California Online Gambling Case Highlights Significant Penalties Charged to Taxpayers Who Fail to File a Timely FBAR
On June 30th each year, the Report of Foreign Bank and Financial Accounts (FBAR) must be filed by United States Taxpayers who have an ownership or signatory authority over certain foreign financial assets totaling at least $10,000. A taxpayer’s failure to timely file the FBAR may result in steep penalties of $10,000 or up to one-half of the highest balance of the asset. The IRS has stated the FBAR must be filed for a variety of overseas assets including, “a bank account, brokerage account, mutual fund, trust, or other type of foreign financial account.” Although many American taxpayers are not aware that they are obligated to file the FBAR, this does not shield them from being penalized.
A recent California case demonstrates that the FBAR must be filed for more than just formal offshore bank accounts. In U.S. v. Hom, a man engaged in online gambling using two offshore commercial websites. The man initially funded his activity through a separate financial website that allowed him to deposit and withdraw money from his personal bank account. After the online financial organization stopped allowing the man to transfer funds to the foreign gambling accounts, he began using Western Union and other financial services to fund his gaming activity. At certain points during the 2006 and 2007 tax years, the aggregate balance of the man’s gambling and online financial accounts exceeded $10,000.
Following an audit of the man’s tax returns, the IRS determined that he was required to file the FBAR in both 2006 and 2007. According to the IRS, the man’s two offshore online gambling accounts and the online banking account he used to fund them constituted overseas financial accounts that should have been reported on the FBAR under 31 U.S.C. 5314. Although the agency deemed the man’s failure to timely file the FBAR non-willful, the agency still assessed a $40,000 civil penalty against the man for the three unreported foreign financial accounts he controlled in 2006 and one offshore gambling account he owned in 2007.
Later, the U.S. government sought to enforce the civil penalty imposed against the man under the Bank Secrecy Act of 1970 in federal court. The main issue in the government’s lawsuit was whether the man’s online gambling and financial accounts were “bank or other financial accounts” under the statute. According to the U.S. government, the civil penalties imposed on the man were merited because the offshore gaming websites functioned as commercial banks. The Northern District of California agreed with the government and held the man’s overseas gambling accounts were “other financial accounts” under the law. The court also stated regardless of where the funds are physically stored, the man’s online accounts were foreign because the institutions holding the financial accounts are regulated, licensed, and headquartered overseas. In addition, because the man is a U.S. person, he had a financial interest in the digital accounts, and the aggregate balance of the online accounts exceeded $10,000 in 2006 and 2007, the court ruled he had an obligation to file a timely FBAR for both tax years.
International tax law requirements can be confusing and the penalties for making a mistake are often costly. If you have questions about your obligations under the nation’s international tax laws, please contact tax lawyer William Hartsock. Mr. Hartsock has decades of experience advising clients in Southern California about international income tax law matters. To discuss your case with a veteran tax attorney, do not hesitate to give Mr. Hartsock a call today at (858) 481-4844.
FBAR Penalty Applies To Offshore Poker Account, by Charles Rettig, Forbes.com
US v. Hom, Dist. Court, ND California 2014
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