“FBAR” stands for Report of Foreign Bank and Financial Accounts.
A U.S. taxpayer who has total maximum balances in foreign financial accounts that collectively exceed $10,000 in a calendar year must file FinCEN Form 114 (formerly TD F 90-22.1) with the Department of Treasury no later than June 30 of the following calendar year.
The FBAR is now filed online.
Last week, a federal judge ruled in United States v. Hom that a taxpayer’s accounts with FirePay, PartyPoker, and PokerStars in 2006 and 2007 were foreign financial accounts subject to FBAR reporting. This is the first court opinion addressing whether an offshore online gambling account was considered a foreign financial account.
The decision is noteworthy because the penalties for failing to timely report financial accounts are severe. Non-willful violations are $10,000 per account not reported per year.
In Hom, the taxpayer was slapped with $40,000 in penalties for not reporting his three accounts in 2006, and not reporting one PokerStars account in 2007.
The taxpayer in Hom was at least fortunate to not have been hit with the willful violation: the greater of $100,000 or 50 percent of the amount in the account at the time of the violation.
Since regulations amending the definition of reportable accounts became final in 2011, the U.S. Treasury has not said whether offshore online gambling accounts are reportable. The language appeared to narrow in scope leaving such accounts outside of the definition. With uncertainty looming, I expressed caution:
[P]erhaps the prudent move at this time is to spend the 10-15 minutes it takes to complete the FBAR and send it in.
Considering Hom, it now seems more prudent than ever before to report all foreign online gambling accounts on the FBAR. The accounts include, among others, accounts similar in nature to FirePay, PartyPoker, and PokerStars.
FirePay was a U.K.-based online money exchange service, similar to PayPal. The defendant in Hom used a FirePay account to transfer money to and from his online PokerStars and PartyPoker gambling accounts.
To be clear, the Hom decision does NOT cover an online gambling account opened with a state-licensed online gaming operator. An account at PartyPoker in New Jersey, for example, would not be reportable. PartyPoker in New Jersey operates under a New Jersey limited liability company.
The New Jersey PartyPoker account is distinguishable from an account with PartyPoker when the site was accepting wagers from U.S. players in the late 1990s until 2006. At that time, PartyPoker’s Gibraltar company was not licensed to operate in any U.S. state. It was this type of offshore-based account in Hom that was found as reportable on the FBAR.
That said, I can see another judge – whether on appeal or in a different case – concluding differently regarding the PartyPoker and PokerStars accounts. A reportable account includes, among other things, “[a]n account with a person that is in the business of accepting deposits as a financial agency.”
The judge felt that PartyPoker and PokerStars essentially functioned as banks, by holding funds for third-parties and disbursing them at their discretion.
I think there’s at least as strong an argument that online gambling companies have not functioned like banks. Banks are in the business of far more than accepting deposits for third-parties, like issuing debit cards, paying interest on deposits, and extending credit.
Hom was decided in a federal district court. Other federal district courts might follow the decision, but they don’t have to. If Hom is appealed to the Ninth Circuit and affirmed, then the decision is binding on all district courts within that circuit.
Taxpayers with unreported offshore online gambling accounts in prior years have to consider coming forward to the authorities.
I often tell clients, “It’s usually better to voluntarily disclose non-compliance and face the consequences than to be discovered by the authorities for wrongdoing.” Each taxpayer’s situation is different, however, and there is no one global approach that’s best for everyone.
In today’s online gambling world, there are still offshore sites accepting wagers from U.S. players. These accounts may be subject to reporting on the FBAR.
The relevance of FBAR reporting for online gambling accounts in the future seems likely to dissipate, as expanded state-regulated online gambling supplants the unregulated offshore sites.
In the meantime, we’ll see if the Department of Treasury speaks on this issue…
Disclaimer: Nothing contained in this article is specific legal advice, as each person’s situation is different. Contact a tax professional to discuss particular facts and circumstances.
IRS Circular 230 Notice: This article is not intended to be used, and it cannot be used by any taxpayer, for the purpose of avoiding federal tax penalties that may be imposed on a taxpayer.