Posted by: Robert Horwitz | September 9, 2016

Gambling with the FBAR Penalty by Robert S. Horwitz

Most tax professionals (and many taxpayers) are by now familiar with the FBAR penalty: It is a penalty imposed on a person who is required, but fails, to report offshore financial accounts to the IRS.  If the failure to report is not willful, the maximum penalty is $10,000.  If it is willful, the maximum penalty is the greater of $100,000 or 50% of the balance in the account “at the time of the violation.”

One type of account that a person can have offshore is with an internet gaming site. In United States v. Hom (July 26, 2016), the Ninth Circuit recently addressed the issue of whether accounts the taxpayer set up with two UK-based internet poker sites were “financial accounts” for purposes of the FBAR penalty.  Although this was a case of first impression, it is an unpublished decision.

Hom had accounts at two online poker sites that were located in the U.K. and with “Fire Pay,” a company that was in the business of transmitting funds between various entities. The IRS assessed FBAR non-willful penalties totaling $40,000, based on his use of these three accounts in 2006 and one account in 2007.  In proceedings before the district court, the Government took the position that each of the accounts was a “bank, securities and other financial account” located in a foreign country.  The district court ruled for the Government and the taxpayer appealed.

The Ninth Circuit held that the Fire Pay account was a “financial account” because Fire Pay was a “licensed sender of money,” which was by definition a financial institution under the FBAR regulations.

It held, however, that the accounts at the poker sites were not foreign “financial accounts.” There was no evidence in the record that the funds maintained with either poker site served any purpose other than to play poker.  Lacking evidence in the record that the accounts were used for any purpose other than to play poker, neither offshore poker site fit the definition of the bank.  The Ninth Circuit therefore reversed the district court as to these two accounts.

The Government went for broke and lost because of its litigating position in district court. Before the district court, the Government relied solely on the argument that the poker sites were banks.  In a footnote, the Ninth Circuit noted that the Government attempted to argue on appeal that the poker sites were casinos, but that it would not consider this issue on appeal.  This was because the Government explicitly disclaimed any reliance on the FBAR regulations that include casinos within the definition of “financial institution” in district court.  It would not be allowed to argue for affirmance on a theory that was not raised before the district court.  Because in future cases the Government might not eschew the claim that offshore gambling sites are not casinos, the case may of no precedential value, which could explain why it was a “Not for Publication” decision.

ROBERT S. HORWITZ – For more information please contact Robert S. Horwitz – horwitz@taxlitigator.com or 310.281.3200   Mr. Horwitz is a principal at Hochman, Salkin, Rettig, Toscher & Perez, P.C., a former Assistant United States Attorney of the Tax Division of the Office of the U.S. Attorney (C.D. Cal) and represents clients throughout the United States and elsewhere involving federal and state, administrative civil tax disputes and tax litigation as well as defending criminal tax investigations and prosecutions. Additional information is available at http://www.taxlitigator.com


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