Posts Tagged ‘FBAR’

The 2016 Hom Decision: Do Online Gambling Sites Still Need to be Reported on the FBAR?

Wednesday, July 27th, 2016

The Ninth Circuit’s unpublished opinion in United States v. Hom is now up. It’s sort of a misnomer to use the word “published” for an unpublished opinion. Unpublished here means it cannot be cited as a precedent; the court doesn’t think it has sufficient precedential value. It doesn’t mean, though, that the opinion isn’t of value.

Back in 2014 Mr. Hom was convicted of not filing an FBAR (then, Form TD F 90-22.1) for accounts at FirePay, PokerStars, and Party Poker. The appeals court quickly upheld that FirePay is a foreign financial account.

Hom’s FirePay account fits within the definition of a financial institution for purposes of FBAR filing requirements because FirePay is a money transmitter…FirePay acted as an intermediary between Hom’s Wells Fargo account and the online poker sites. Hom could carry a balance in his FirePay account, and he could transfer his FirePay funds to either his Wells Fargo account or his online poker accounts. It also appears that FirePay charged fees to transfer funds. As such, FirePay acted as “a licensed sender of money or any other person who engages as a business in the transmission of funds” under 31 U.S.C. § 5312(a)(2)(R) and therefore qualifies as a “financial institution.”… Hom’s FirePay account is also “in a foreign country” because FirePay is located in and regulated by the United Kingdom.

This part of the ruling shouldn’t be a surprise. If it looks like a duck, walks like a duck and quacks like a duck, it might just be a duck. FirePay offered services that banks do. It looked like a financial institution; the court ruled it was one.

However, Mr. Hom prevailed regarding PokerStars and Party Poker.

In contrast, Hom’s PokerStars and PartyPoker accounts do not fall within the definition of a “bank, securities, or other financial account.” PartyPoker and PokerStars primarily facilitate online gambling. Hom could carry a balance on his PokerStars account, and indeed he needed a certain balance in order to “sit” down to a poker game. But the funds were used to play poker and there is no evidence that PokerStars served any other financial purpose for Hom. Hom’s PartyPoker account functioned in essentially same manner.

The Government argues that these entities were functioning as banks, but this argument lacks support. Neither the statute nor the regulations define banking. In discerning the plain meaning of the text, we interpret words in light of their “ordinary, contemporary, common meaning” unless they are otherwise defined. Merriam-Webster dictionary defines bank as, “an establishment for the custody, loan, exchange, or issue of money, for the extension of credit, and for facilitating the transmission of funds.” There is no evidence that PartyPoker and PokerStars were established for any of those purposes, rather than merely for the purpose of facilitating poker playing. [footnotes and citations omitted]

So are we done (again) with including online gambling accounts as foreign financial accounts? Unfortunately, the government made another argument: that online gambling sites are casinos. The Court rejected that argument because it was raised too late (it needed to be presented during the actual case). However, we need to examine it because nothing prevents the government from raising it in the future.

So let’s look at the law and the regulations promulgated under the law. 31 USC § 5312(a)(2)(X) defines a financial institution to include, “a casino, gambling casino, or gaming establishment with an annual gaming revenue of more than $1,000,000 which—
(i) is licensed as a casino, gambling casino, or gaming establishment under the laws of any State or any political subdivision of any State….”

Unfortunately, most online poker sites offer activities found in a casino. For example, PokerStars now offers casino games; other sites offer sports betting. A court could easily find that PokerStars meets the definition of an online casino and since it is clearly based outside the United States meets the definition of a foreign financial institution. Thus, the only safe course is to continue to report online gambling sites as foreign financial sites on the FBAR.

I would prefer (from a workload standpoint) to draw a different conclusion, but the safe course is that we must continue to recommend that individuals with funds on online gambling sites file the FBAR.

Hom Decision Reversed

Tuesday, July 26th, 2016

Back in 2014 the US District Court for the Northern District of California held that online gambling accounts are reportable foreign financial accounts for the FBAR. Mr. Hom appealed that decision. Today, the Ninth Circuit Court of Appeals reversed the decision in regards to online poker accounts. (Hat Tip:

I’m not sure of how much this decision changes things. (Once the decision is published, I will post further on the decision.) From Jack Townend’s analysis:

FirePay was a financial institution, the Ninth Circuit held, because it met the definition of money transmitter. The other two were not money transmitters or otherwise financial institutions as defined. The Ninth Circuit rejected the Government’s argument that they should be treated as banks (a type of financial institution requiring an FBAR) because they functioned as banks, applying the plain meaning of the term bank to exclude these services.

Two caveats about the opinion. First, the panel described it as nonprecedential under Ninth Circuit rules. Second, the Government made an argument — which the Court declined to consider because too late (see p. 4 fn. 1) — that PokerStars and PartyPoker were casinos, another category of financial institution which, if foreign, requires FBARs for accounts.

The casino argument could be valid for the future. And as I said before, I want to read the decision before I tell people you don’t have to file an FBAR for online gambling accounts. Thus, I still recommend (for the moment) including online gambling accounts as reportable foreign financial accounts.

FBAR Deadline Approaches

Monday, June 20th, 2016

Ten days from today is June 30th. That’s the deadline for filing Form 114, the Report of Foreign Bank and Financial Accounts (the “FBAR”). There are no extensions available.

The FBAR is a report. There is no tax to pay. It’s simply a listing of the accounts and maximum balances. However, the penalties for not reporting the FBAR are egregious. Willful non-reporting has a minimum penalty of $100,000 or half the balance in the account, whichever is greater. So file the FBAR.

I’m getting asked lots of questions from non-clients, and I can’t answer them. The best advice I can give is when in doubt, file the FBAR. You can file it yourself using the BSA efile system.

The IRS has a chart showing many of the accounts that are required to be reported on an FBAR. However, the list is not complete. For example, online gambling accounts must be reported (I maintain a list of addresses of those accounts). (Note: Accounts with the legal/regulated sites in Nevada, New Jersey, and Delaware are US-based accounts and are not reported.)

One question I will answer: The FBAR must be filed by June 30th; it does not have to be accepted by then. That used to be the case, but FINCEN goes by the time (in your local time zone) when you transmit the return to them. (If you are sending it via tax software, it’s the time of transmittal to the tax software company.)

Next year, the deadline for FBARs will advance to mid-April (hopefully matching the tax deadline), with an extension available for six months. It’s unclear how this will impact expatriates (who have a June tax deadline) or if a separate extension will be required. But that’s an issue where I can honestly say, “Wait ’til next year.”

Answering Some FBAR-Related Questions

Sunday, June 5th, 2016

The FBAR–the Report of Foreign Bank and Financial Accounts (Form 114)–is due on June 30th. If you have $10,000 aggregate in one or more foreign financial accounts you must file the FBAR. There are no extensions available. Here are three of the many questions regarding the FBAR in the mailbag:

1. “I live in Denmark; my wife is a Danish citizen (I am a US citizen). We have elected to file a joint US tax return. Does my wife need to file the FBAR?”

No. The FBAR is required of US citizens and permanent residents, but not for non-US citizen/permanent resident spouses of US citizens residing outside of the US. However, if you have a Form 8938 filing requirement your wife’s accounts would need to be included on that form (since you have elected to file a joint tax return).

2. “I became a permanent resident in November [2015]. My one foreign account, a bank account in Mexico, has not had $10,000 (equivalent) in it since I became a permanent resident. Do I need to file an FBAR?”

Maybe. The requirement is based on the calendar year, not the two months you were a permanent resident. So if your Mexican bank account had $10,000 in it at any time during 2015, file the FBAR.

3. “Why do we have to file both the FBAR and Form 8938? It’s the same information!”

Because we live in the bureaucratic world, and our Congress gave us duplicative laws. The FBAR is not a tax law; it’s part of the Bank Secrecy Act (Title 31 of the US Code). Form 8938 is a tax law (Title 26 of the US Code) and comes from FATCA. Until Congress changes the law we’re stuck complying with it.

What FINCEN Should Do Regarding FBAR Filing Dates and 25 or More Accounts

Wednesday, April 27th, 2016

On March 1st, FINCEN issued a press release noting that they requested comment regarding a proposal such that individuals with 25 or more foreign financial accounts would have to report the details on those accounts rather than just noting they have 25 accounts. Buried in the actual Notice of Proposed Rulemaking was the fact that this rulemaking would include complying with the new law that for 2016 FBARs filed in 2017 the due date would be April 15th with a six-month extension available upon request.

This latter issue (the due date) is key. I can easily see bureaucrats reading the law and saying, “Well, now the deadline is April 15th regardless of whether or not that falls upon a weekend or holiday in the District of Columbia” rather than taking the common sense approach of aligning the FBAR due date to the tax return due date. It’s pretty clear to me that Congress intended the dates to be aligned. I felt it important to submit a comment on the record to note this.

My comments are available here. If you wish to respond to the proposed rulemaking, the deadline is May 9th.

Bozo Tax Tip #1a: They Shoot Jaywalkers, Don’t They? (Or Ignoring the FBAR!)

Friday, April 15th, 2016

I have, unfortunately, become quite competent in the Report of Foreign Bank and Financial Accounts. That form is better known as the FBAR. It used to have the form number TD F 90-22.1 (yes, it really did) but now goes by Form 114. The form must be filed online through the bsaefiling center of FINCEN, the Financial Crimes Enforcement Network.

You must file an FBAR if you have $10,000 aggregate at any time during the year. The report for 2015 is due June 30, 2016; there are no extensions.

The form is fairly simple and straightforward: Note every foreign financial account you have with name, address, account number, and maximum balance at any time during the past year. Let’s say you have one foreign account, a bank account at the Royal Bank of Canada. You would take your maximum balance and convert it to US dollars from Canadian dollars (you should use the year-end Treasury Department conversion rates no matter when the high balance was). The form must be electronically filed and is filed separately from your tax return.

The penalties for not filing it are quite high. Willful non-filing has a minimum penalty of $100,000 or half the balance in the account–and that’s per account! There’s also possible jail time.

So what must be reported:
– Foreign Bank accounts;
– Bank accounts outside the US of a US financial institution;
– Foreign financial accounts where all you have is signature authority;
– Foreign securities accounts;
– Foreign mutual funds;
– Foreign life insurance with a cash or annuity value; and
– Online gambling accounts if outside the US.

There are probably others, too.

The IRS does have a chart that lists most things that need reporting on the FBAR and Form 8938. Form 8938 is the “cousin” of the FBAR; this form needs to be filed if you have larger balances in foreign accounts.

Millions of FBARs are filed each year. When I started in tax, filing an FBAR was a huge audit red flag; that’s no longer the case. There are just too many FBARs filed. Do note that if you have an FBAR filing requirement you must note that in question 7 at the bottom of Schedule B.

To end this with some humor, one of my pet peeves in dealing with taxes is that there are three different sets of abbreviations for foreign counties used in tax. The FBAR has one set; question 7 at the bottom of Schedule B has another set, and Form 8938 has a third set. Some countries are noted identically while others are not. On one of of the abbreviations Curacao is “CU” while that means Cuba in another.

In any case, the FBAR is no laughing matter. The IRS’s mantra here is to shoot jaywalkers. Don’t become such a person: If you have an FBAR filing requirement, file it! Again, the FBAR is due June 30th this year and there are no extensions.

Now this is the real end of our Bozo Tax Tips for the 2016 Tax Season. I’ll be back no later than April 25th with new content.

There’s Innocent FBAR Violations, and There’s This

Tuesday, August 11th, 2015

It’s one thing when Aunt Sally inherits €8000 in the old country, it sits in the bank for one day, and she then gets the money the next day in the US. Yes she should have filed an FBAR, but it really is an innocent violation.

Then we have what David and Nadav Kalai did. The two (father and son) headed up United Revenue Service, a tax preparation firm with offices in Orange County, California and Bethesda, Maryland. The Kalais’ methods were of the very deliberate violation of the rules on FBARs:
– Take a high wealth individual,
– Have him form a foreign corporation in Belize,
– Have that corporation get a bank account with Bank Leumi (an Israeli Bank) in Luxembourg, and
– Don’t disclose any of this to the IRS, FINCEN, or the Department of the Treasury.

Last year they were convicted of one count each of conspiracy to defraud the IRS, and two counts of willfully failing to file an FBAR. Yes, they practiced what they preached: They used the same methods to not disclose their own foreign bank accounts.

The sham corporations that the co-conspirators incorporated in Belize and elsewhere were used to act as named accountholders on the secret Israeli bank accounts. The co-conspirators then recommended and facilitated the transfer of client funds to the secret accounts and prepared and filed tax returns that falsely reported the money sent offshore as a false investment loss or a false business expense, or entirely omitted any income earned by a client from a foreign source. The Kalais also failed to disclose the clients’ secret accounts on tax returns that they prepared, and caused the clients to fail to file FBARs with the U.S. Treasury as required.

The Kalais will have some time to think over what they did. David received 36 months at ClubFed and a $286,000 fine while his son received 50 months at ClubFed and a $10,000 fine. An alleged co-conspirator, David Almog, remains at large. Meanwhile, three customers (so far) of the Kalais and United Revenue Service have pleaded guilty to tax charges, and there are likely more charges coming.

Deadline Changes for 2016 Tax Returns and 2016 FBAR

Sunday, August 2nd, 2015

Congress passed and President Obama signed the Surface Transportation and Veterans Health Care Choice Improvement Act of 2015 in late July. That law’s primary function has nothing to do with tax; however, it will have a major impact on entity tax returns for 2016 and for the 2016 FBARs:

  • Partnership tax returns will be due on March 15th, not April 15th (for calendar year partnerships);
  • C Corporation tax returns will be due on April 15th, not March 15th (for calendar year C Corporations);
  • S Corporation tax returns remain due on March 15th (unchanged); and
  • FBARs (FINCEN Form 114) will be due on April 15th, not June 30th.  An extension for six months will be available (until October 15th).

The most important change for my practice is the FBAR. Here’s the exact change in the law:

The due date of FinCEN Report 114 (relating to Report of Foreign Bank and Financial Accounts) shall be April 15 with a maximum extension for a 6-month period ending on October 15 and with provision for an extension under rules similar to the rules in Treas. Reg. section 1.6081–5. For any taxpayer required to file such Form for the first time, any penalty for failure to timely request for, or file, an extension, may be waived by the Secretary.

It is unclear whether a separate extension for the FBAR will need to be filed. The reference to Treasury Regulation 1.6081-5 is for the automatic two-month extension of time to file for those residing outside the United States, so it appears those who do so reside will have a June 15th deadline for filing the FBAR (with a four-month extension available until October 15th).

There are several other deadline changes in the law, but they all are for 2015 returns due in 2016 (not 2014 returns due in 2015). Also, because Friday, April 15, 2016 is Emancipation Day in the District of Columbia the deadline for tax returns will be extended to Monday, April 18, 2016. However, it is likely the deadline for FBARs will not be extended from April 15, 2016. The deadline for FBARs is a receipt deadline, not a postmark deadline, as is not extended if the deadline falls on a weekend or holiday. My strong suspicion is that this change in deadline could be a huge FUBAR given the three day extension for tax returns in 2016. We will have to see if common sense exists within FINCEN or if bureaucratic regulatory procedures take precedence (which is what I suspect will happen).

Does a Nonresident Alien Spouse that Has Elected to be Treated as a US Person Need to File an FBAR?

Monday, June 29th, 2015

With the FBAR deadline upon us, an interesting question arose: Does a spouse covered by the §1.6013-6 regulation allowing a nonresident alien individual to be treated as a resident need to file an FBAR? Logic says no; the FBAR comes out of the Bank Secrecy Act, not the Tax Code. And the IRS agrees with logic: “If the wife is non us person for FBAR therefore she does not have a filing requirement.” (That quote comes from a question I submitted to the FBAR group at the IRS.)

But beware, if the taxpayers have a Form 8938 filing requirement the wife’s accounts will need to be reported on that form. That’s a tax form, so the accounts would need to be included.

FBAR Due in One Week

Tuesday, June 23rd, 2015

The Report of Foreign Bank and Financial Accounts (Form 114, the FBAR) is due on June 30th. The form must be electronically filed with FINCEN. Your tax professional may be able to do it through his software (we can) or you can do it yourself using the BSA EFile system. There is now an online form you can use (besides Adobe reader) that may work better (it certainly can’t work worse).

Because of the Hom decision of last year, we now must again report foreign online gambling accounts. That’s basically all online gambling sites except the legal sites in Delaware, Nevada, and New Jersey. I maintain a list of online gambling sites and their mailing addresses here.

There are ridiculous penalties if you willfully fail to file an FBAR (half the balance in the account or $100,000 (per account), whichever is greater). Thus, as I said last year, just file the FBAR…timely.