Tax ramifications with frozen NETeller funds

[The Judge]

Neteller, the DOJ, and the IRS
By: Russ Fox of Clayton Financial and Tax of Irvine, CA

Neteller, the beleaguered Isle of Man financial intermediary firm whose two founders were arrested on money laundering charges in the United States, announced that they have come to an agreement with the US Attorney's Office for the Southern District of New York (where the potential prosecution will take place). While it's very unlikely the agreement with the DOJ will be made public, Neteller's press release notes that:

• Within the next 75 days (by June 4th) they will announce a plan for the return of funds of their American customers;
• A consulting firm, Navigant Consulting, Inc., will, according to the press release, "...provide a report to the USAO on the Group’s current financial condition."
• Neteller "is continuing to cooperate with the USAO’s investigation, under the advice of its legal advisers and in accordance with court orders in the Isle of Man"

So what does this mean for a Neteller customer?

1. Neteller is cooperating with the US Attorney's Office (the Department of Justice). What is the DOJ interested in? Money laundering, of course. Large accounts with activity. Individuals (and entities) that haven't reported their foreign bank accounts. Individuals and entities that haven't filed tax returns on income earned overseas.

2. If you have a Neteller account, and you had $10,000 in it at any time during 2006, you should make sure that you mark the box on Schedule B of your tax return that indicates you have a foreign bank account. The IRS will likely, by year-end, have balance information on every Neteller account. You also need to file Form TD F 90-22.1 with the Department of the Treasury (not the IRS) by June 30, 2007.

3. If prior to 2006 you had $10,000 at Neteller and you didn't file the TD F 90-22.1, you should consider filing it today, attaching a note that says you weren't aware of the law requiring notification of a foreign bank account. The penalty for not filing the form is $10,000 (minimum), and it's a felony—you can go to prison for this. Do realize you are likely going to have your tax return audited, but if you're choosing between an audit and jail time, I know which one I'd choose.

4. A client asked me over the weekend when I thought he'd see his Neteller funds. I told him late Summer or Fall. I think a July to September time frame is a reasonable estimate.

So the Neteller saga continues, but the ending is clear. American customers will almost certainly see their funds this year, and the DOJ (and later, the Treasury Department and the IRS) will see Neteller's records this Spring or Summer.

http://www.taxabletalk.com/posts/1174486504.shtml

[verdict]

im fuked

[Jim Kelly]

I don't understand what the hell this tax guy is trying to say at all.

First, why is the amount $10,000? What if I deposited $20,000 at the beginning of the season, and I was left with $12,000 in my Neteller account. This means that I lost $8,000 and this tax guy is telling me to fill out some form saying that I have a foreign bank account?????

Is this guy smoking crack????

I just lost $8,000 and now I am going to tell the IRS about it, so they can further look into it???? Then audit me????

In addition, if the IRS is looking for money laundering, accounts with activity, etc., then all they have to do is look at the individual history of any account that looks fishy to them, right?

If they are going to have all Neteller records, like this guy says they will have, then can't they look up each person's deposit and withdrawal history?

All they have to do is see what a person deposited, and what they withdrew at the end of the season. Obviously, if the withdrawal amount is much higher than the original deposit investment, then they have something to investigate. But, if the withdrawal amount is less than or just a little bit higher than the deposit amount, then there is nothing to investigate.

The IRS knows that most of the people using Neteller were using it for gambling purposes. The ones who were using them for other things will surely stick out with a simple investigation.

This whole thing with the $10,000 amount makes absolutely no sense. If you did this you would just be drawing attention to yourself that you do not want. If you were not laundering money, then you will not be caught for laundering money. They are not looking at ANYONE with a $10k account. Maybe $100k, but surely not $10k. This bullshit is not worth their time.

If they wanted to, they could start going after everyone who places bets too, but they don't. Just not worth the energy.

Now, if we are talking about paying taxes on gambling winnings, then that is a different story.

This whole foreign bank account thing is just ridiculous. The $10k thing makes no sense either.

I don't know where this guy is getting his info from.

Then he says that the fine for not filing this is $10k, and it is a felony and you could go to prison. Please.

I would like to see them put some guy in prison because he didn't put down his $10k Neteller account on his taxes.

This whole thing is a big joke.

[njtrader]

good post...

[The Judge]

Originally Posted by Jim Kelly

I don't understand what the hell this tax guy is trying to say at all.

First, why is the amount $10,000? What if I deposited $20,000 at the beginning of the season, and I was left with $12,000 in my Neteller account. This means that I lost $8,000 and this tax guy is telling me to fill out some form saying that I have a foreign bank account?????

Originally Posted by The Judge

If prior to 2006 you had $10,000 at Neteller and you didn't file the TD F 90-22.1, you should consider filing it today, attaching a note that says you weren't aware of the law requiring notification of a foreign bank account. The penalty for not filing the form is $10,000 (minimum), and it's a felony—you can go to prison for this. Do realize you are likely going to have your tax return audited, but if you're choosing between an audit and jail time, I know which one I'd choose.

Seems pretty clear to me. The bottom line is that your NETeller account is considered a foreign bank account which is required to be reported on your tax return. The author did not say that it had to be reported as income, only that any foreign bank account in access of $10,000 is supposed to be reported.

We have no way of knowing how much of their records NETeller will be sharing with the Department of Justice but anyone who had a large NETeller account should certainly get advice on this from a tax attorney.

[E_Wrecked]

Im not sure if you are a tax guy and know all this or what. im not a tax professional but I know that $9,999 is MAX across the board on plenty of things. Standard check deposits, withdrawals, casino wagering after $9,999 the IRS has to be notifed in some way, shape or form. The bank wont even check signatures on checks less then $9,999 go ahead and try it. Some guy has already proven this, he wrote his name in heiroglyphics amongst other things. $9,999 is the max on ALOT of things before you have to inform the IRS. Its even less at pony tracks, I had to sign an IRS form on a 3 dime TRIFECTA I hit couple years back.

$9,999 is the max

I dont know if you can deduct losses and use that as a figure. Like I said im not a tax guy, I know a decent amount about the financial world.

Maybe what you are saying is they wont waste time for 10K people, I beg to differ. If they want you they will get you

Its standard procedure from what I know

Im not a lawyer or tax professional as mentioned. They will get you if they want to thjough I know that much.

Im certain it doesnt have to do with losses. If you make deposits or hold a balance over 10k at any point regardless of winning or losing you may have issues.

I wouldnt mess with the IRS or the government, personally.

[The Judge]

Here is another interesting article written by the same author:



Taxes and Online Gambling
I'm a poker player. I've been playing competitive poker, including tournaments, for several years, quite successfully. And yes, I claim my winnings on my tax return. I'm also co-author of a poker book.

I've had a natural fascination with gambling and taxes for several years, and that's a primary reason why one of my areas of emphasis is gambling taxes. Several individuals have asked me to give an overview on online gambling and taxes. Given the out-and-out lies and falsehoods that I see on the Internet, I'm going to present a short series on online gambling and taxes.

"If I gamble online, it's overseas, and I don't have to pay tax on it." I see this statement all the time, and it's absolutely false. Under the US Tax Code, all income for US citizens is taxable, whether earned in the US, overseas or on the Internet. Section 61(a) defines gross income as “all income from whatever source derived,” including gambling, unless otherwise provided. McClanahan v. United States, 292 F.2d 630, 631-632 (5th Cir. 1961).

"Internet gambling is illegal, so I don't have to pay taxes on it." Ignoring (for the moment) the legality of Internet gambling, this is also false. The US taxes legal and illegal income. Remember Al Capone? He went to prison not for the murders he committed, but for tax evasion.

"The government has no way of tracking how much I win, so I'm not going to report it, and they'll never find out." If you're not audited for some other reason, the government is not likely to find out. However, if for whatever reason you are audited, and you have unreported income that the government finds out about, you will, at a minimum, pay tax, penalties and interest. If the IRS determines that you willfully evaded taxes, you could even be subject to imprisonment.

"I didn't receive a W-2G, so I don't have to report the gambling income." Another falsehood. Whether you receive paperwork or not, all gambling income is taxable.

"I can net my gambling wins and losses." Some gamblers can net their wins and losses—if they are professional gamblers. Most gamblers, however, must put their gambling income on line 21 (Other Income) and take their losses, up to the amount of their winnings, as an itemized deduction on Schedule A. This deduction is not subject to the 2% AGI limitation.

Finally, "I don't have to claim my online gambling winnings until the money is repatriated into the United States." This is yet another falsehood for gambling income. When you win your wager, you have gambling income, no matter if the bet is in the United States, the United Kingdom, or any other country. This falsehood, though, deserves a complete debunking and that will be the subject of the next installment of this series, next week.

Repatriation and Income Recognition
I recently read a blog where a very successful online poker player wrote,

There really aren’t IRS regulations on online gambling. It exists in a grey area. As fun160 pointed out "In the financial markets money earned off-shore is not taxable until it is repatriated. A strong case can be made that the same is true for off-shore gambling."

I have talked to CPAs about whether the taxes should be paid upon earning the money or upon cashing out and the answer I was given is that a strong argument could be made for either. In the end it would be up to a court.

Well, some of the statements this player made are true: there aren't any IRS regulations on online gambling and I'm sure he spoke with a CPA. As to the rest...

1. The recognition of income is a long-decided principle in the United States based on the concept of Constructive Receipt of Income. As the IRS's Publication 525 states, "You are generally taxed on income that is available to you, regardless of whether or not it is in your posession." Let's say you win $500 at the poker club, but you decide to leave it in the form of chips and put it in your safety deposit box. It's still income.

2. "But I won the money online, and it's in [Gibraltar, the Isle of Man, Costa Rica, etc.], and not in my hands...." So what! When there are no specific rules governing the online world, the rules of the real world govern. The rules for gambling income are quite clear. You must keep a log of your sessions, you must report wins and losses by session, with your wins going on Line 21 (Other Income) and losses as an itemizable deduction not subject to the 2% limitation on AGI. Repatriation of income as far as gambling is totally irrelevant. Offshore casinos are considered by the IRS as just another taxpayer avoidance scheme.

3. Repatriation of investment income isn't relevant, either. Let's say you have an investment in a hypothetical British company, BritCo Ltd. They declare a dividend of £2 per share today and you own 10 shares. You will owe the dollar equivalent of tax based on £20 on this year's tax return. You will get a tax credit for any British taxes imposed on your investment, and you may be able to deduct investment expenses on your investment.

4. "In the end it would be up to a court." Well, anyone can bring a case in Tax Court. Since there has yet to be a case in Tax Court on online gambling, it's unlikely you'll end up paying a frivolous penalty. But you're going to lose. There have been many Tax Court cases dealing with the issue of constructive receipt. The opinion in a recent case, Millard v. Commissioner (TC Memo 2005-192) notes, "Consequently, a cash method taxpayer constructively receives income as of the date that a check is received absent a substantial limitation. Furstenberg v. Commissioner, 83 T.C. 755, 791 n.28 (1984); Kahler v. Commissioner, 18 T.C. 31, 34-35 (1952); Roberts v. Commissioner, T.C. Memo. 2002-281." Now, I find it hard to believe that the Tax Court would rule that money put in a players' online casino account wasn't constructively received.

The tax rules for online gambling are quite clear—the rules are the exact same as in the brick and mortar world of casinos. This may not be what the typical online gambler wants to hear, but it's the bitter truth.

Records and Professionalism
I will now examine recordkeeping and professional status for online gamblers. Unfortunately, a lot of this material is, frankly, boring. But it's necessary. Some of the material in this article is based on an article I wrote for Chuck Humphrey's excellent website, http://www.gambling-law-us.com/.

First, let's examine the situation for the casual (or non-professional) gambler. The Tax Code requires gamblers to record their wins and losses by session. You take all of your winning sessions for the year, add them together, and you come up with a result. Let's assume that's $12,000.00. Then you take all your losing sessions, add those up, and come up with a second number. Let's further assume that's $10,000.00. However, you cannot net those two numbers! The wins go as part of Other Income (line 21) while the losses are an itemizable deduction (Schedule A) not subject to the 2% AGI limitation on itemized deductions.

Well, you're probably thinking that there's no particular difference between netting and this result. That's wrong, for three reasons. First, if you don't itemize your deductions (because you don't have enough deductions to itemize) you lose out on your gambling losses. In such a situation your gambling losses are presumed to be part of your standard deduction. Second, many items on the tax return are tied to Adjusted Gross Income (AGI). The prescribed method for handling gambling income and losses increases AGI (even if the taxable income remains unchanged). This can limit some taxpayers' other deductions, including medical and miscellaneous itemized deductions. Finally, gambling losses can, in certain circumstances, trigger the dreaded Alternative Minimum Tax (AMT).

So you ask, why not declare myself a "professional" gambler. A few years ago that would not have been possible. Luckily a gambler named Robert P. Groetzinger fought the IRS on this issue. In a case that made it to the Supreme Court, the court held that you can legally be a professional gambler. The most relevant portion of the opinion reads:

...[W]e conclude that if one's gambling activity is pursued full time, in good faith, and with regularity, to the production of income for a livelihood, and is not a mere hobby, it is a trade or business within the meaning of the statutes with which we are here concerned. Respondent [480 U.S. 23, 36] Groetzinger satisfied that test in 1978. Constant and largescale effort on his part was made. Skill was required and was applied. He did what he did for a livelihood, though with a less-than-successful result. This was not a hobby or a passing fancy or an occasional bet for amusement. [Commissioner v. Groetzinger, 480 U.S. 23 (1987)]

There are some caveats to this. Note the usage of full time, with regularity, and production of income for a livelihood. If you gamble in this manner, you can classify yourself as a professional. And, yes, you can be a professional gambler and lose.

Professional gamblers have a business. They file their gambling results on Schedule C. Their wins and losses are netted, they may deduct necessary and reasonable expenses (i.e. mileage and travel, computer ISP, books and other training materials, etc.). However, they are subject to self-employment tax (Schedule SE). That tax (equivalent to Social Security and Medicare) is 15.3% of the first $90,000 of income (2005 limits) and 2.9% thereafter. You do get to deduct half of your self-employment tax as an adjustment to income on line 30 of Form 1040. For some gamblers, it's cheaper (for taxes) to be an amateur than a professional. Talk to a professional tax advisor before making the decision to become a professional gambler. There are several other caveats and limitations.

Finally, the IRS has fought some taxpayers who have declared themselves professionals. The IRS has been relying on the literal wording of the Groetzinger decision; that a professional must be a "full time" gambler. They have rejected that status for some gamblers who maintain other businesses. None of these cases have been decided in Tax Court (yet). I think this is a losing position for the IRS. Consider a hypothetical professional gambler, John Smith. Mr. Smith plays in only the biggest poker tournaments of the year. The remainder of the year he and his wife operate a successful jewelry store. He files two Schedule C's on his return. Is he a professional gambler?

Of course he is, assuming that his goal is to earn income from gambling—"...[the] production of income for a livelihood...." There are many individuals who file multiple Schedule C's. I believe that the IRS's position is wrong. However, be forewarned. If you're in this situation the IRS may fight you.

In conclusion, becoming a professional gambler should be decided on the basis of your skill (in gambling), not your tax situation. However, you must keep your tax situation in mind.

States, Filings, and Legalities
In this, the fourth of five parts of my series on taxes and online gambling, I'll examine state income taxes, withholding requirements, and some legal issues, including the Silver Platter Doctrine.

State Income Taxes
Americans not only pay federal income tax, we pay income tax to the state we live in. If you're lucky enough to live in Alaska, Florida, Nevada, South Dakota, Texas, Washington or Wyoming, there is no state income tax. Additionally, New Hampshire and Tennessee tax only dividend and interest income.

Every state with a state income tax taxes gambling income. The tax rate will depend on what bracket you fall into. Unfortunately, many states do not allow deductions for gambling losses. Some of the states that don't allow gambling losses are Connecticut, Massachusetts, and Ohio. Professionals can deduct their losses because they will file Schedule C (or the state equivalent).

And some cities have city income taxes. Some cities tax everything, including gambling; some only tax specific items (usually wages, interest, dividends, and self-employment income). As each city's ordinance is different, you should check with a professional to determine what, if anything, is taxable and what, if anything, can be deducted.

Withholding Requirements
Adding to the filing burden is that many gamblers must make estimated tax payments. The government expects to receive its tax receipts during the year. If you're a wage earner, a portion of your wages are withheld and paid as federal (and state) income tax. If you gamble, and you are successful, you may have to make additional estimated payments. These are done by filing Form 1040-ES. If you also have wage income, you can increase your withholding to pay your additional tax. If you elect not to make these additional payments, you may be subject to penalties for underpayment of tax (not enough tax withheld).

I strongly advise gamblers to consult with a professional tax advisor. He or she can look at your tax situation in totality, determine what payments (if any) need to be made and to whom, and give advice to your specific situation.

Deducting More Than You Lose
For the amateur, deductions are limited to the amount of winnings. This rule also holds for the professional gambler. The professional gambler is in the only profession where losses are not allowed (for tax purposes).

Personally, I believe that this violates the US Consitution's Due Process Clause. (The "Equal Protection Clause" only applies to states, not the federal government.) The Tax Court, and Courts of Appeals, have ruled that the prohibition against deducting gambling losses outweighs the professional gambler's right to be treated like any other occupation. To fight this, a gambler would have to show that he's normally a winner, had a bad year, and win in both a Court of Appeals and potentially the US Supreme Court. That's an expensive fight, and unlikely to happen. Thus, don't expect any change in the law soon.

Legal Issues
I am not an attorney. The remainder of this article is not meant as legal advice. Rather, I'm examining some legal issues from a tax perspective.

I. Nelson Rose, a professor of law at Whittier University, wrote, “The State Gaming Division acknowledged that a tip from an outside source started their investigation. Jeff says he thinks it was the IRS. This is unlikely, because the IRS is bound by the "silver platter" doctrine, which prevents the IRS from turning over a gambler, and his required tax returns, on a silver platter to local law enforcement.” However, the references that I’ve seen to the Silver Platter doctrine are a bit different.


Indeed, the Silver Platter doctrine allowed federal courts to permit the introduction of evidence seized by state officers which had they been seized by federal officers would have been inadmissible, Weeks v. United States, 232 U.S. 383, 398 (1914), so long as no federal officer participated in the search, Byars v. United States, 273 U.S. 28 (1927), or the search was not made on behalf of federal law enforcement purposes. Gambino v. United States, 275 U.S. 310 (1927). This rule became known as the ''silver platter doctrine'' after the phrase coined by Justice Frankfurter in Lustig v. United States, 338 U.S. 74, 78-79 (1949): ''The crux of that doctrine is that a search is a search by a federal official if he had a hand in it; it is not a search by a federal official if evidence secured by state authorities is turned over to the federal authorities on a silver platter.'' In Elkins v. United States, 364 U.S. 206 (1960), the doctrine was discarded by a five-to-four majority which held that inasmuch as Wolf v. Colorado, 338 U.S. 25 (1949), had made state searches and seizures subject to federal constitutional restrictions through the Fourteenth Amendment's due process clause, the ''silver platter doctrine'' was no longer constitutionally viable. During this same period, since state courts were free to admit any evidence no matter how obtained, evidence illegally seized by federal officers could be used in state courts, Wilson v. Schnettler, 365 U.S. 381 (1961), although the Supreme Court ruled out such a course if the evidence had first been offered in a federal trial and had been suppressed. Rea v. United States, 350 U.S. 214 (1956).

The IRS’ Criminal Investigation Handbook notes, “Evidence obtained by state officers under circumstances which would constitute unreasonable search and seizure under the Fourth Amendment if obtained by Federal officers is equally inadmissible in a Federal criminal trial. This repudiates the former so-called silver platter doctrine which had allowed Federal courts to admit evidence illegally obtained by state officers if there had been no collusion by Federal officials. The Federal court must decide for itself if there has been unreasonable search and seizure by state officers, even though the state court has already considered the question and irrespective of the state court's findings.” (Admissibility of Evidence, Handbook 9.4, Chapter 9.15.4)

So let's examine online gambling. Chuck Humphrey has concluded that online poker is technically illegal in California. His website has both a summary of his conclusions on the legality of gambling in each state and each state's law. For example, all gambling is illegal in Tennessee and Utah. Of course, the 2003 World Series of Poker champion won his entry via online gambling and hails from Tennessee and, to my knowledge, hasn't been prosecuted. But that doesn't mean you won't be, unfortunately. Until the situation is clarified (and this may take some number of years), the legality of being a professional online gambler is unknown.

On every federal tax return you must include your occupation. This is a statutory requirement. However, you do not have to incriminate yourself (the Fifth Amendment). There is nothing wrong with an online gambler (filing as a professional) calling himself a professional gambler. That's a correct description of what he or she does. Be forewarned that if you are stupid enough to put down on your tax return that you are in an illegal occupation (e.g. "illegal drug dealer"), you can have your name forwarded by the IRS to other law enforcement.

Today the government isn't attempting to prosecute online gamblers. However, the government might be looking to prosecute owners of online gambling sites and people who work for online gambling sites. Online gamblers are far better off declaring their gambling income on their tax returns and paying their taxes than facing fines, penalties and possible imprisonment for ignoring the law.

Poker Tournaments and Banking Issues
This final article in the series begins with a discussion of withholding. This leads into a discussion of poker tournaments (in cardrooms and casinos). Lastly, we'll examine banking regulations and how they impact online gambling.

The IRS is mandated with collecting the federal government's tax revenues. For employees, this means payroll deductions of income taxes that your employers remit to the IRS. If you're self-employed, this means filing Form 1040-ES.

Many forms of gambling have withholding requirements, while some are exempted. If you're lucky enough to win while playing blackjack (21), baccarat, craps, roulette, or the big-6 wheel, nothing will be withheld. However, if you win $600 or more and your gross winnings are at least 300 times your wager, you will receive a W-2G and 25% of your gross winnings will be withheld. (The monetary limit is $1200 from bingo and slot machines and $1500 from Keno.)

But what about poker?
Poker is not mentioned specifically in the regulations. Thus, it falls under the generic $600 or more and 300 times your wager restrictions. There are only a few poker tournaments where this comes into play (e.g. the main event of the World Series of Poker).

The IRS isn't happy about this. They believe, probably correctly, that many tournament poker players are not reporting all (or a large portion) of their winnings. Thus, the IRS wants to impose withholding on poker tournaments, by writing a Revenue Procedure that mandates withholding. I believe that this will likely classify poker tournaments as "wagering pools:" 26 USC [Ch. 24] Sec. 3402 (a) (1) reads, "Every person, including the Government of the United States, a State, or a political subdivision thereof, or any instrumentalities of the foregoing, making any payment of winnings which are subject to withholding shall deduct and withhold..." 26 USC [Ch. 24] Sec. 3402 (a) (3) (C) reads, "Sweepstakes, wagering pools, certain parimutuel pools, jai alai, and lotteries"


There is only one court decision on point referencing "wagering pools." In Chickasaw Nation v. United States (208 F.3d 871), footnote 1 notes, "The term [wager] is also defined to include "(A) any wager with respect to a sports event or a contest placed with a person engaged in the business of accepting such wagers, [and] (B) any wager placed in a wagering pool with respect to a sports event or a contest, if such pool is conducted for profit ...." 26 U.S.C. §§ 4421(1)(A) and (B)"

IRS Technical Advice Memorandum 199906057 states, in part,

"Section 4401(c) provides that each person who is engaged in the business of accepting wagers shall be liable for and shall pay the tax on all wagers placed with him. Each person who conducts any wagering pool or lottery shall be liable for and shall pay the tax on all wagers placed in such pool or lottery.

Under § 4421(1), the term "wager" includes any wager placed in a wagering pool, if such pool is conducted for profit, and any wager placed in a lottery conducted for profit.

Section 44.4421-1(c)(1) of the Wagering Tax Regulations provides that a wagering pool conducted for profit includes any scheme or method for the distribution of prizes to one or more winning bettors based upon the outcome of a sports event or contest, or a combination or series of such events or contests, provided that such wagering pool is managed and conducted for the purpose of making a profit.

Under § 44.4421-1(c)(3), a contest includes any type of contest involving speed, skill, endurance, popularity, politics, strength, appearances, etc.. such as a general or primary election, the outcome of a nominating convention, a dance marathon, a log-rolling, wood-chopping, weight-lifting, corn-husking, beauty contest, etc.

Rev. Rul. 57-521, 1957-2 C.B. 779, states that a wagering pool is a gaming transaction where the wagers alone comprise the prize to be won by the successful contestant."

In a private letter ruling in 2005, the IRS noted that:


"Based on the description of the tournament play, if the activities are to be classified as wagering, they must fall within the definition of either a “lottery” or a “wagering pool.” However, these terms are not defined in the Code or regulations associated with federal withholding or reporting requirements. Thus, it is appropriate to look to dictionaries, court decisions, and other regulatory provisions to ascertain the ordinary meaning of the terms.

Wagering pool . The dictionary does not define a wagering pool. However, “pool” is defined as “all the money bet by a number of persons on the result of a particular event with the aggregate to be paid to the winner or divided among several winners according to conditions established in advance.” Webster’s Third New International Dictionary 1764 (1986). Similarly, Black’s Law Dictionary defines pool as follows: “In various methods of gambling, a pool is a sum of money made up of the stakes contributed by various persons, the whole of which is then wagered as a stake on the event of a race, game, or other contest, and the winnings (if any) are divided among the contributors to the pool pro rata. Or it is a sum similarly made up by the contributions of several persons, each of whom then makes his guess or prediction as to the event of future contest or hazard, the successful better taking the entire pool. Such pools are distinct from the practice of bookmaking.” Black’s Law Dictionary 1161 (6th ed. 1990).

United States v. Berent , 523 F.2d 1360, 1361 (9th Cir. 1975), notes that in “common usage the term pool connotes a particular gambling practice, an arrangement whereby all bets constitute a common fund to be taken by the winner or winners.” State v. Duci , 727 P.2d 316, 319 (Ariz. 1986) notes that “pool selling” is generally defined as “the receiving from several persons of wagers on the same event, the total sum of which is to be given the winners, subject ordinarily to a deduction of a commission by the seller of the pool.”

In connection with the tax on certain wagers imposed by § 4401 of the Code, § 44.4421-1(c)(1) of the Wagering Tax Regulations provides that a wagering pool conducted for profit includes any scheme or method for the distribution of prizes to one or more winning bettors based upon the outcome of a sports event or contest, or a combination or series of such events or contests, provided that such wagering pool is managed and conducted for the purpose of making a profit. Under § 44.4421-1(c)(3), a contest includes any type of contest involving speed, skill, endurance, popularity, politics, strength, appearances, etc., such as a general or primary election, the outcome of a nominating convention, a dance marathon, a log-rolling, wood-chopping, weight-lifting, corn-husking, beauty contest, etc.

Thus, these authorities suggest that a wagering pool is an arrangement to pool bets into a common fund, which are wagered on a sports event or contest, with the successful bettor (or bettors) receiving the pool proceeds, subject to the pool sellers commission. That contrasts with a situation where monies are received as entrance fees in order to compete for a preestablished prize offered by a third party that must be awarded in any case...."

Put simply, poker tournaments are not wagering pools.
(hide)
Will this stop the IRS from trying to impose withholding on poker tournaments? No, but it will be interesting to see what code section they come up with to justify withholding. Of course, if Congress amends the Code to specify withholding from tournaments, then it will become a non-issue.

Banking Regulations
Two banking rules come into play vis-a-vis online gambling. First, if you have a foreign bank account(s), and at any time during the year you have $10,000 in the account, you must report the account. You must do this in two ways: first, by checking the box on Schedule B of Form 1040 that asks this question. Additionally, you must file a report of Foreign Bank and Financial Accounts (Form TD F 90-22.1) with the US Department of the Treasury (not the IRS).

So what is a foreign bank or financial account? Bank accounts are obvious; financial accounts are less obvious. The instructions for Form TD F 90-22.1 state that the definition of a financial account is, "Generally includes any bank, securities, securities derivatives or other financial instruments accounts...The term also means any demand, checking, deposit, time deposit, or any other account maintained with a financial institution or other person engaged in the business of a financial institution."

So now we must ask, what is a financial institution? Well, your thinking it's a bank. But that's not necessarily true. Under a different law (as noted below), the IRS considers the following domestic entities to be financial institutions:

"The financial institutions as defined in 31 CFR 103.11, for which the IRS has civil enforcement are listed below.

1. currency dealer or exchanger.
2. check casher.
3. issuer of traveler's checks, money order, or stored value (funds or monetary value represented in digital electronics format (whether or not specially encrypted) and stored or capable of storage on electronic media in such a way as to be retrievable and transferable electronically).
4. seller or redeemer of traveler's checks, money orders or stored value.
5. money transmitter.
6. licensed gambling casinos/card clubs having gross annual gaming revenues in excess of $1,000,000 (except those in Nevada where the dollar criteria is $10,000,000).
7. a domestic agent, or agency of a foreign bank which is not supervised by one of the Federal Banking Regulations, such as a law firm acting as an agent for a foreign bank 8. banks and other financial institutions which are not supervised and examined for safety and soundness by any
Federal banking agency or the SEC."

The IRS hasn't pressed the point, but if they want to, they could classify all online casinos as financial institutions. There is no doubt, though, that Neteller, FirePay, and similar services are foreign bank accounts and must be reported (if you meet the $10,000 threshold).

So you have to report a foreign bank account—that's not a big deal (just another piece of paper). Well, that's true except for one not-so-minor detail:

The quickest and surest way that I know of to have your return audited by the IRS is to declare a foreign bank account on Schedule B and/or Form TD F 90-22.1. Based on my experience in dealing with the IRS, the audit rate is close to 100% the first time you make such a declaration.

So if you have a foreign bank account, you need to make sure you declare your gambling income.

Finally, under the Bank Secrecy Act banks are encouraged to report suspicious transactions of less than $10,000. So if you receive regular Neteller deposits of (say) $4,000 and your bank considers them suspicious, you may be flagged. The Comptroller of the Currency handles banking regulations.

Conclusion
The rules that an online gambler must follow to correctly report his or her taxes can get frustrating. The regulatory world is based on the real (brick and mortar) world, not the online world. There are many places where a gambler can make mistakes. I strongly urge that online gamblers consult a professional tax advisor to make sure that they don't end up going down the wrong path.

[Jim Kelly]

This tax guy obviously plays by all the rules.

Look, I understand this guys point here, and technically speaking he is probably right.

I just don't see the logic in it.

I am not saying that anyone do anything wrong here, or even hide anything.

If I ever won a large amount of money, I would claim in on my taxes. Legally or illegally, I would claim it. I agree with the guy about that, no question about it.

I am not saying to commit any sort of tax evasion at all.

I just don't see how your Neteller account is a foreign bank account.

This is what I have the problem with.

Personally, I have nothing to worry about. My Neteller account was not even close to $10k.

Just thought that this whole thing made no sense to me.

[E_Wrecked]

Originally Posted by Jim Kelly

I just don't see how your Neteller account is a foreign bank account.

.

Unfortunately it appears A "financial institution" is open for some negotitation. Whether you are a bank, money transfer center or a check cashing operation.

you are depositing money with any of those companies, technically.

Damned if you do, damned if you dont.

What if some dude lost 30K to an online book and transfered through Neteller. Maybe he lost on purpose to get the money to somebody for ALL the wrong reasons. Have to be careful nowadays, people are crazy!!!