Online gaming is technically illegal. The Interstate Wire Act of 1961 prohibits interstate gaming but that law was passed long before the Internet became the place of choice for many gamblers. Tens of thousands of Americans now play blackjack, poker and other games online. Because of US laws prohibiting internet gambling, the gaming site are all offshore.
Few people think of gaming accounts as offshore accounts but the IRS says they are reportable.
Most readers of this blog already know that bank accounts located outside the United States must be reported annually to the U.S. government if at anytime the aggregate balances exceed $10,000. Reporting is done on both one’s income tax return and also on a separate Report of Foreign Bank and Financial Accounts (often called an FBAR).
While millions of taxpayers are finally starting to report their foreign bank accounts, many other types of financial accounts are also reportable. According to the IRS, that includes online gaming accounts.
The courts are now deciding if the IRS is correct.
The IRS says that John Hom gambled online through several websites including PartyPoker.com (Gibraltar) and PokerStars.com (Isle of Man). To fund his gambling account, they say he used an intermediary account in London called FirePay. Although the IRS didn’t prosecute Hom for illegal gambling, they sued him in 2013 and claimed that all three of his offshore gaming accounts should have been properly reported. Because Hom had not filed FBAR forms on these accounts, the IRS demanded penalties.
FBAR penalties are some of the highest in the IRS’ arsenal. The willful failure to report an offshore account and file an FBAR is up to the greater of $100,000 or 50% of the highest historical account balance.
The IRS only imposed a negligence penalty on Hom and sought just $10,000 for each unreported offshore account. The FBAR penalty laws have changed since then, however.
Surprisingly, Hom appealed and challenged the IRS. He claims the accounts at PartyPoker, PokerStars and FirePay are not “financial accounts.”
Whatever your opinion on FBAR and foreign reporting requirements, we believe the IRS is correct in its technical interpretation of the rules. At the time Hom had his gambling accounts, the instructions on the 1040 form defined foreign financial account as” “any savings, demand, checking, deposit, time deposit, or any other account… with a financial institution or other person engaged in the business of a financial institution.”
The definition of “financial institution” is even broader.
According to the IRS, Hom could deposit, transfer or withdraw his money at will.
What does this mean for online gamblers?
The laws defining “financial institution” and “financial account” are very broad. When trying to determine what offshore assets need to reported on an FBAR form, think beyond traditional bank accounts.
Certificates of deposit? Yes.
Brokerage accounts? Yes.
Precious metals accounts? Probably.
Annuities or life insurance policies with a savings component? Probably.
If you have questions or concerns, speak with an experienced expat tax service, CPA or tax lawyer. The cost of noncompliance is simply too great to chance an error.
John Hom was lucky that he was only assessed a negligence penalty. These days, the IRS tends to assume that all failures to report an offshore account were “willful” thus warranting the much draconian FBAR penalty provisions.
Need more information? Call an experienced FBAR lawyer at Mahany & Ertl. The initial consultation is free and confidential. For more information, contact attorney Bethany Canfield at or by telephone at (414) 223-0464.