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Federal Judge: Offshore Online Gambling Accounts Are Reportable Foreign Financial Accounts

A federal district court judge in California has ruled that FirePay, PartyPoker, and PokerStars online gambling accounts are subject to the foreign financial account reporting rules.

Ok, so who cares?

Any U.S. taxpayer who has or had offshore online gambling accounts. If a U.S. taxpayer’s total maximum balances in foreign financial accounts exceed $10,000 at any point during a tax year, he must file FinCEN Form 114, formerly known as the FBAR.

In the case United States v. Hom, the defendant had online gambling accounts with PokerStars, PartyPoker, and FirePay in 2006 and 2007. The defendant acknowledged that the aggregate amount of the funds in these accounts exceeded $10,000 in U.S. dollars during 2006 and 2007. But, he contended that they were not foreign financial accounts.

The judge disagreed. Because FirePay, PokerStars, and PartyPoker all functioned as banks, said the court, they fall within the scope of the definition for a reportable account. The judge granted the IRS’s motion to impose against the taxpayer FBAR penalties of $10,000 per account not reported per year.

We’ve discussed this issue before. I said:

1. It is possible Treasury could at some point view offshore online casino accounts as subject to FBAR disclosure, and

2. It is becoming more and more likely the IRS will have access to the records of offshore online casinos if and when offshore online casinos bring their operations to U.S. soil.

That was written two weeks before the Department of Justice seized the U.S. domains of Absolute Poker, Full Tilt Poker, and PokerStars on April 15, 2011.

As for (1):

Our judicial branch is tasked with interpreting the law. Our executive branch, including the Department of Justice, is tasked with enforcing the law. Will the DOJ suddenly allocate resources to penalize taxpayers who didn’t report offshore online gambling accounts because of this one decision?

Perhaps not, unless the violation also involves a serious offense such as tax evasion or it’s simply convenient to. Which brings us to (2):

I had suspected the federal government might obtain access to the records of offshore online gambling companies sometime in the future. Turns out I was correct, just for the wrong reason: Full Tilt Poker and PokerStars agreed to maintain all records relating to its business in the United States in connection with their domain seizures in 2011.

In order to retrieve funds on their offshore online gambling accounts that were frozen by the Department of Justice, some U.S. taxpayers had to provide their social security numbers. It’s clear the government can easily look into whether these U.S. taxpayers with larger balances filed FBARs. The questions remains of whether they will.

As Russ Fox notes, this is one court decision in one district. A federal district court decision is mandatory authority only on some lower specialized courts in that particular district. This case was decided in the Northern District of California. The court is headquartered in San Francisco and covers fifteen northern California counties.

If Mr. Hom appeals to United States Court of Appeals for the Ninth Circuit and the Ninth Circuit affirms the lower court’s decision, then the decision is mandatory authority on all district courts within the Ninth Circuit.

In all districts other than Northern California, the case is merely persuasive authority for now. This means all the other district courts may follow the decision but do not have to.

How should implicated U.S. taxpayers respond to the decision?

As I’ve said before, I don’t see the downside to playing it safe and filing the Form 114 going forward.

For taxpayers with prior years at issue, there are some options to consider. One is by coming forward through the IRS Offshore Voluntary Disclosure Program. This option may not be most appropriate for all taxpayers, as each taxpayer’s particular situation is different. A taxpayer should consult a tax professional to discuss specific facts and circumstances.

We’ll see if Hom decides to appeal or if the DOJ issues a statement on this…

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