Online or internet gambling was declared illegal in the United States under the Unlawful Internet Gambling Enforcement Act of 2006. This prompted many professional online gamblers to relocate/re-domicile to other countries where they could continue to play legitimately.
The FBAR is an annual report filed by U.S. persons living and/ or operating overseas of foreign bank accounts and financial holdings. FBAR filing is required on all foreign accounts with $10,000 or more at any time during a calendar year.
John Hom, a professional internet gambler, played through three separate international gambling websites based out of the United Kingdom and Gibraltar. He maintained his accounts through these three international portals: Fire Pay, Party Poker, and Poker Stars, some of the biggest online poker sites in the world.
In 2010, during an income tax investigation, the Internal Revenue Service (IRS) discovered unreported foreign financial accounts owned by John Hom. On discovering that the taxpayer owned several unreported foreign accounts, the IRS filed a summons with which Mr. Hom did not comply. After the taxpayer’s refusal to comply with the IRS summons, a lawsuit was filed, and Mr. Hom was court ordered to pay penalties of up to $10,000 for each account, for each year that he did not file an FBAR. Mr. Hom was found to owe a total of $45,000 in debts to the IRS.
In response, Mr. Hom filed a counter suit claiming that methods used to acquire this knowledge were in violation of section 6103(a) of the Internal Revenue Code, “All tax returns and return information must be kept confidential.”
The case of John Hom, et al. v. USA has garnered much attention because of the questions it raises:
- Does the violation of the Internal Revenue code section 6103(a) invalidate the information brought against Mr. Hom?
- Should a foreign internet gambling account be treated the same as a regular foreign bank account?
The courts found that the information brought against John Hom did not violate the Internal Revenue Code 6103(a) because the Code allows for an exemption, which permits disclosure for tax administration purposes. Under this exemption, Tax Administration is determined as, “the administration, management, conduct, direction and supervision of the execution and application of the internal revenue laws or related issues.”
One of the biggest conundrums to come up is the clear definition of the type of financial institutions which should be included in an FBAR filing. Should an internet gambling account be treated in the same way as a regular foreign bank account?
Mr. Hom stipulated that an online gambling account is not the same as a bank or a regular financial account and he should not be obligated to report his income from these accounts.
However, the IRS insisted that although online gambling accounts are not typical bank accounts, they operate in the same way and offer the same services a typical account does, like, depositing and withdrawing funds, transferring funds, and more, all at the account holder’s discretion.
This case highlights some potential pitfalls and costly oversight, which can be avoided by taxpayers with foreign accounts. It also makes it obvious, that as a relatively new directive, taxpayers remain vulnerable to many challenges when filing FBARS.