“Foreign” Online Gambling Accounts – IRS Says FBAR Filing Is Required

Given all the press surrounding “Report of Foreign Bank and Financial Accounts” or so-called FBARs, by now we all know about what should be reported on an FBAR, right? Well, given the Internal Revenue Service’s latest assertion in United States, v. John C. Hom, maybe we had better start studying once again.

Online Gambling Accounts

In the Hom case, the taxpayer was an avid and professional internet gambler with online gambling accounts maintained with overseas entities: FirePay.com (based in London), PokerStars.com (based in Isle of Man), and Partypoker.com (based in Gibraltar). Overseas gambling accounts were necessary because of US laws that prohibit the interstate operation of betting businesses in the United States, making online gambling technically illegal. The IRS discovered the accounts during an audit. The IRS issued a summons, but Mr. Hom did not comply. After the IRS sued to enforce the summons and the district court ordered enforcement in 2010, the taxpayer complied. The IRS assessed the FBAR negligence $10,000 penalty for each unreported online gambling account for each year at issue. Mr. Hom is presenting various defenses, including making the argument that the online gambling accounts are not “financial accounts” for FBAR purposes.

While these online accounts were not traditional types of financial accounts, such as a bank account, they functioned in the same way as such traditional accounts. For example, taxpayer opened the accounts in his own name, he had a user name and password, funds were transferred or disbursed from the accounts at taxpayer’s discretion, taxpayer could transfer funds from one account to another, deposit and withdraw funds at will and could carry a balance in the accounts. For these reasons, the IRS maintains that the accounts at FirePay.com, PokerStars.com, and Partypoker.com are “bank, securities, or other financial account[s]” for purposes of FBAR reporting under the Bank Secrecy Act provisions.

The IRS is asking the court to issue a summary judgment in its favor. The case will be heard on April 18th. It will be interesting to see how the case turns out.

Since 2013 FBARs are due no later than June 30, 2014 now is a good time to review some FBAR basics.

Who Must File FBAR?

US persons (including a green card holder, or individual who is treated as a US “resident” due to prolonged physical presence in the US pursuant to the US tax laws) who have ownership or control (for example, signature authority) of foreign accounts with an aggregate value of over $10,000 in the calendar year, must file this form. Please note that a non-US individual, who merely makes a so-called 6013(g) election in order to file a joint tax return with his/her US spouse, is not treated as a US person for purposes of filing the FBAR. The term US person includes entities such as corporations, partnerships, limited liability companies, or similar organizations that are organized or created under US law. Estates and trusts are also subject to the FBAR reporting rule.

Indirect interests in foreign financial accounts can also trigger FBAR reporting. A US person who directly or indirectly owns more than 50% of a corporation by vote or value will be deemed to have a financial interest in the foreign financial accounts owned by the corporation itself. Similar rules apply to interests held in partnerships or trusts that have foreign accounts.

An FBAR reporting duty will arise if a US person has “signature authority” over a foreign financial account(s) exceeding the $10,000 aggregate threshold. Signature authority is the authority of an individual (alone or in conjunction with another individual) to control the disposition of assets held in a foreign financial account by direct communication (whether in writing or otherwise) to the bank or other financial institution that maintains the financial account. Conceivably this means a US person with internet authorization of a transaction through the use of passwords also has a “signature authority” for FBAR purposes.

Foreign (non-US) “Accounts”

The most common types of financial accounts required to be disclosed are bank, securities, financial instruments accounts, commodity futures or options accounts and accounts held in commingled funds (e.g., mutual funds) when the account holder holds an equity interest in the fund. A mutual fund or similar investment is treated as a reportable account if it issues shares to the general public that have a regular net asset value determination and regular redemptions. Foreign life insurance or annuities with a cash surrender value are also reportable on an FBAR. Individually owned bonds, notes, stock certificates, and unsecured loans are not “accounts” and need not be reported on the FBAR; but if the same bonds notes or shares are held through a foreign broker, the brokerage account is reportable for FBAR purposes.

Remember, the FBAR rules apply only to “foreign” financial accounts. The term “foreign’ refers to the location of the account, and not where the financial institution is located. Thus, an account with a branch of a Swiss bank that is located in New York is not a “foreign” account, but a deposit with the Zurich branch of a US bank would be treated as “foreign”.

Common FBAR Mistakes

Many persons are under the mistaken belief that if one has several overseas accounts and a particular account is not over $10,000 then that account does not have to be reported. This is incorrect. Remember if the highest aggregate value of all of the foreign accounts on any day in the tax year is over $10,000, then all accounts must be reported on the FBAR. Another common mistake arises when an account beneficially belongs to another person. In this case it is often erroneously believed that the nominee does not need to report that account on an FBAR. This is incorrect; the nominee must still file the FBAR if the dollar threshold is met by the nominee. Other mistakes involve an improper understanding about what must be disclosed on the FBAR – for example foreign mutual funds or foreign life insurance / foreign annuity with a cash surrender value.

Form 1040 / Schedule B

Even if you do not have enough dividend or interest income to require filing of Schedule B with your tax return, US taxpayers filing Form 1040 are required to check a box on Schedule B, Part III, indicating whether they have an interest in or signature authority over a financial account in a foreign country. Make sure this question and its follow-up are answered both accurately and completely.

Filing Deadline

FBARs must be filed by June 30th of the year following the year to which the Form relates. Thus, the FBAR for 2013 is due no later than June 30 2014. NO extension of time is permitted. The FBAR, Form 114, must be filed online at the BSA E-Filing website.

Do not simply use an Internet search engine to ascertain where to e-file your FBAR as these may lead you to third party online businesses offering FBAR e-filing services. It is recommended that you use the official Banking Secrecy Act website of the US Treasury, above. You will be required to complete a user application. The FBAR form is not to be attached to any tax return. It must be filed (assuming the requisite conditions are met) even if the individual is not under an obligation to file an income tax return.

Detailed FBAR instructions are here.

In accordance with Circular 230 Disclosure

Virginia La Torre Jeker J.D., has been a member of the New York Bar since 1984 and is also admitted to practice before the United States Tax Court. She has 30 years of experience specializing in US and international tax planning as well as international commercial transactions. She has been based in Dubai since 2001; prior to that time she worked in Hong Kong for 15 years as a US tax consultant for international law firms, major banks (including HSBC) international accounting firms (Deloitte) and trust companies. Early in her career she worked in New York with the top-tier international law firm, Willkie Farr & Gallagher.

Virginia is regularly asked to speak at numerous conferences and seminars for various institutes and commercial organizations; publishes a vast array of scholarly works in her area of expertise, been interviewed by CNN and is regularly quoted (or has her articles featured) in local and international publications. She was recently appointed to the Professional Tax Advisory Council, American Citizens Abroad, Geneva, Switzerland. She was a guest lecturer at the University of Hong Kong, LL.M Program (Law Department) and served as an adjunct Business Law professor at the American University of Dubai and at the American University of Sharjah where she also taught the legal / ethical aspects of internet law and internet based transactions.


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