A few interesting questions have come in recently on gambling and taxes:
Question. I think it’s ridiculous that you have to file an FBAR on an online gambling account. These aren’t bank accounts and I don’t think the government can force me to file this form.
Answer. The Department of the Treasury has the unlucky task of determining what Congress meant when they passed the various laws that mandate the foreign bank account reporting (FBAR). I agree that it’s definitely debatable whether an online gambling account is a foreign bank or financial account. That said, for a variety of reasons I’ve recommended to my clients that they file the Form TD F 90-22.1 with the Department of the Treasury.
First, in the United States casinos are considered financial institutions for bank and currency reporting requirements. Shouldn’t a casino headquartered outside of the United States also be considered in the same manner?
Second, the big objection to filing an FBAR (that some of my clients have mentioned to me) is the risk of audit. Years ago, that was definitely the case. However, in 2006 (the last year I’ve seen statistics for) the Department of the Treasury received over half a million FBARs. It’s impossible for the IRS to audit all (or most) of these individuals.
Finally, the IRS and Treasury have come to the conclusion that online casinos fall under the FBAR rules. If you are found guilty of willfully not filing an FBAR, the minimum fine is $100,000 (or half the value of the account, whichever is greater). The federal government is also the deepest pocket law firm in the world; you do not want them as your enemy. The government says to file the form. It’s far easier (and cheaper) to comply with this than to risk a battle and potentially cost yourself a lot of money.
Q. I’m a resident of Washington state. My state considers online gambling a felony. Why do I have to file a tax return when I might be self-incriminating myself?
A. Because it’s the law, and you won’t be self-incriminating yourself. In the United States illegal income is just as taxable as legal income. Washington state does not have a state income tax so you just need to pay the federal income tax.
I wouldn’t list as my occupation “online professional gambler” if I resided in Washington state; you just need to list it as “professional gambler.” There are many professional gamblers (including online gamblers) who reside in Washington. While there are likely better locales from a legal standpoint it’s today unlikely that the Washington state authorities are seeking to arrest online gamblers.
I do need to point out that Washington does have a Business and Occupation Tax that a professional gambler may be liable for.
Q. I’m planning on traveling the world during 2010, spending no time in the United States. I plan on supporting myself by playing poker. I assume I won’t have to file or pay any US income tax. Is that correct?
A. No. All US citizens, no matter where they reside, must file a tax return (assuming they meet minimum filing/income requirements). There are some tax benefits if you are outside of the United States, though.
First, if you are not in the United States on April 15th you get an automatic two month extension to file your tax return. While you will owe interest if you pay after April 15th, there will be no penalties as long as you file and pay on or before June 15th.
Second, you may be eligible for the Foreign Earned Income Exclusion. This allows you to exclude up to $91,500 in 2010 from income tax. However, assuming you are a professional gambler you will still owe self-employment tax on all of your income.
Finally, you will still likely need to file a state income tax return. Not all states recognize the Foreign Earned Income Exclusion. For example, California does not recognize the Exclusion and if you are a California resident you will owe California tax on all of your income.
Some interesting questions, and perhaps some interesting answers though I expect some of the answers disappoint the individuals who asked the questions.
Tags: FBAR
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Hiya, Pennsylvania practitioner here, with a fair number of clients who are US citizens now living abroad in the carribean. I am not a CA attorney, but wouldn’t the requirement to file a CA return be in large part based on whether he intended to return? I have on client, formerly a CA resident, who moved to the carrib in April. HE does not intend to return to CA. If and when he returns to the states, he will live in Florida. He has a driver’s license in the carib country where he lives, a full time job, pays taxes there, does not maintain a residence (though he has a rental property) in CA, nor a bank account. From these facts, we determined that it was most appropriate to file a part year resident return through April, and maintain that the client is no longer a resident, and has no intention to return at any reasonably discernable future point. now, the travelling guy seeme dto say he was just spending the year tooling about, and did not specify that he intended not to return, or that there was the severance of usual contacts with CA, and I assume this is what your answer depended upon; Am I misinterpreting CA law here?
The Franchise Tax Board assumes that if an individual doesn’t establish a new domicile in California he will be returning to the state. That’s the presumption. The FTB takes this further: In a residency audit, they will almost always rule that an individual is domiciled in California until he establishes a domicile in another state. California does not recognize the Foreign Earned Income Exclusion.
The problem with your position is, what state is your client domiciled in while he’s tooling about the Caribbean? The FTB will say California, and this is especially true given his owning rental property in the state. He has not severed all ties with California.
well, he’s not tooling about there, he lives there and works there and intends to stay. I think I have at least a reasonable argument that he would be a Florida resident – his parents live there, and any us correspondence that does not go to him in Curacao goes to his parents house. He hires a rental agent to manage the properyy. An odd state of affairs that cali is almost requiring him to be a resident when he neither lives there nor intends to return. I need to read more on this, because i have another person in the same situatoin, but without the potential florida angle. Can you recommend a resource for me to research this?
Also, after tax season, I have a friend with a significant potential tax gambling issue, and although I rep poker players, I think yo have more experience in this area, and might be better able to advise him on his issues. I have tried to explain the recordkeeping and proof requirements for gambling losses, but I think that he needs a third party to speak with about it. I will email you from my listed email in the reply section. Obv, he will pay for the advice.