Posts Tagged ‘FBAR’

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

June 6th, 2014 No comments

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…

Comparing Form 8938 and FBAR Requirements

April 2nd, 2012 No comments

Form 8938 is a new form for the 2011 tax year. Taxpayers are required to disclose on the form “specified foreign financial assets” if the total value of the taxpayer’s interests in such assets exceeds certain thresholds.

I’ve written before about the requirements here. The Form 8938 instructions may also be helpful.

The IRS has realized Form 8938 is creating a fair bit of confusion. That’s because the FBAR (TD F 90-22.1) requirements were already in place. And they still are.

Form 8938 has not replaced the FBAR. They are two separate reporting requirements that have some similarities and some differences. To assist taxpayers with figuring it all out, the IRS recently posted a chart comparing them. View it here.

Categories: International, IRS Tags: ,

FBAR E-File Mandate Postponed

March 1st, 2012 No comments

Last July, the U.S. Treasury Department’s Financial Crimes Enforcement Network (FinCEN) announced it had developed an e-filing system for FBARs. Then in September, FinCEN proposed to require all FinCEN reports (including FBARs) be filed electronically as of June 30, 2012.

Last week, FinCEN announced its decision to postpone the proposed FBAR e-file mandate until July 1, 2013.

Taxpayers may still voluntarily e-file 2011 FBARs through the BSA E-Filing System. 2011 FBARs must be received by the Treasury Department no later than June 30, 2012.

Categories: International Tags:

Hurricane Irene Extends OVDI Deadline to September 9, 2011

August 27th, 2011 4 comments

The eye of Hurricane Irene is approaching New York City. At approximately 7:00PM (just under an hour from the writing of this post), the strong bands of rain are expected to arrive, and continue throughout the night into tomorrow.

Fortunately, I live in a “no zone.” This means that, according to folks at the Mayor’s office who put this map together, I face a strong threat of flooding only if the hurricane becomes a category 3 or 4, which appears very unlikely. Unfortunately a close colleague of mine lives in Zone A. Residents of Zone A were required to evacuate their homes by 5:00PM today. As unhappy as he was with having to take his four kids elsewhere, it’s better to be safe than sorry.

Representing taxpayers who are participating in the 2011 Offshore Voluntary Disclosure Initiative, I was concerned with some clients not timely meeting the August 31 deadline if required documents were not in transit to the IRS before I left the office yesterday. I can’t assume that roads will be drivable on Monday or that the NYC subway system will resume operations by then. So I decided to work late and wrap up OVDI matters, in order to be safe than sorry.

So, it turns out I’m not the only one concerned about this. The IRS is too. Yesterday, the IRS announced that the due date for offshore voluntary disclosure requests has been extended to September 9, 2011, due to Hurricane Irene.

The cynic interprets this announcement as a last-ditch effort to publicize the program. Although that motive may be at play here, the bottom line is that taxpayers who waited until the last opportunity to participate in the program were just given some more time, courtesy of the IRS. And taxpayers with undisclosed foreign accounts should strongly consider doing so.

Categories: International, IRS Tags: ,

New FBAR E-Filing System

July 21st, 2011 No comments

Earlier this week, the U.S. Financial Crimes Enforcement Network (FinCEN) announced in a news release it now offers to taxpayers who are required to file FBARs (Form TD F 90-22.1) the option to file the form electronically through FinCEN’s BSA E-Filing system. Who is required to file an FBAR?

A U.S. person who has a financial interest in or signature authority over foreign financial accounts must file an FBAR if the aggregate value of the foreign financial account exceeds $10,000 at any time during the calendar year.

This is only a step in the right direction, but it’s a start. Taxpayers who have joint reportable accounts and want to electronically file must file separate forms online; currently, the system can only handle one signature per FBAR. Also, a taxpayer’s accountant or attorney cannot file the FBAR on the client’s behalf. I suppose FinCEN isn’t very interested in paralleling BSA with the IRS e-file system at this time.

A taxpayer who has been required to file FBARs over the past several years but hasn’t should strongly consider coming forward. The deadline to participate in the 2011 IRS Offshore Voluntary Disclosure Initiative is rapidly approaching.

Categories: International Tags:

Noisy or Quiet?

June 17th, 2011 2 comments

The June 30, 2011 deadline looms near for filing 2010 tax year FBARs.  For some taxpayers with previously undisclosed foreign financial accounts, however, a rather important decision must also be made.  First, a quick reminder:

If the total maximum balances of all foreign bank accounts of a U.S. person during the tax year exceed $10,000, then that person must file the FBAR by June 30 of the following tax year.

Example: A U.S. person who deposited $150,000 into a United Kingdom bank account in her name in 2007 and has not touched the funds since then would almost certainly be required to file FBARs for 2007, 2008, 2009, and 2010.

The penalty for willfully failing to file the FBAR for a given tax year can be as high as the greater of $100,000 or 50% of the total balance of the foreign account per violation.  Non-willful violations that the IRS determines were not due to reasonable cause are subject to a $10,000 penalty per violation.  These possible penalties are separate and in addition to penalties that may be imposed for failing to report any taxable income associated with the account (e.g., failure to file, failure to pay, 20% accuracy-related penalty, etc.).

Many taxpayers don’t learn about the FBAR requirements until long after the filing deadline passes.  In fear of facing such significant penalties, a taxpayer may think, “I’d rather risk IRS discovery of me than to voluntarily come forward.”  In order to relieve the fear and encourage taxpayers to come forward, the IRS announced in February the launch of their 2011 Offshore Voluntary Disclosure Initiative (OVDI).  The deadline for participating in the 2011 OVDI is August 31, 2011.

The purpose of the program is to bring taxpayers who have failed to disclose foreign accounts from past years and have not reported the associated tax into compliance with U.S. tax laws.  If the taxpayer had already reported the tax associated with the account, then the taxpayer need not participate, and instead simply files delinquent FBARs for the appropriate years.

An advantage to disclosure via the 2011 OVDI is that if the taxpayer truthfully, timely, and completely complies with all program provisions, the IRS will not recommend criminal prosecution to the Department of Justice.  A disadvantage to the program, however, is that IRS examiners and managers administering 2011 OVDI cases have no authority to negotiate different offshore penalties; in other words, those penalties are strictly mandatory.  Participation in the 2011 OVDI is referred to as a “noisy” disclosure because the taxpayer comes forward knowing that penalties will be imposed.

What penalties do I speak of?  No, not the FBAR penalties described above.  Essentially, in lieu of the FBAR or other offshore-related information return penalties, the 2011 OVDI requires imposition of a penalty equal to 25% of the highest aggregate balance in foreign bank accounts/entities or value of foreign assets during the period covered by the voluntary disclosure; the 2011 OVDI includes tax years 2003 through 2010.  Again, the mandatory penalty is separate and in addition to any tax reporting penalties.

Because IRS agents handling OVDI cases have no discretion regarding offshore-related information return penalty imposition, taxpayers have considered alternative options for coming forward.  At present, one popular option is known as the “quiet” disclosure.

The idea behind a “quiet” disclosure is this: The taxpayer won’t participate in the 2011 OVDI because she doesn’t want to guarantee penalty imposition. Instead, the taxpayer will just file her delinquent FBARs and amended (or original) U.S. tax returns reflecting the income associated with the offshore accounts, and let the IRS decide whether to impose the statutory FBAR penalties.

By making a “quiet” disclosure, a taxpayer runs the risk of being examined and potentially criminally prosecuted for all applicable years.  The risk of criminal prosecution may be likely if, pursuant to the “quiet” disclosure, the taxpayer fails to fully disclose all foreign financial interests and associated taxes.  For example, check out the case of Boston venture capitalist Michael Schiavo.  Some possible criminal charges include tax evasion and filing a false return.  Willfully failing to file an FBAR is also a violation subject to criminal penalties.

To be clear, I’ll reiterate: A significant difference between the 2011 OVDI and a “quiet” disclosure is that while FBAR and offshore-related information return penalties are mandatory under the 2011 OVDI, these penalties are merely discretionary under a “quiet” disclosure.  An examiner reviewing a “quiet” disclosure has the ability to assess penalties in excess of those under 2011 OVDI, but may instead assess penalties for a lower amount, if at all.  As you can see, although the penalties imposed on participants of the 2011 OVDI may be reasonably estimated, the same cannot be said for taxpayers making “quiet” disclosures.

A taxpayer faced with the decision between making a “noisy” or “quiet” disclosure should certainly consult a tax professional to review all facts and circumstances.  There’s simply no “one size fits all” approach.

As a final note, for further discussion on this topic, be sure to check out Jack Townsend’s Federal Tax Crimes blog.  It’s well worth the read.

Categories: International, IRS Tags: ,

New FBAR Form and Instructions Fail to Clarify Applicability of Offshore Online Casino Accounts

March 31st, 2011 No comments

Not that I expected them to.

In late February, FinCEN (Financial Crimes Enforcement Network) issued final regulations governing the Foreign Bank Account Reporting (FBAR) laws, effective March 28, 2011.  These regulations do apply to the 2010 tax year.  In order to incorporate the new regs, the Department of Treasury recently released the revised Form TD F 90-22.1, more commonly known as the FBAR.

On the FBAR form itself, Treasury states:

The estimated average burden with this collection of information is 20 minutes per respondent or record keeper, depending on individual circumstances.

Sure, maybe if you only consider the “easy” part of this process–actually filling out the form.  The harder part is what must be done beforehand–determining whether one is even required to report an account.

I’ve written about the FBAR several times, but it can’t hurt to see the bottom line rule again:

If the total maximum balances of all foreign bank accounts of a U.S. person during the tax year exceed $10,000, then that person must file the FBAR by June 30 of the following tax year.

This rule hasn’t changed.  What has changed, among other things, is the scope of reportable accounts.  Fairly recently, I discussed in detail how a change in one provision seemed to exclude accounts with offshore online casinos.  A commenter then pointed out another provision that he suggested could include such accounts.  After careful thought (he raised a fair question), I didn’t change my position.  But I was sure to note just that:  It’s only my position.

The Treasury hasn’t commented on this issue as far as I know; it’s anybody’s guess whether one day they decide to.  I was hoping the instructions would provide more guidance; that was wishful thinking.

So we move on in a state of uncertainty.  Consider these two points:

  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.

Ultimately, I don’t see the downside to playing it safe and filing the FBAR (other than the supposed 20 minutes it takes to complete).

If you believe you should have filed the FBAR in past years and did not, consider participating in the FBAR Voluntary Disclosure Program.  Be sure consult a tax professional to discuss all of your options, of course.

Categories: Gambling, Gambling Tax Basics, IRS Tags: ,

New (and Additional) Foreign Financial Asset Disclosure Requirements

March 15th, 2011 No comments

It’s rather evident the Department of Treasury is working hard towards forcing getting more and more U.S. residents to (voluntarily) disclose their overseas financial accounts and assets.  After all, the U.S. income tax is a worldwide system; income tax is imposed on income of U.S. residents from all sources, regardless where it is earned.

As applied to some U.S. residents, however, this system seems overly broad.  The Internal Revenue Code imposes income tax not only on U.S. residents but also its citizens on worldwide income.  Consider the dilemma of this law-abiding expatriate.  This is not a unique situation; many U.S. born citizens move abroad without changing their citizenship, also easily subjecting themselves to, among other things, FBAR requirements.  As much as you and I may feel for these individuals, the bottom line is they are subject to the Internal Revenue Code and the Bank Secrecy Act, and there are no signs that the Treasury will change this result.

In fact, the signs point in the opposite direction.  As part of the Hiring Incentives to Restore Employment (HIRE) Act, the Foreign Account Tax Compliance (FATC) Act was passed in March 2010, establishing a entirely new and distinct foreign asset disclosure regime.

That’s right.  This is separate from and in addition to the FBAR rules.  Let’s look at the key components.

The relevant provision, IRC section 6038D, essentially says that an individual holding an interest in a “specified foreign financial asset” during the tax year must attach to his or her tax return certain information for each such asset if the total value of all such assets exceeds $50,000.  It’s unclear whether the 50k threshold: (a) is similar to the FBAR 10k rule, (b) is evaluated at the end of the tax year, or (c) need be met only at some point during the tax year.

All of the following are considered “specified foreign financial assets”:

  • a depository, custodial, or other financial account maintained by a foreign financial institution;
  • a stock or security issued by a person other than a U.S. person;
  • a financial instrument or contract held for investment that has an issues or counterparty other than a U.S. person; and
  • an interest in an entity that is not a U.S. person.

Clearly, the scope of assets is significantly broader than those covered by the FBAR.  Interests held in offshore hedge funds, for example, are specified foreign financial assets, but are not reportable accounts for FBAR purposes.

It’s worth re-pointing out that if subject to 6038D, the taxpayer must attach the disclosed assets to his/her tax return.  This is unlike the FBAR, which is filed with the Treasury office in Detroit, MI.  In other words, the IRS will clearly see the foreign assets owned.  Don’t be surprised if taxpayers subject to 6038D have a high audit rate.

The FATC is effective for tax years beginning after March 18, 2010.  In other words, most individual taxpayers are subject to the rules beginning with their 2011 tax year.

What about penalties?  Are they as absurd as the FBAR penalties?  Yeah, pretty much.

The baseline penalty is $10,000 for failing to disclose.  If the IRS mails to the taxpayer a notice of failure to disclose, and failure continues for 90 days thereafter, the taxpayer is subject to additional penalties of $10,000 for each 30-day period of noncompliance after the 90 day period, up to $50,000.  Ugh.

But that’s not all.  If the IRS determines additional tax due from the undisclosed assets, a 40% accuracy-related penalty may be imposed on the understatement of tax.

The one possible form of relief is that penalties will not be imposed if the failure to disclose is due to “reasonable cause.”  While that at least provides an out, don’t be the first person to test the standard.  I’d play it safe and disclose away, until hearing otherwise.

ADDENDUM: Moments before I published this post, international tax attorney Philip Hodgen published a very interesting letter written by a tax practitioner, who serves expatriates, to the Treasury about foreign financial asset disclosure.  View it here.

FBAR Requirement for Offshore Online Casino Accounts in Doubt

February 24th, 2011 2 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:

New FBAR Voluntary Disclosure Program

February 10th, 2011 No comments

In mid-January I wrote about the FBAR (Financial Bank Account Reporting) rules and pointed out that accounts with offshore online casinos are likely considered foreign financial accounts.  In case you forgot:

If the total maximum balances of all foreign bank accounts of a U.S. person during the tax year exceed $10,000, then that person must file the FBAR by June 30 of the following tax year.

Penalties for late filing (or not filing at all) are severe.  Indeed, I’m on the record for claiming the severity of the penalties as “ridiculous.”  Despite my stance, I would still advise an individual falling under the FBAR rules to submit the form, even if late.  That’s even more the case now.

Earlier this week, the IRS announced its 2011 Offshore Voluntary Disclosure Initiative.  The purpose of the initiative is to encourage individuals with unreported offshore assets to come forward.

If you haven’t filed the FBAR, why consider participating?  Most importantly, by voluntarily disclosing pursuant to the program, the taxpayer is shielded from prosecution by the IRS for tax evasion, relating to the disclosed accounts.  Additionally, penalties imposed are less than if merely filing the FBAR late (or not filing and getting caught).

The penalties under the initiative, however, are still pretty harsh.  The initiative requires taxpayers to pay 25% of the highest aggregate foreign account balance spanning 2003 to 2010.  (The normal penalty rate is 50%.)  And that doesn’t include additional tax and interest due, if any.  The penalty rate may be reduced to 12.5% if the aggregate accounts balance never exceeded $75,000.  Or reduced to 5% for taxpayers inheriting accounts they haven’t actively managed.

In order to participate in the program, account holders must file all documents by August 31, 2011.  Note that a taxpayer may first obtain a “pre-clearance notification” from the IRS to make the voluntary disclosure.  More details here.

Speculation is this will be the last time the IRS offers an FBAR voluntary disclosure program.  File by the deadline or be subject to criminal prosecution and heftier penalties.  Seems like a pretty easy call to me.

Categories: International, IRS Tags:
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