When most taxpayers and tax professionals think about the Foreign Account Tax Compliance Act or the Bank Secrecy Act, they think of bank accounts that Americans may be using to shelter funds from U.S. taxation. And though this is normally the case, the Internal Revenue Service is beginning to widen the scope of what an “account” is, under the law.

In a ruling handed down on June 4th, a Federal Court for the Northern District of California found that “financial accounts” that are subject to foreign reporting statutes aren’t limited to traditional banks1. In fact, it seems that under the ruling, any “digital construct” that holds money could require the filing of an FBAR. This includes online accounts held for the purpose of foreign online gambling.

Mr. Hom’s Gambling Activities

In 2006 and 2007, John Hom gambled online through digital poker sites such as PokerStars.com (based in the Isle of Man) and PartyPoker.com (based in Gibraltar). In order to play, Hom would transfer money into an account with a service called FirePay (based in the U.K.), which would then send those funds to his chosen gambling sites where they would be placed into an account directly with the respective digital poker service. Because Hom played with two different poker sites, he had three accounts: the FirePay account, the PokerStars account and the PartyPoker account.

During a routine audit of Hom’s taxes, the I.R.S. determined that the numbers didn’t add up and they opened an FBAR audit and discovered that he had not filed FBAR’s for the accounts until 2010. The I.R.S. assessed penalties for $30,000 ($10,000 per account) for 2006 and a $10,000 penalty based on his 2007 PokerStars account.

Hom argued that the online gambling accounts weren’t “foreign” because it is possible that the gambling services were holding his money in a U.S. account. It is true that all three of the online gambling services had bank accounts in the United States and therefore a real possibility existed that Hom’s money was actually being kept in a U.S. bank. But the federal court ruled that it was irrelevant where his money was actually being kept. They court said in its’ ruling that the account at issue is not the bank account where the gambling services kept their money, but rather the fact that the account that Hom kept his money may have been a “digital construct” but was controlled by foreign corporations and therefore were considered “other accounts” under the Bank Secrecy Act.

What Does this Mean for Americans Who Gamble Online?

This federal court ruling plainly states that any American that has had a balance of $10,000 or more in an online gambling account must file an FBAR before June 30th. Further, if you have gambled online in previous years and failed to file an FBAR, it is in your best interest to seek the advice of an experienced tax attorney. The penalty for the willful failing to file an FBAR is 50% of the highest account balance for each year that you failed to file. There is also possible prison time for a taxpayer that is found to have willfully not filed an FBAR.

As we reported last week, the terms of the Offshore Voluntary Disclosure Program have changed. The government has made it easier to come clean and get current on your FBAR disclosures. But you must act fast. If the government finds out about your foreign accounts before you enter the voluntary disclosure program, you won’t be allowed to enter and will be looking at hefty penalties and possibly time in a federal prison.

The tax professionals at the Tax Law Offices of David W. Klasing have valuable experience in assisting taxpayers participate in the Offshore Voluntary Disclosure Program and avoid steep fines and jail time. But time is not on your side. FBAR’s for this year must be submitted by June 30th and foreign countries will start sending the I.R.S. American account information beginning on July 1st. If you have or have had money in a foreign account (including an online gambling account) contact us today for a reduced rate consultation.

1 United States v. Hom, 13 AFTR 2d 2014-XXXX, (N.D. Cal, 06/04/2014)