Gambling Sites & Foreign Accounts & FBAR Rules

Gambling Sites & Foreign Accounts & FBAR Rules

Polk & AssociatesDon’t assume your online gambling wins are not taxable. Here are some key facts and examples of how to report your winnings from foreign gambling sites.

Gambling Sites & Foreign Accounts

  • Hom, (DC CA 6/4/2014) 113 AFTR 2d 2014-893
  • Code: Secs. 6011and 6038D
  • Key Issue: Are accounts set up with foreign gambling sites, accounts subject to reporting under the FBAR rules?
  • Tax Return Year(s): 2006, 2007
  • Key Facts: Taxpayer gambled online and had accounts worth more than $10,000 during the years in question with two online poker companies, PokerStars and PartyPoker
  • He used a third company, an online financial organization, FirePay.com, to facilitate the transferring of money to and from his two poker accounts; he also had more than $10,000 in his FirePay account during one of the years in question.
  • Key Facts: The IRS assessed Taxpayer with 31 USC 5321(a)(5) penalties for his non-willful failure to submit FBARs, regarding his interest in his FirePay, PokerStars, and PartyPoker accounts.
  • Combined, he had more than $10,000 in these accounts during the years involved.
  • Law: An individual must file an FBAR for a reporting year if:
    • He or she is a U.S. person;
    • He or she has a financial interest in, or signature or other authority over, a bank, securities, or other financial account;
    • The bank, securities, or other financial account is in a foreign country; and
    • The aggregate amount in the accounts exceeds $10,000 in U.S. currency at any time during the year. (31 CFR 103.24)
  • Conclusion: The only issues in the case were:
    • (1) Whether Taxpayer’s accounts with the poker companies were “a bank, securities or other financial account”; and
    • (2) Whether each of the three accounts was in a foreign country.
    • The court answered “yes” to both of these issues and, as a result, agreed with the IRS’s assessment of the penalties.
  • Conclusion: 31 USC Sec. 5312(a)(2) lists 26 different types of entities that may qualify as a “financial institution.”
    • Based on the breadth of the definition, the Ninth Circuit has held that “the term “financial institution” is to be given a broad definition.” [Dela Espriella, (CA 9 1986) 781 F2d 1432]
    • The IRS claimed that FirePay, PokerStars, and PartyPoker are all financial institutions because they function as “commercial banks” as that term is used in 31 USC Sec. 5312(a)(2)(B).

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