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FBAR Requirement for Offshore Online Casino Accounts in Doubt

February 24th, 2011 Leave a comment Go to comments

An absolute must for any blogger is to date one’s posts.  It may not seem all too important at the time of publishing, but very well could be.  The notion is particularly true if you are writing about the law:  It’s always undergoing changes.

Back in January, I wrote at length about how the FBAR rules require some online poker players to disclose their offshore casino accounts to the U.S. Treasury.  Less than two months later, the post now appears to be “old” law.

Today, proposed regulations governing the Foreign Bank Account Reporting laws became final.  Peruse the regs and associated comments here.  What has changed?

Before delving into the meaty part, I note that the regs are effective March 28, 2011.  Does that mean the 2010 tax year is not implicated?  No, it is.  The explanation for the revisions say, well, because you have until June 30, 2011 to file the FBAR for the 2010 tax year, the amended regs do apply to the 2010 tax year.

But that’s probably a good thing.  Here’s the subsection of 31 CFR 1010.350 telling us what is a “reportable account”:

(c) Types of reportable accounts. For purposes of this section—
(1) Bank account. The term ‘‘bank account’’ means a savings deposit, demand deposit, checking, or any other account maintained with a person engaged in the business of banking.
(2) Securities account. The term ‘‘securities account’’ means an account with a person engaged in the business of buying, selling, holding or trading stock or other securities.
(3) Other financial account. The term ‘‘other financial account’’ means—
(i) An account with a person that is in the business of accepting deposits as a financial agency;
(ii) An account that is an insurance or annuity policy with a cash value;
(iii) An account with a person that acts as a broker or dealer for futures or options transactions in any commodity on or subject to the rules of a commodity exchange or association; or
(iv) An account with—
(A) Mutual fund or similar pooled fund. A mutual fund or similar pooled fund which issues shares available to the general public that have a regular net asset value determination and regular redemptions; or
(B) Other investment fund. [Reserved]

For accounts with offshore online casinos, the pertinent language is in (c)(3)(iv), which is part of the definition for “other financial account.”  Now focus on “pooled fund.”  Those who deposit funds with an online casino have their funds pooled with funds of the other patrons.  Until these regulations became final, the consensus was that offshore online casino accounts were subject to FBAR rules.  Why?  Because the language following pooled fund, “which issues shares available to the general public,” was not in the old regulations.  Now, as you can see, they are.  For online poker players, this is good news.  Russ Fox also explains.

I read the comments from the Financial Crimes Enforcement Network regarding the change to (c)(3)(iv).  The comments specifically state that the “general public” requirement was incorporated in order to exclude hedge funds and private equity funds, shares of which are not issued to the general public.

In other words, hedge funds and private equity funds are “pooled funds,” interests in which do not fall under “other financial account,” and thus are not subject to the FBAR rules.  Although the comments do not explicitly exclude accounts with offshore online casinos from the “other financial account” designation, I don’t see how one can now argue that it could be considered an “other financial account.”  I’m all ears if you see something I don’t.

Bottom line: For the 2010 tax year and beyond, accounts with offshore online casinos are likely not subject to FBAR requirements.

(As of the date of this post, of course.)

Categories: Gambling, Gambling Tax Basics, IRS Tags:
  1. mike cannon
    February 28th, 2011 at 19:43 | #1

    While I understand your analysis and conclusion with regard to the change to (c)(3)(iv), doesn’t (c)(3)(i) give you some pause with regard to concluding the accounts are not subject to FBAR requirements. This seems comparable to (c)(1) but without the requirement that the deposit be with a bank or financial institution. Agency seems pretty broad and not defined here. Is the online casino acting as an agent for its customers as undisclosed principlals with the institution in which the casino keeps the pooled funds?

    • March 1st, 2011 at 22:24 | #2

      Good question.

      For purposes of the Bank Secrecy Act, “financial agency” is defined in 31 USC 5312(a)(1) as “a person acting for a person (except for a country, a monetary or financial authority acting as a monetary or financial authority, or an international financial institution of which the United States Government is a member) as a financial institution, bailee, depository trustee, or agent, or acting in a similar way related to money, credit, securities, gold, or a transaction in money, credit, securities, or gold.”

      Unfortunately, in the announcement making these regulations final, FinCEN did comment on this definition, other than mentioning its exceptions (which are not relevant here).

      So let’s look further back. In 2010, FinCEN issued Notice of Proposed Rulemaking 2010-4042, which includes the language in (c)(3)(i) above. Regarding this provision, FinCEN said: “FinCEN believes that it is necessary to include this provision to ensure that deposit accounts and similar relationships will be covered despite differences in terminology, operations of financial institutions, and legal frameworks in other countries.”

      FinCEN seems to be saying: We are including “financial agency” because the focus regarding “reportable accounts” is substance over form. In other words, the traditional methods financial transactions are conducted in other countries may differ from those in the U.S., yet these traditional methods should fall within the scope of reportable accounts, and can under the “financial agency” provision.

      Applying this rationale to offshore online casinos, I don’t think it squarely fits the purpose of including “financial agency,” because depositing funds into a casino (i.e. buying chips) is far from an non-traditional practice in the U.S.

      But that’s just my take. What’s more important is how the IRS views the applicability of (c)(3)(i) to offshore online casinos. It is possible they see it differently. Unfortunately, it’s anybody’s guess if and/or when we learn of its view.

      Ultimately, it is possible that offshore online casinos are still subject to FBAR requirements. It just now seems far less likely. Nevertheless, perhaps the prudent move at this time is to spend the 10-15 minutes it takes to complete the FBAR and send it in.

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