One of my practice areas is professional gambling. Many gamblers maintained an account with the e-wallet firm Neteller. Neteller served as a financial intermediary between US customers and online gambling firms. In January, the Department of Justice arrested the two founders of Neteller and charged them with multiple offenses, including money laundering. Neteller then pulled out of the US market. Neteller announced today that they are cooperating with the DOJ, and that $55 million in funds had been seized by US law enforcement.
Neteller, in one swell swoop, lost over half of its business. Ignoring whether or not such business was legal, assume you were running Neteller. The Department of Justice has arrested your two founders, has decided to fight you, and you no longer have any means to make financial transactions to the United States. What would you do? Fight the US DOJ, or make the best deal you can? It’s clear from the Neteller press release that they are in negotiations with the DOJ, and that transaction records are being sent from Neteller to the DOJ.
Indeed, it’s clear what’s likely to happen. Neteller and the DOJ will likely come to an agreement. Neteller will announce that they will no longer do business with Americans, and they may have to pay a fine; the DOJ won’t indict the company, or any of its current stockholders. The DOJ might even accept some sort of plea bargain for the two founders who were arrested. It’s also certain that as part of such a deal Neteller will agree to release details of all transactions between American customers and Neteller.
What does the DOJ want with thousands of pieces of data? Well, Neteller required the customer’s name, address, and for many accounts, their social security number. The details of those transactions will undoubtedly be sent to a government agency that’s in the revenue collection business: the IRS.
So what does that mean for the customer who used Neteller?
If you complied with the law—you reported all of your gambling income and your foreign bank accounts—you have nothing to worry about. But probably fewer than 5% of taxpayers report their gambling transactions as income.
First, Neteller is considered to be a foreign financial institution. If you have a foreign bank account, and have $10,000 or more in a foreign bank account(s) at any one time, you are required to file Form TD F 90-22.1 by June 30th of the following year with the Department of the Treasury and check the box at the bottom of Schedule B. If you have a foreign bank account and don’t declare it, you can face civil and/or criminal penalties. Anyone who received $10,000 or more in one transaction from Neteller had a foreign bank account. I expect the Treasury Department to check their records and come after those who didn’t declare their Neteller account. A few individuals may even face criminal prosecution over this, if they had extremely large transactions from Neteller.
Second, the IRS will check their records and see if individuals receiving funds from Neteller declared gambling winnings. The IRS will almost certainly target those receiving large amounts. If an individual received large amounts from Neteller, and didn’t declare any gambling winnings, now is the time to amend your return, and pay the tax, interest, and penalties. It’s almost always better to come forward to the IRS than to have the IRS knock on your door.
The IRS’s first targets will be those with large (in dollars) transactions. But given the ability of the IRS to conduct computer matching, if you received funds from Neteller and didn’t declare any gambling winnings, you might receive a “letter audit” from the IRS. (“Dear taxpayer, we’ve added $xxx [the amount of money you received from Neteller] to your income. If you agree, pay the tax, interest, and penalties….’)
I believe that a few individuals will likely face criminal prosecution over this. If the IRS can find an online gambler who earned over $100,000 and didn’t declare his gambling income (and I think the IRS will have several to choose from, and might even find someone who earned over $1 million) that individual could find himself facing jail time for tax evasion.
But what if you used Neteller for non-gambling activities? Interestingly enough, I know of one firm that paid individuals through Neteller. If you declared the income on your tax return (and can show that), there’s nothing to worry about. You may have to spend some time responding to an IRS notice, but if you’ve paid your taxes, you’re fine.
However, I believe that many (if not most) online gamblers have thought that since Neteller was based on the Isle of Man (a known tax haven), the IRS would never be able to see their records. You’ve just lost that gamble. It will take some time, probably several months at a minimum, for the IRS to conduct their matching of records. If you’re one of those who just lost the first gamble, do you want to double-down and bet that the IRS won’t find you or do you want to amend your return(s) and pay the tax that you knew you owed…and the interest and penalties?
As I’ve said many times, gambling income is taxable. The Tax Code isn’t fair to gamblers, but the alternatives if you don’t pay your taxes are worse than paying the tax that you owe.
Tags: Neteller