Back in June, a federal district court ruled in United States v. Hom that foreign online gambling accounts are reportable for FBAR purposes. An obvious question is what does this mean for prior years.
First, these are just my thoughts. I am not giving advice here on what any individual should or should not do. You need to consult with your own tax professional and possibly an attorney knowledgeable in FBAR issues.
There are three different foreign account reporting requirements for Americans:
1. The boxes on Schedule B of Form 1040;
2. The FBAR; and
3. Form 8938.
Each of these has a different statute of limitations. Form 8938 has only been in existence for two years, so it only applies for 2012 and 2013. The statute of limitations on tax returns is generally three years (though there are exceptions), so the boxes on Schedule B apply only to 2011 – 2013. The statute of limitations on the FBAR is six years; 2007 and earlier years are beyond the statute date. Finally, online gambling accounts were reportable for 2008 and 2009 (even before the Hom decision), so the years we’re concerned with for the FBAR are 2010-2013.
There are also different financial thresholds for these reports. On Schedule B, any foreign financial account must be reported. For the FBAR, the requirement kicks in at an aggregate balance of $10,000. Form 8938 must be filed if you are in the US and have $50,000 aggregate on December 31st or $75,000 aggregate on any other day of the year. If you are filing Married Filing Jointly (MFJ), the balance amounts double for Form 8938. If you are outside of the US, the limits are $200,000 aggregate on December 31st or $300,000 on any other day of the year (again, the balance limits double if you file MFJ).
Because I am a licensed tax professional, the only advice I can give is to comply with the law.
But Russ, you ask, what is the law? The IRS told us back in 2011 we didn’t have to report online gambling accounts; now a judge says we do. What’s right?
Unfortunately, no one knows. We’re left to make guesses. Oh yes, it’s a well known principle that the IRS is not bound by the answers they give. This makes no sense to me (or most tax professionals) but this, too, is the law.
So let’s look at some scenarios:
1. An individual has online gambling accounts with more than $100,000 in them since before 2008. This individual also has not filed tax returns claiming the income from one or more of his online gambling accounts. He also maintains foreign bank accounts. Anyone in this situation should speak to a tax attorney familiar with FBAR issues immediately. This individual has major compliance issues and is definitely a potential target of criminal prosecution. Usually, if you go first to the IRS before they find you, criminal prosecution is unlikely.
2. An individual began online gambling in 2012, but just in the Nevada and New Jersey legal sites. She has filed her tax returns noting her income (including the gambling income). There are no FBAR or other foreign account issues. The current regulated online gambling sites in Delaware, Nevada, and New Jersey are not foreign financial accounts.
3. An individual began online gambling in 2012 with non-US-regulated sites. His aggregate balance has never reached $10,000. The question here is whether this individual should amend his 2012 returns to note the foreign financial accounts. (Question 7a of Schedule B asks, “At any time during 2012, did you have a financial interest in or signature over a financial account…located in a foreign country?”) Amending your return for this would not change your tax but would extend the statute of limitations on the return. Because I am a licensed tax professional, the only advice I can give is to amend your return. Of course, given that this issue is not settled law, and there is no specific penalty for answering Question 7a incorrectly, most individuals will not amend their tax returns for this.
4. An individual was playing on Full Tilt Poker from 2008 – 2011 (until “Black Friday”). Since April 15, 2011, he has not played on any of the unregulated sites. This individual filed FBARs for 2008 – 2009 but not for 2010 and 2011. Two weeks ago this individual received through remission the $20,000 balance that he had on Full Tilt Poker. He did include his 2008, 2009, and 2010 Full Tilt winnings on his tax returns. He did not include his 2011 winnings on his 2011 return (but he did not make any withdrawals during 2011, so based on constructive receipt he did not have any reportable 2011 winnings); he plans on including his 2011 winnings on his 2014 tax return (filed in 2015).
Based on the Hom decision, this individual has a foreign financial account for 2010 and 2011. (It’s somewhat unclear whether or not he really has a foreign financial account for 2011. The “balances” at Full Tilt in 2011 were effectively not real; the Department of Justice charged that Full Tilt Poker was a “massive Ponzi scheme.”) That said, I would conclude based on the Hom decision that this individual had FBAR reportable foreign financial accounts.
The problem here is that late-filed FBARs can be subject to penalties. An individual late filing because it was unclear whether the account should be reported would almost certainly not be subject to the “willful” penalties; however, the non-willful penalties can be up to $10,000 per account. Each individual will have to weigh reporting these or not.
If the taxpayer amends his 2011 return (to note that he has a foreign financial account and that he filed an FBAR), this extends the statute of limitations. The 2010 return is beyond the statute date and would not need to be amended to note the FBAR.
There are numerous other scenarios I could write; most will feature some version of the above scenarios. There are some conclusions we can draw:
1. Even with the Hom decision it is possible that other courts will rule differently. This was a decision of a US District Court. An appellate court or another US District Court could rule differently; it is not clear that online gambling accounts are really the same as banks.
2. However, prudence requires that for 2013 returns (and forward) that until FINCEN announces that they do not want online gambling accounts reported on the FBAR, and until the IRS (or Department of the Treasury) announces that they do not want online gambling accounts reported on Form 8938 and the check boxes on Schedule B of Form 1040, taxpayers should report these accounts.
3. When an individual has reportable online gambling accounts for the past, he or she will have to weigh reporting versus the consequences of reporting. Everyone’s situation is different so there is no one size fits all advice here.
4. That said, individuals with unreported foreign financial accounts (on an FBAR) and who haven’t filed tax returns for those years should run, not walk, to a tax attorney who specialized in FBAR matters.
The best advice I can give is that if you are impacted by this, speak to your tax professional. Everyone’s situation is different. If you let your tax professional know how you are impacted by the Hom decision, your tax professional should be able to give you good guidance.