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The UBS Case and Potential IRS Examination of Online Poker Company Records

One of the many popular questions currently circulating the pokerverse:  Is it possible the Department of Justice internet domain seizures of Full Tilt Poker, PokerStars, and Absolute Poker will result in IRS audits of poker players who were using these sites?

The simple answer:  Of course it is possible.

But that reply is far from enough to satisfy my curiosity.  As I recently discussed, the fact that FTP and PS agreed with the DOJ to, among other things, maintain all U.S. related business records only strengthens the possibility.  But to what extent?

I conveyed these points on Twitter shortly after reading the agreements.  This caught the attention of Alexander Ripps, a legal analyst in Washington, DC for the independent gambling market analysis firm Gambling Compliance.  He pondered how closely the settlement between the Department of Justice and UBS bank in 2009 may parallel the agreements reached by the DOJ with Full Tilt Poker and PokerStars, particularly in terms of making available customer information to the government (and hence possible audits for tax evasion).  Great question.

The UBS U.S. Tax Evasion Controversy

A brief background discussion about the UBS U.S. tax evasion controversy is first necessary.  UBS is a Swiss-based financial services firm.  It’s one of the giants.  In July 2008, UBS was accused by a U.S. Senate panel of assisting U.S. residents with committing tax evasion by shielding assets in offshore accounts.

In February 2009, as a result of the ongoing Department of Justice investigation of UBS’s U.S. cross-border business, UBS agreed to pay $780 million to the U.S. government in fines, penalties, interest and restitution.  A substantial portion of the $780 million represented U.S. taxes that UBS failed to withhold on the accounts.  UBS also entered into a deferred prosecution agreement on charges of conspiring to defraud the U.S.  As part of the agreement, UBS agreed to immediately provide the U.S. government with the identities of and account information for certain United States customers of UBS’s cross-border business.

The UBS case was purely one of tax evasion.  Back in 2000, UBS entered into an agreement with the Internal Revenue Service requiring the bank to report to the IRS income of its U.S. clients holding U.S. securities in UBS accounts.  UBS also agreed to withhold income taxes from United States clients who directed investment activities in foreign securities from the United States.  Ultimately, UBS failed to deliver on these promises to the IRS, and paid the price.  As did several UBS account holders.

The day after UBS entered into the deferred prosecution agreement with the DOJ, the U.S. government sued UBS to compel disclosure of the identities of up to 52,000 UBS U.S. customers.  After some jostling between the U.S. government and Swiss lawmakers, a final deal was reached in June 2010 to provide to the DOJ and IRS the identities of thousands of Americans accused of tax evasion.  Further investigations commenced, and many U.S. taxpayers were caught.  To make examples of these tax evaders, the IRS has listed the identities and corresponding ramifications for several previous UBS bank account holders.

Comparing the Primary Purposes of the UBS and Poker Company Investigations

Again, the driving force behind the Department of Justice’s investigations of UBS was alleged tax evasion; UBS broke its promises to the IRS.  Alleged tax evasion is NOT the driving force behind the recent indictments of the poker companies and their associated payment processors; the offshore poker companies did not enter into agreements with the IRS to withhold income tax from online poker players.

Instead, the case against the poker companies and their associated payment processors is for alleged bank fraud and money laundering.  Eleven individuals are charged with setting up sham companies to shield the nature of their financial transactions.

The purpose of evaluating these driving forces is to obtain a clearer sense of the DOJ’s intentions with the Poker Company case going forward.  Here, the DOJ didn’t commence investigations in order to punish tax evaders.  This point is further highlighted by the fact that, as far as we know, the DOJ hasn’t yet proceeded to obtain the identities of U.S. poker player accounts.  In the UBS case, however, the DOJ took such action the day after UBS entered into the deferred prosecution agreement.  The Poker Company case is to make examples of money launderers.

Also noteworthy:  In the UBS case, the DOJ knew that some account holders committed tax evasion because the evidence was there at the bank level.  Here, however, there is no evidence of tax evasion by U.S. online poker players on the surface.  It could take far more effort to locate tax evaders in this case.

Concluding Thoughts

To this point, the only indication that the DOJ may be interested in making tax evasion inquiries is the “Records Preservation” paragraph in both of the agreements with Full Tilt Poker and PokerStars, requiring them to maintain their U.S. related business records.  On the one hand, this aspect of the agreements leaves the door open for the IRS to also get involved.  On the other hand, it’s very possible the paragraph is merely a “just in case someday we feel like investigating” provision.  Ultimately, the extent of record review for tax evasion may require more manpower than the IRS can afford to commit.

We shall see.

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