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February 12, 2007
The Tax Man Cometh
One interesting thing that I think a lot of online poker players have learned all too recently is that anyone with over $10k in a foreign bank or "financial account" are required to fill out a Treasury Department form and check a box on Schedule B of your 1040. From what I understand from the searching I've been doing lately Neteller, ePassporte, and other similar ewallets, almost definitely qualify as "financial accounts". It is also my understanding that it is unclear whether or not poker sites qualify, due to "constructive receipt". Of course given the money we all have stuck in Neteller with little hope of ever seeing, I'd personally consider Neteller funds not to be constructively received either, but for some reason I doubt the IRS would agree with me.
I can't even begin to guess at the number of people who've had over $10k in their Neteller account. Considering that it was the most popular way of cashing out money ever since PayPal stopped taking online casinos, it has to be a large number. How many people won a $10k or larger prize in a tournament (dozens each day, as even lower buy-in tournaments often had top prizes in that range) or had a good run at any game $15/$30 or above? It had to be thousands, and maybe in the tens of thousands. And I'd bet no more than a handful knew of them filled out that form for the Treasury Department.
So I decided to ask Russ Fox over at Taxable Talk what he thought those of us who had not filled out that form for years prior to 2006 (you still have until June to do it for last year) should do. He was gracious enough to take the time to answer, and here's what he said:
To report a foreign bank account(s), there are two things you must do. There are two boxes at the bottom of Schedule B of your tax return that have to be checked (one to indicate that you have a foreign bank account, and on the other you must list the country(ies) where they are. Of course, that's if you meet the $10k aggregate limit. You must also fill out Form TD F 90-22.1 by June 30th (postmark deadline) to the Dept of the Treasury, not the IRS.If you haven't completed the Treasury Dept form for previous years, you have two options. The first is to immediately fill out the form for the previous year, and send it to the Treasury. Realize that you've just raised a huge flag that says to the IRS, "Audit me." Unfortunately, the other option—hoping that the Treasury Dept/IRS doesn't find you—can make you liable for a felony (punishable by civil fines, criminal fines, and possible jail time).
While it's in theory possible for someone to be fined for completing the form late, in almost every case it's much better for you to report yourself than for the government to come after you in this matter. I haven't heard of fines for completing the form late when it's been an innocent mistake.
None of this is meant as legal advice. Everyone should consult their own professional tax advisor and/or legal counsel as everyone's situation is different.
I also found this quote on about.com:
The law governing form TD F 90-22.1 "provides for a nonwillful penalty of up to $10,000 per violation for violations occurring after October 22, 2004. This penalty will be waived, however, if the person can show reasonable cause for the violation and if the person provides a late-filed [Form TD F 90-22.1] with the information that should have been reported earlier."IRS will consider the facts and circumstances of each case in determining whether penalties are appropriate. Persons who have not timely filed [Foreign Bank Account Reports] should attach a statement explaining why the [Form] was not timely filed."
Personally I have no desire to become a felon, or pay any sizeable fines, so I'm going to fill out those forms immediately and pretty much prepare for an audit. An audit will certainly be a pain in the ass, but I've been paying taxes so I'm not too afraid. I have a feeling I'll be spending a week or two making pretty excel sheets, and if any of you have ever survived an audit I would love to hear what you have to say about it. I may or may not opt for a tax attorney, as I'm told that if you have all of your ducks in a row they really aren't necessary, and I think I do/will.
Thoughts?
Posted by themaroon at February 12, 2007 3:09 AM
Comments
You may want to consider contacting a local law school. Many law schools run clinic programs in the area of taxation and provide law students to assist with tax matters for free. An issue like this would be considered novel and likely garner interest from the clinic. Give it a shot if there is a law school in your area.
Posted by: Pokerletter.org at February 12, 2007 10:15 AM
You raise a lot of good points here, and that interview with Russ Fox is extremely helpful. However I am wondering, as I'm sure many NETeller users are, if those of us who did not reach the aggregate $10,000, nor filed any taxes on winnings, nor deducted any losses, will be facing heat from the IRS? You noted that potentially tens of thousands didn't know about this treasury form. I'm guessing hundreds of thousands had less than $10,000 in their accounts, whether overall winners or losers, and didn't file taxes. Chances of IRS going after the little fish?
Posted by: Dave at February 12, 2007 11:37 AM
While the idea of contacting a law school is an interesting one, it is unlikely to work. As a student at a law school, I know our tax clinic only provides services to persons of low economic means. Whether or not they could refer you to a good tax attorney is another question.
Posted by: Andrew at February 12, 2007 2:53 PM
Never been audited but I have dealt with the IRS before because they overpaid me one year and argued that I owed them interest on that money. I had all the documentation and was able to readily offer it to them and then ended up waiving the interest, though I did have to pay them back the overpayment.
The point is, if you have good documentation, are confident and show them you are not trying to hide anything (which you aren't) then even an audit should be a relatively painless procedure.
If it's possible to get a list of money going into and out of the various poker sites I'd have that prepped as well to show the flow of money (poker site-neteller-bank and vice versa.)
Dave, you don't want to gamble with the IRS. Most of their audits are flagged by computer. Some relatively simple adjustments in those flags change who gets audited year by year.
Since Justice obviously is making online gaming a priority, one would be wise to assume the IRS is going to do the same.
Posted by: Jeff D at February 12, 2007 4:51 PM
I would not go to a law school. Tax law is highly specialize and those who are good at it are REALLY good. There really isn't a middle ground. A good tax attorney is tough to find.
Anyway, I'm going to look back a diligently and see if I was ever over 10K in neteller. I generallly made a conscious effort to stay below the 10K threshold (and my research makes me believe that pokersites would not qualify). Regardless, my spread sheets are pretty good, but...ugh... would love to hear from any poker player who has been audited...
Posted by: Buddyglass at February 12, 2007 6:52 PM
I'd find a good CPA who's also an attorney to handle the matter. Being a CPA, he can do your taxes and records, but as an attorney cannot turn over any records due to attorney/client priveledge. However, that being said, not reoprting income is a criminal offense under the US tax code. You can be as aggressive in your deductions as you want (deductions are a civil matter as long as they aren't fraudulent) but hiding income is criminal. I've been through the wringer on this one, and suggest an attorney.
A good CPA/Attorney will pay for himself with the fact that you'll be able to sleep at night.
Jeff
Jeff
Posted by: jeff at February 12, 2007 6:56 PM
Matt:
My wife and I were audited several years ago. We make relatively large (compared to our income) donations to a variety of private charities, and it's obviously a red flag to donate 20-25% of your income and claim the deduction. We typically attach receipts right to our return, but one year we forgot that attach about half of them.
Our entire audit was a letter from the IRS inquiring about the charitable donations, which we answered with a letter that had copies of the missing receipts. After that, we received confirmation that we had satisfied the issue.
Bottom line: if your ducks are truly in a row, you have nothing to worry about, and absolutely no need to hire a tax attorney. Honestly, you are unlikely to ever do anything except correspond via letter. And for what it's worth, I was actually hoping that I would have to go to a face-to-face, since i knew i had nothing to worry about and I kinda wanted to see what it was actually like.
I wouldn't sweat the foreign bank account reporting. The bottom line is that if you make a good faith effort (which you will by amending), and you aren't hiding income, there's really nothing that can come of it. You'll be a model audit-ee.
matt
Posted by: Matty G at February 12, 2007 8:57 PM
I've been audited once personally, and every month in my day-to-day.
You are correct in that, in most instances, you will not need a tax lawyer. The only real "pain in the ass" is finding and accounting for all income/expenses for the year. The good news is that if you have access to online statements (Neteller, any Bank, etc.), it's not that much of a pain. Start with a high-level overview of income/expenses that were reported and make sure you have back-up for every single number on that sheet. Every single one.
Good luck.
Posted by: Frank Guest at February 12, 2007 9:49 PM