foreign account reporting due today - question
 

I have waited until the last minute to do this. Can you please tell me where in the world the following poker sites are stationed:

Party poker
Full Tilt
Poker Stars

also, neteller.

Thanks.

Re: foreign account reporting due today - question
 

I might as well piggy-back onto this, so...

What did you all put for NeTeller regarding the 'Type of account'. It's not really a security. I guess you could call it a bank, even though it garners no interest. I'm seriously thinking about checking 'Other' and putting 'E-Wallet' and letting them deal with it.

What about the "country in which the account is held"? Isle of Man?

Re: foreign account reporting due today - question
 

I figured it out... all the info for the poker sites is here:

poker scout'

Neteller is headquartered in Isle of Man. For 'type', I just wrote 'Neteller', lol.

Re: foreign account reporting due today - question
 

Country is England, technical term is financial institution. Be sure you are ready for the audit. You understand because of constructive receipt you need to pay tax from the moment the money is in your Neteller or gaming site account, not from when you actually physically receive the money.

Some useful websites:

http://www.gambling-law-us.com/Artic...mbling-tax.htm
http://www.taxabletalk.com/posts/1170966022.shtml

Re: foreign account reporting due today - question
 

As I understand it, reporting is only required if you had 10K+ in the account during the year, correct?

Re: foreign account reporting due today - question
 

[ QUOTE ]
As I understand it, reporting is only required if you had 10K+ in the account during the year, correct?

[/ QUOTE ]

yes.

Re: foreign account reporting due today - question
 

[ QUOTE ]
As I understand it, reporting is only required if you had 10K+ in the account during the year, correct?

[/ QUOTE ]

I believe you need to report if you had 10K+ total across all your foreign accounts at any time.

Re: foreign account reporting due July 2
 

I contacted the IRS/Treasury Department Foreign bank directly and confirmed with them that e-wallets such as Neteller are reportable foreign accounts for U.S. foreign bank account reporting (due July 2, 2007.)

While I was at it I asked about monies at online gambling sites such as PartyPoker. This was their reply:

"As for a response on the Party Poker account, it may be harder to determine if it is reportable. If it is just a transfer service account it is not considered reportable."

It is my belief now that:

Most likely, most of monies are held at PartyPoker, PokerStars, etc. not reportable. While all non-US online e-wallets are reportable.

FYI

Chip CPA

Re: foreign account reporting due July 2
 

I agree with this and this seems to be the general consensus of the way the issue is being handled this year. I would like to make clear that the definition of financial institution is so broad, and because sites allow peer to peer transfers especially, the IRS would have a case to extend FBAR reporting to them. I would also warn players that do a peer to peer transfers in number, or at larger amounts you could face additional problems if the IRS chooses, as under Title 31, you could arguably have to register as a financial institution on your Form TD F 90-22.1.

The FBAR had previously been under enforcement by FinCEN, and when it was transfered to IRS it created some questions about Title 26 protections, (the taxpayer protection laws enacted in the '90's). The IRS has decided that if the FBAR investigation comes about in a normal audit, and the foreign account was not used for tax evasion, then Title 26 protection will apply and the FBAR investion will be dropped. However, if the FBAR is a direct FBAR investion, or if it was used for tax evasion or criminal purposes, then the taxpayer will not have any typical Title 26 rights.

There is a four part test the IRS is using to determine if a unwilling violator can receive leniency, which would mean a penalty of a maximum of 5-10% of the maximum value of the account.
1. The taxpayer has no history of FBAR violations.
2. The funds passing through the foreign account were not from illegal sources or used for criminal purposes.
3. The taxpayer cooperated during the investigation.
4. The IRS did not fine the taxpayer based on failure to report income from the foreign account.
If you do not think you pass this four part test, and be aware that the IRS believes that internet poker is illegal and money laundering, be sure you have very good help during your audit, as the audit rates for first year Form TD F 90-22.1 filers are 100%.

The penalties for not properly filing a FBAR are:
1. Non-willful transaction/account: 5-10% of transaction/account or 10K whichever is more.
2. Willful transaction/account: 50% of transction/account or 100K whichever is more.
3. Criminal FBAR: Fine of not more than 250K and/or 5 years and if it is a pattern of illegal activity a fine of not more than 500K and/or up to 10 years.

While the OVCI has expired, and taxpayers who had no opportunity to take advantage of it will undoubtably get a much worse deal, there are still two IRS programs of note for taxpayers who should have filed FBAR's in the past. One the LLCI, is for taxpayers the IRS has already identified as likely tax cheats, and has no criminal waiver. This program is only for taxpayers identified by the IRS. The other program is the Voluntary Disclosure Policy, which would normally shield taxpayers from most criminal liabilty from self identifying, however, as the IRS is maintaining no Title 26 protections for direct FBAR
filings, tax firms are at this time unsure whether this protection will apply. Current IRS legal memo appear to say it will not.

I am also going to make sure everyone knows about the rule of bring cash into or out of the U.S. You must fill out a CMIR, a currency or monetary instruments report. If you break the money up into less than 10K to avoid the CMIR, you are guilty of a structuring crime. So anyone winning money outside of the U.S. must be filling out CMIRs or FBARs to repatriate it.

Also, be careful of making a number of under 10K deposits, especially in cash. The reason that the gaming sites are prefering under 10K transfers is that they avoid filing a CTR, currency transaction report, in that case. However, if you make many of these deposits, your bank may file a SAR, suspicious activity report, and the FBI and Homeland Security will come see you. It will be bad and expensive. The best way to avoid this is to be sure some of your deposits are over 10K and trigger a CTR, which are rarely investigated. Talk to your bank, make sure they know that you are a professional poker player. This is why your deposit record might be odd. Banks have a program KYC, which is based on them knowing their customers, but it is mostly a very sophiscated computer program. The problem for poker players is that their typical deposit records can look alot like a money launderer or other illegal business. In general, a smaller bank, with a hometown branch will have more input from staff about filing a SAR.

Good Luck, FILE BY MIDNIGHT, THERE IS NO EXTENTSION FOR FBARS!

Thanks, that was an incredibly good summary and should be posted
 

... with a sitcky.

Thanksfor the clarification on treatment of late filers. Bottom line: EVEN if you missed the deadline this week, go ahead and file anyway.

The only different point I would make is that offshore gaming companies avoid filing a CTR, currency transaction report, because they are offshore and because they do not take cash.

Re: Thanks, that was an incredibly good summary and should be posted
 

You are right, there was some treatment about ETF in the CTR that was misleading. Should have realized as have sent million dollar transfers without a CTR. I think they are just trying to avoid the Denmark computer. More transactions in typically amounts are more likely to get lost in the clutter.

Re: Thanks, that was an incredibly good summary and should be posted
 

Is there anywhere a step-by-step instruction for how to report Neteller?

Re: foreign account reporting due July 2
 

[ QUOTE ]
be sure you have very good help during your audit, as the audit rates for first year Form TD F 90-22.1 filers are 100%.

[/ QUOTE ]

I have read here and elsewhere it is 90%. Not much difference between 90 and 100 I guess but how do you know it is 100% and how long does it usually take for the audit to happen?

Re: foreign account reporting due July 2
 

[ QUOTE ]
[ QUOTE ]
be sure you have very good help during your audit, as the audit rates for first year Form TD F 90-22.1 filers are 100%.

[/ QUOTE ]

I have read here and elsewhere it is 90%. Not much difference between 90 and 100 I guess but how do you know it is 100% and how long does it usually take for the audit to happen?

[/ QUOTE ]

I've talked to multiple CPAs that dispute this due to the fact that this is not such an uncommon filing anymore. I submitted this for 2006 tax year.

Re: foreign account reporting due July 2
 

As this year is the first year with the penalties coming into play, there may be a reduced audit rate, but I wouldn't count on anything. If you are not audited the first year you are still a very high priority to be audited within a few years. You are also more likely to be the type of people to be selected. The type now filing, that was typically non-compliant that may not be audited at as great rates are the kids on semester overseas and American ex-pats working overseas. In general, the larger your account, the more likely you will be to be audited. There is a detailed instruction form, it is tricky to find, I will post as soon as I can.

Re: foreign account reporting due today - question
 

http://www.irs.gov/businesses/small/article/0,,id=148849,00.html
http://www.irs.gov/businesses/small/article/0,,id=148845,00.html
http://www.speranzasystems.com/pdf/G...ofUSTaxLaw.pdf
http://www.hbtlj.org/v07p1/v07p1Sheppardar.pdf

The Speranza document is probably the clearest for non-tax preparers. This is pretty much all there is out there. If it is not clear, you can ask a specific question, but I am sure no one is willing to be responsible for the accuracy of your tax return. Be sure you mail to Detroit.

Re: foreign account reporting due July 2
 

If I knew that filing this form was so likely to lead to an audit, I wouldn't have filed. I pay all my taxes so being audited will be an unnecessary giant pain in the ass.

Re: foreign account reporting due July 2
 

[ QUOTE ]
If I knew that filing this form was so likely to lead to an audit, I wouldn't have filed. I pay all my taxes so being audited will be an unnecessary giant pain in the ass.

[/ QUOTE ]

Same here.

Re: foreign account reporting due July 2
 

The penalties are huge for not filing, up to half a million and 10 years in jail. It is much better to file, perhaps the huge increase in FBAR filings will reduce the audit rate.

Re: foreign account reporting due July 2
 

[ QUOTE ]
If I knew that filing this form was so likely to lead to an audit, I wouldn't have filed. I pay all my taxes so being audited will be an unnecessary giant pain in the ass.

[/ QUOTE ]

Since they can tell you have paid taxes, you may be less likely to be audited. My guess is it would be far better to face the IRS having paid your taxes, than the DOJ.

Re: foreign account reporting due July 2
 

[ QUOTE ]
The penalties are huge for not filing, up to half a million and 10 years in jail. It is much better to file, perhaps the huge increase in FBAR filings will reduce the audit rate.

[/ QUOTE ]

They may also focus on those who have not filed, since they have the Neteller records. If we are lucky they will check off most of those who have filed, and dig through the records for those who have not.

Re: foreign account reporting due July 2
 

[ QUOTE ]
If I knew that filing this form was so likely to lead to an audit, I wouldn't have filed. I pay all my taxes so being audited will be an unnecessary giant pain in the ass.

[/ QUOTE ]

For any tax year prior to 2006, I agree. No telling how meticulous our Neteller records are being picked apart. I'd much rather run the risk of an audit, since I've paid all taxes, than face fines or penalties for not complying.

Re: foreign account reporting due July 2
 

Is the audit rate really that high? I filed this form in 2005 (as well as 2006) and I haven't had anything happen to me. How likely is it that I will be audited considering so much time has passed?

Re: foreign account reporting due July 2
 

The audit rate used to be 100%, however under the compliance initiatives and new penalties, it has dropped somewhat. How much more it will drop this year with the surge of FBAR's that will occur is anyone's guess. What I would generally tell you is the FBAR filers, (or people who are non-compliant FBAR filers) are considered the most significant tax evasion problem, and thus the number one audit priority for the IRS, period. If you are a FBAR filer, I would be prepared to be audited at any point, and by law you must maintain records relating to your FBAR's for five years.

Re: foreign account reporting due July 2
 

Geez, what a pain. It would certainly suck to be audited, but the unpleasantries and fines they lay out for non-filers makes me feel better about filing, if only marginally so.

Quick follow-up question: I see that we're supposed to check off the box Part III on Schedule B in addition to filing the FBAR. I didn't even know about this form until last week and already filed my taxes without checking off this box. Is there any way that I can correct this? Do I need to?

Re: foreign account reporting due July 2
 

Note: if you did note file your FBAR by the midnight deadline, and have not filed previous years, and did not check Schedule B, please read!

QUESTION: I read your article in the June 2005 issue of the Tax
Adviser (Reporting and Disclosing Foreign Financial Accounts) and
found it very informative. Thank you.

One question I had which I have had trouble finding a direct answer to
is whether or not the penalties (willful or non-willful) can be
imposed on late filings of the form. It is clear that they can be
imposed on failure to file the forms but the text in the AJCA
discusses violations, which I would think that filing past the due
date could be considered a violation. In practice my guess is that as
long as the form is filed before the IRS questions it then the
individual should be ok but I wanted to know your thoughts on this.
Do you know if the penalties can be imposed on late filings?

REPLY: I have not been able to find a clear answer to the question.
The instructions in the Form TD F 90-22.1 do not make any statement
about a late filing. It only refers to a failure to file. The most
recent copy of the form on the IRS web site is dated in 2000 and has
clearly not been revised to reflect the new penalty.

Your question relates to the new penalty of up to $10,000 for a non
willful violation of the financial account reporting requirement to
disclose any interest in or authority over a foreign financial
account. The effective date of the new penalty is that it applies to
violations occuring after the date of enactment of the AJCA -- which
was October 22, 2004. The Committee reports do not add any
clarification.

The reporting requirement applies to the aggregate value of all
foreign financial accounts for a calendar year. Thus, for 2004, such
accounts must be reported on or before June 30, 2005. The law is
silent with respect to the imposition of penalties on reports that are
filed late but the new penalty may be waived by the IRS if the
taxpayer can show a reasonable cause for the failure and if the income
from the foreign accounts has been reported.

It is not clear to me whether these penalties would now apply where a
taxpayer has failed to file the reports in prior years. However, I
believe that a failure to check the "Yes" box on Form 1040, Schedule
B, Part III regarding foreign accounts would constitute an incomplete
return if the taxpayer did have any foreign accounts to report. (A
similar question is on most other income tax forms such as the Form
1120.)

I will be informing any new clients who have failed to respond to the
question on a prior tax return and have failed to file the required
form TD F 90-22.1 that there is no assurance that the IRS would be
willing to waive the new penalty or that the new penalty might not
apply where such accounts have not been reported.

Prior to the passage of the AJCA, I filed a number of delinquent
reports of foreign financial accounts and my clients have not received
any notice of penalties from the IRS because the penalty required that
the failure to file the information was willful. The new penalty for a
non-willful failure to file will put taxpayers in the difficult
position of having to decide whether to file late returns and take a
chance on whether the penalty will be imposed or whether to gamble on
continued non reporting which could be subject to far greater
penalties.

Tax preparers can not advise clients in this regard because to do so
could be construed to be a conspiracy to evade taxes. A taxpayer who
has failed to file these reports in prior years and/or has not
responded to the question on their prior income tax returns regarding
foreign accounts may want to consult with a tax lawyer rather than a
tax accountant.

This puts taxpayers between a rock and a hard spot. If they ask any
tax preparer what to do, the tax preparer has to advise them to file
the required forms and take their chances on the generosity of the IRS
to not impose penalties for returns that were due before the change in
the law but that were filed after the change in the law.

If the IRS wants compliance more than they want to collect penalties,
then they should make it clear that they will not impose the penalty
on a late filing of returns that were due before the enactment of the
AJCA or they should offer an amnesty period for filing late.

Vern Jacobs

THE INFORMATION HEREIN DOES NOT CONSTITUTE A COVERED OPINION AND MAY
NOT BE USED TO AVOID POTENTIAL PENALTIES.
(CIRCULAR 230, SECTION SECTION 10.35(b)(4)(ii).

To summarize: you may be liable for the up to 100K penalties. Consult a tax attorney, not a CPA. Do not file yet. People, this is some serious crap. If people do not understand what I said about FBAR's not having Title 26 protections, let me make it clear.
1. You have very limited self incriminations rights if caught doing something wrong by the IRS.
2. This document can be shared. The police, the DOJ, your wife's divorce lawyer, it will not have normal privacy protections.
3. If you do not start FBAR filing cleaning on a given year where you file FBAR on time, pay all your taxes, check Schedule B, the penalites are ridiculously harsh, and they will be sure to give no mercy to internet poker players. If you have not done all this, TAX ATTORNEY, good one. Cheaper in the long run.

http://tax.aicpa.org/NR/rdonlyres/A0...2D/0/8_01a.doc

Re: foreign account reporting due July 2
 

I have been wondering about this myself. You can always amend your return. Seems silly to amend your return to add a check box, but it is the thing to do if you want to be 100% compliant.

Re: foreign account reporting due July 2
 

I do not like giving specific advice. However, this is equally part of the requirement. Generally, I would believe a taxpayer in this situation, given no other information, should amend their return. However, you should seek professional advice for your own situation.

Re: foreign account reporting due July 2
 

PokeReader:

The issue of "Constructive Receipt" is very misleading. For a properly filed Professional return, this is a non-issue, and in fact the current Netteller situation presents a excellent chance to delay income recognition until 2007 and maybe 2008.

Re: foreign account reporting due July 2
 

I am not sure what you are discussing relating to constructive receipt/neteller/FBAR filings. Could you be more specific?

Re: foreign account reporting due July 2
 

Your following statement is misleading to the professional poker player. Very much so.

"You understand because of constructive receipt you need to pay tax from the moment the money is in your Neteller or gaming site account, not from when you actually physically receive the money."

Re: foreign account reporting due July 2
 

I understand that you then are stating that you believe that funds in Neteller accounts were not constructively received? That players had no ability to access or use that money? I must say this is contradicted by sources I have found. Please explain.

(including segment of taxable talk on constructive receipt and Neteller)

Neteller and Constructive Receipt
As the saga of Neteller, the Isle of Man based financial intermediary, drags on, I've gotten many questions regarding the money that's tied up. For those who are unaware, some of the Neteller money was seized by the US government as it was moving over the wires between Neteller's banks and customers' banks, and some is sitting in customer accounts at Neteller. All of it, though, remains out-of-reach of American customers of Neteller. So the question is, do customers of Neteller have to pay tax on gambling proceeds won in 2006 that are stuck at Neteller?

Yes.

When an American must pay tax on income is governed by the doctrine of "constructive receipt." Suppose you gamble on an online poker site, and you win $1000. However, right when you win that money the poker site goes out of business, and you never collect a penny of the $1000. You've never had access to the money—you never were able to use it. You didn't have constructive receipt of the money.

Now suppose you win $1000 on December 31, 2006, and the money is immediately put in your account. On January 16, 2007, you withdrew the money into Neteller. You immediately requested Neteller to transfer the money into your American bank account. On January 17th that money was either seized or is stuck at Neteller.

That individual has $1000 of gambling income in 2006. The gambler could have withdrew the money on January 1, 2007 or he could have gambled with it on January 1. He had constructive receipt of the money. That he was unlucky in that the money was seized or stuck at Neteller is unfortunate. He or she must pay tax on the $1000.

So what should an individual do who has significant funds stuck at Neteller—so significant that he may not be able to pay what he owes in taxes? Talk to a professional tax advisor now; don't wait until April 10th. Most tax preparers are very busy between now and April 17th. We're not (in general) going to be able to give you specific advice if you wait until the very last minute.

Realize that you owe the money. Find out what your total tax is (including your state income tax, if applicable). Determine what you can afford to pay. Options include going on extension and installment plans. But not filing a tax return (or at least an extension) by April 17th will subject you to the failure to file penalty!

The phrase caveat emptor (let the buyer beware) applies to many offshore entities. The IRS considers online gambling to be just another tax avoidance scheme. They're not going to be very sympathetic to taxpayers using a financial intermediary that serviced offshore online gambling firms.

IRS training manual re : attorneys and deferring income
 

First, the Neteller fiasco has nothing to do with the timing of earning income, it is a distinctly separate and unfortuneate event.

Second as to deferring income in a poker account, here is a sample of what the IRS thinks about attorneys deferring income by leaving the income in their escrow account:

"The training manual notes that most attorneys have one or more trust accounts under their control and instructs auditors that adjustments to taxable income most frequently arise when an attorney diverts funds from a trust to a personal account or defers income by allowing fees to remain in a trust account."**

**From Research Institute of Taxation/Market Segment Specialization (MSSP) audit guidelines

Re: IRS training manual re : attorneys and deferring income
 

There is a way the Neteller fiasco would come into play. THIS IS HYPOTHETICAL. Not to serve as actual tax advice. If you put money into your Neteller account on the day it was seize, and thus did not have Constructive Receipt, you would have an arguement that you did not own taxes on that money. However, if the money was in the account the day before, and you could have theoretically taken it out, (the mess with non-seized Neteller accounts being irrelevant), than the general consensus is that you achieved constructive receipt. However, Poker CPA seems to believe something different, and I am interested to hear how he is treating this issue.

Re: IRS training manual re : attorneys and deferring income
 

PokerReader and ChipLeeder

"Neteller and Constructive Receipt
As the saga of Neteller, the Isle of Man based financial intermediary, drags on, I've gotten many questions regarding the money that's tied up. For those who are unaware, some of the Neteller money was seized by the US government as it was moving over the wires between Neteller's banks and customers' banks, and some is sitting in customer accounts at Neteller. All of it, though, remains out-of-reach of American customers of Neteller. So the question is, do customers of Neteller have to pay tax on gambling proceeds won in 2006 that are stuck at Neteller?

Yes."

You are correct, but very misinformed as to the’ impact on the professional gamblers "tax liability". For a properly prepared pro's return, the issue of "constructive receipt" does not apply because he has not elected the "cash basis" of accounting. He has elected the "Accrual Basis" of accounting for his business. There is no reason for a pro to have the cash basis of accounting, NONE. For income recognition purposes both methods produce the same income amount. For example, if he wins $100 on Dec 31st, he has $100 in gross income on his tax return (Sch C) under BOTH methods. But under the accrual method, if he does not receive the $100, in this case, an "Accounts Receivable from Neteller" then it’s a bad debt as of Dec 31st and his taxable income nets to $0. The cash basis write-off occurs when he tries to get the cash, but can't. And in this Neteller situation that occurred after January 14, 2007, thus a 2007 write-off. Thus the "cash basis" method produces a mismatch of income and the related bad debt. The "accrual basis" does not. The election of the "accrual basis" is done on the first return filed by a pro and is a “no-brainer” for a competent tax accountant. Let me give you an example of an advantage of the “accrual basis”, outside the Neteller situation, for a professional poker player. Let’s say he has his returned prepared at a cost of $1,000 and pays his accountant on March 15th, 2007. Under the accrual basis he can take the tax deduction in 2006, while the cash basis allows only a deduction in 2007. I’m sure you can see the advantages of paying for expenses in 2007, yet getting the deduction in 2006. Again a “No-brainer”. On the income side on both methods produce the same income so no advantage either way. BUT the “cash basis” is governed by the doctrine of “construction receipt”, while the accrual basis is not. In other words the cash basis produces, in the IRS’s eyes, cash in your pocket while the accrual basis produces an “Account Receivable”. This receivable now has to collected and its write-off is based on “facts and circumstances” that occur subsequent to year end. Based on the “song and dance” professional players are getting from Neteller, a write-off is possible.

In my opinion the 2006 “bad debt” deduction can be taken with very little problem. Now if any recovery, from Neteller, is made after we file the 2006 return then the “recovery provisions” of the IRS code take over. We can now file an amended return for 2006 OR show the income in 2007. You obviously go with the year that produces the lowest liability. I have a feeling this could finally be resolved in 2008.
But you need the “Accrual Basis” of accounting. If your accountant elected “cash basis” then a great big “WHY” should be asked. This will be your accountant’s version of a “song and a dance”.

I hope you understand my comment of “misleading”.

Re: IRS training manual re : attorneys and deferring income
 

Thank you, I fully admit that I had mainly investigated FBAR's. I thought you were saying that if constructive receipt had not occured that it would effect FBAR filings. My misunderstanding, while I am a good researcher, and have dealt with writing legislation, tax law is not my specialty.

Re: IRS training manual re : attorneys and deferring income
 

Poker CPA,

I am a "competent tax accountant" and I strongly disagree with your statement that the accrual basis is the only way to file for a professional gambler. Your argument fails for many reasons.

1) You appear to not understand the rules for a bad debt deduction. For tax purposes, there is no difference between the cash and accrual rules relating to bad debts. Your bad debt example uses GAAP considerations to accrue a bad debt. Bad debt has its own rules under Code Section 166(a)(1) - "There shall be allowed as a deduction any debt which becomes worthless within the taxable year." Your example clearly states that the debt became worthless after the end of the year, therefore the bad debt would be a 2007 expense.

2) Many of my clients stake other players on a monthly or quarterly basis. There is no way that I am going to accrue staking income from stakees that may or may not pay in full. Some stakees pay slowly or infrequently, so I have no reasonable basis to calculate a partial bad debt for all of this extra income that I would be forced to accrue. My fee for a tax return is usually substantially less than whatever staking accrual I would be forced to make.

3) None of my clients keep their books on the accrual basis or are willing to pay me to set up accrual basis books for them. Under Code Section 446(a), "income shall be computed under the method of accounting on the basis of which a taxpayer regularly computes his income in keeping his books." The accrual method would require a client to do some real accounting, which is a hard sell when you consider how difficult it is to get a client to track sessions. I'm thrilled when a clients transfers between accounts actually reconcile, so you can understand why I don't trust a client to honestly record all receivables that may increase taxable income.

I understand that accrual basis may be beneficial to some clients, but you really need to carefully check the client's circumstances to avoid any unwanted results. The audits of gamblers are not fun and the IRS auditors have that guilty until proven innocent mindset.

Re: IRS training manual re : attorneys and deferring income
 

I agree with Broiler, and disagree with PokerCPA.

The big problem is that on January 1, anyone with money on Neteller could have withdrawn the money. Period. They had constructive receipt.

As for accruals, I don't see it being applicable. The money would have moved from a gambling site to Neteller...thus, even someone using the accrual method would have earned the money (Neteller being akin to a bank). Now there would be (potentially) a bad debt loss in 2007, but as for 2006, the money was earned.

And as broiler points out, accrual basis individual taxpayers--including professional gamblers--are very, very rare.

I strongly suggest that individuals who believe they have potential issues with Neteller and/or FBAR/taxes/etc. find a competent professional (EA, CPA, or tax attorney) and talk over their situation with him or her. Everyone's situation is different, and "cookie-cutter" advice can be bad advice.

Finally, audits of gamblers are not fun. Like Broiler, I'm a professional tax preparer, and I've seen the good, the bad, and the ugly.

-- Russ Fox (EA)

Re: foreign account reporting due July 2
 

[ QUOTE ]
I contacted the IRS/Treasury Department Foreign bank directly and confirmed with them that e-wallets such as Neteller are reportable foreign accounts for U.S. foreign bank account reporting (due July 2, 2007.)

While I was at it I asked about monies at online gambling sites such as PartyPoker. This was their reply:

"As for a response on the Party Poker account, it may be harder to determine if it is reportable. If it is just a transfer service account it is not considered reportable."

[/ QUOTE ]

It would seem that Neteller is more of a "transfer service" than a poker site.

How firmly has it been established that Neteller is a "Financial Institution" subject to the reqirements of FBAR?

Re: foreign account reporting due July 2
 

On the matter of “Constructive Receipt”, the following is from Publication 538, page 14, “Cash Method”, and “Income”

"Income
Under the cash method, you include in your gross income all items of income you actually or constructively receive during the tax year. If you receive property and services, you must include their fair market value in income.

Constructive receipt. Income is constructively received when an amount is credited to your account or made available to you without restriction. You need not have possession of it. If you authorize someone to be your agent and receive income for you, you are considered to have received it when your agent receives it. Income is not constructively received if your control of its receipt is subject to substantial restrictions or limitations."


And under The “Accrual Method”, the following (page 16):

"Accrual Method
Under an accrual method of accounting, you generally report income in the year earned and deduct or capitalize expenses in the year incurred. The purpose of an accrual method of accounting is to match income and expenses in the correct year.

Income

You generally include an amount as gross income for the tax year in which all events that fix your right to receive the income have occurred and you can determine the amount with reasonable accuracy. Under this rule, you report an amount in your gross income on the earliest of the following dates.
• When you receive payment.
• When the income amount is due to you.
• When you earn the income.
Example.
You are a calendar year, accrual basis taxpayer. You sold a computer on December 28, 2002. You billed the customer in the first week of January 2003, but did not receive payment until February 2003. You include the amount received in February for the computer in your 2002 income, the year you earned the income.

Estimated income. If you include a reasonably estimated amount in gross income and later determine the exact amount is different, take the difference into account in the tax year you make that determination"



(Poker CPA Point #1) Constructive receipt
:
There is no mention of “Constructive Receipt” in the accrual method area, while in the cash basis it is prominently discussed.

(Poker CPA Point #2) The Matching Concept

This concept is the foundation of GAAP (Generally Accepted Accounting Principles). This concept simply states that all expenses are matched to its related income. This involves in making a proper cutoff at year end. The IRS regulations accept this GAAP concept with the following, as stated above:

“The purpose of an accrual method of accounting is to match income and expenses in the correct year. “

The IRS requires this match and thus all the taxpayer needs to do is match the neteller funds, not received, to the income earned in 2006. This matching is based on the “facts and circumstances”. An IRS argument that on January 1st the funds could have been transferred and therefore “tough luck”, is ridiculous. The IRS cannot expect taxpayers to predict future events. Hell Neteller was listed on the London Stock Exchange on January 1st. Taxpayers are not perfect and no one could have predicted this. EZ win for an accrual basis taxpayer, very EZ. Cash basis taxpayers are screwed.

In addition, this from page 19, Pub 538

"Matching expenses with income. Costs directly associated with the revenue of a period are properly allocable to that period. To determine whether the accrual of an expense in a particular year results in a better match with the income to which it relates, generally accepted accounting principles are an important factor."

The Neteller match is EZ for the accrual basis taxpayer.

(Poker CPA Point #3) Estimated income:

This one is especially good and in their own words, as stated above:

"Estimated income. If you include a reasonably estimated amount in gross income and later determine the exact amount is different, take the difference into account in the tax year you make that determination"

Being reasonable with your estimate is the only requirement. So based on facts and circumstances, what is the outcome of the Neteller situation? The Company has been delisted (I think this is the term) from the London Stock Exchange, had massive layoffs, lost business in three major countries and have been giving the old “song and dance” to US taxpayers. I wonder if the management has taken pay cuts? And we live and die with the “DUE DATE” IRS mentality. Being reasonable, while dealing with “DUE DATES” and penalties. LIFE is GOOD if you are an accrual basis taxpayer and have funds stuck in Neteller.

In addition, the following statement is repeated a thousand times in IRS regulations, publications and revenue rulings:

"Your tax liability depends on your particular facts and circumstances."

And the foundation of a professional poker players “facts and circumstances” is the accounting method he has elected on his initial tax return.

(Poker CPA Point #4) DOJ:

It appears the Justice Department considers Neteller part of the internet gambling community and if fact, are one in the same. I think this is called a “criminal conspiracy”. I believe all professional poker players consider them part of the whole process of internet poker, or one in the same. At least I do for my own poker playing. Therefore if the DOJ can make this connection, then I believe the US taxpayer can also in the filing of their tax returns. In other words, the poker sites and Neteller are one in the same. So the statement to an IRS auditor “I won but they didn’t pay me by the time I filed; I assumed the worse. I then reported the income in the year in which the recovery was made.” If the DOJ can make the conspiracy connection, then a connection can be made by an accrual basis poker pro. He can proceed under the recovery income provisions of the IRS code or file an amended return. The cash basis pro is screw by the “constructive receipt” doctrine.


(Poker CPA Point #5) The advantages of the Cash Basis Method:

There are no advantages to a professional poker player. NONE, unless he is a losing player. LOL

The revenue cycles are the same, in that income recognition is the same. At the end of your session, income (or losses) are reported the same. SO NO DIFFERENCE

The payment cycles are different. Expenses are match with the year in which they were incurred, no matter when they were paid. So the accounting fee you paid in 2007 can be deducted in 2006, because it relates to the year 2006. Same goes for travel, education and the like.

Your books and records should reflect the accounting method selected, but there is very little difference in bookkeeping between cash and accrual methods, for the professional poker player. Not so in other businesses, where the differences can be quite complex and very costly to account for. So no adjustment is necessary on the pro’s part, except provide the tax accountant 2006 expenses paid in 2007.

The accountant books the accrual and reverses the prior year accrual. This takes about ten extra minutes for your accountant. This bookkeeping concept is called “reversing entries” and is very common. The Courts and the IRS has accepted this simple reconciliation and is preferred by auditors. As long as the accrual is simple in nature. An example of a complex situation would be a construction company on the percentage of completion method, for his banker, and the cash basis for the IRS. A pro poker player is simple.

(Poker CPA Point #6) The pro filing for the first time in 2006; is on extension and has a Neteller problem:

You need to make the proper elections on the 2006 return, which is the first one filing as a pro. Sch C, line F is where you make the accounting method election. Check box 3 and state the following or something to this effect “Accrual Basis with actual winnings processed in an orderly and timely fashion by sites or their processors”. For my new 2006 clients the actual wording is different. (I use Neteller in the description). But please consult a good tax accountant, well verse in accounting method elections.

(Poker CPA Point #7) The pro filing for 2006, on the cash basis. and has a Neteller problem:

File for a change in accounting method. Form 3115 is used for this change but please be aware a “real-live IRS” person will be reviewing this. You should sit down with your accountant, for a serious talk about this matter.


(Poker CPA Point #7) Presentation of the Neteller Write-off:

The actual writeoff of the loss on an accrual basis tax return is difficult to say the least. Is it a bad debt, embezzlement, gross income adjustment or whatever? The presentation on the return is best handled by reviewing your own particular business items and concerns with a competent tax professional.

(Poker CPA Point #8) Response to Boiler and Mr Fox:

First of all I have not doubt that both of you a competent tax professionals. I think I have address your thoughts with my above “Points”, if not, please ask.

The one question that I have for you is “Why cash basis?” and the point of the accrual method being rare is suppose to mean What?”

Now “staking” could be a reason but its still an advance, but how do you over come constructive receipt on income that is due you?


(Poker CPA Point #9) Audits:

An accrual basis poker player; his related neteller problem; and an IRS auditor, I have no doubt I win the issue for my client, based on the above points.

The Best of Luck