If you play online poker and keep your playing funds in accounts associated with the games, you may not have considered whether those accounts are FBAR reportable. Given that the Ninth Circuit issued a ruling earlier this year attempting to clarify the situation, you should probably familiarize yourself with the current state of the law on this subject. In United States v. Hom (2016), the court ruled on three types of playing accounts that a California district court had previously held were all subject to the FBAR.
In that case, John Hom--a high-stakes gambler--was assessed a total penalty of $40,000 for failing to report his three accounts in 2006 and his remaining account in 2007 ($10,000 per violation). The three accounts consisted of two accounts tied directly to poker services, PokerStars and PartyPoker (both are still in operation in 2016), and FirePay (an early competitor to PayPal no longer in existence), which transferred money from an account with that service into either his online poker accounts or his Wells Fargo bank account.
U.S. citizens who maintain accounts with foreign financial agencies are required to file the FBAR. For this requirement to apply, the funds must be “in a bank, securities, or other financial account” that is “in a foreign country.” In Hom’s case, it was undeniable that the funds were located in foreign countries since all three services were based offshore. The relevant question was whether they were held within a “financial agency,” which the court defined as a “financial institution,” a term comprising commercial and private banks as well as licensed senders of money.
In the opinion of the Ninth Circuit, the FirePay account was FBAR-reportable, and that fine should be allowed to stand. FirePay, which was based in the United Kingdom, had acted as a money transmitter, allowing Hom to move money between his bank account and online poker accounts. However--and somewhat surprisingly--the court reversed the fines related to the PartyPoker and PokerStars accounts. Those accounts, the court reasoned, “were used solely to play poker and there is no evidence they served any other purpose for Hom.” They were not acting as banks, and since the statute and its related regulations failed to define the term, the court consulted the dictionary and determined that no part of the dictionary definition of bank (“an establishment for the custody, loan, exchange, or issue of money, for the extension of credit, and for facilitating the transmission of funds”) could be applied to either of those accounts.
Though this was an unusual holding--it would seem logical that all of these accounts should be reportable for FBAR purposes, as the district court had originally held--this decision may influence other circuits. Nevertheless, individuals with concerns about the tax implications of these and other foreign accounts should seek professional advice before determining what they should report to the IRS.
For a free consultation regarding the FBAR or other tax matters, please contact The Law Offices of Aaron P. Richter, a Bethesda-based law firm with expertise in Tax Controversy, Business Formation, Estate Planning, and Tax Preparation.