I suspect the government does not go after these because they know that perhaps only 1% of handicappers are consistent winners, and the potential taxes monies they could secure are minimal, and take away resources they could use to go after bigger potential tax cheats.
Similar to JustRalph, I was audited in 2005 because of my racing activities. I knew I was correctly following the law, but it took 3.25 years (when the statute of limitations was set to run out) before the IRS finally ruled in my favor.
My advice: Know the tax laws and keep excellent records. Also seek wise and competent tax council when necessary.
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