In Hom v. United States, No. 14-16214 (9th Cir. 2016), the court addressed whether an online payment account and poker websites triggered FBAR filing requirements. The stakes are high with FBAR penalties, so those with foreign accounts should take heed.
FBAR Filing Requirements
Taxpayers with an interest in or authority over certain foreign accounts are required to disclose the interest to the U.S. government by making a Foreign Bank and Financial Accounts Report (“FBAR”) filing. The government imposes a $10,000 civil tax penalty for each FBAR that is not filed.
What Foreign Accounts Trigger FBARs?
Let’s consider the technical explanation and then the layman’s explanation.
The Technical Explanation
The technical definition of what foreign accounts trigger FBARs is found in 31 U.S.C § 5314. This statute uses the term “foreign financial agency” to describe when a FBAR filing requirement is triggered. The term foreign financial agency means “a person acting for a person as a financial institution, bailee, depository trustee, or agent, or acting in a similar way related to money, credit, securities, gold, or a transaction in money, credit, securities, or gold.”
The term financial institution includes a number of businesses, including money transmitters. A money transmitter is “a licensed sender of money or any other person who engages as a business in the transmission of funds, including any person who engages as a business in an informal money transfer system or any network of people who engage as a business in facilitating the transfer of money domestically or internationally outside of the conventional financial institutions system.”
The Layman’s Explanation
The IRS interprets 31 U.S.C § 5314 to include:
- Bank accounts, such as a savings deposit, demand deposit, checking, time deposit (CD), or any other account maintained with a financial institution or other person engaged in the business of banking.
- Securities accounts, securities derivatives account, or other financial instruments account held with a person engaged in the business of buying, selling, holding or trading stock or other securities.
- Other financial accounts, including:
- An account with a person in the business of accepting deposits as a financial agency.
- An insurance or annuity policy that has a cash value.
- An account with a person that acts as a broker or dealer for futures or options transactions in any commodity on or subject to the rules of a commodity exchange or association.
- A mutual fund or similar pooled fund defined as “a fund which issues shares available to the general public that have a regular net asset value determination and regular redemptions.”
What About Online Payment Accounts?
The FBAR rules do not expressly address online payment accounts by name. This was one of the issues in the Hom case. In Hom the taxpayer had a FirePay account. FirePay was a UK-based payment processor that competed with outfits like PayPal. FirePay acted as an intermediary between Hom’s Wells Fargo account and the online poker sites. Hom could use the account to transmit money between his bank account and the poker websites. Given this ability to move funds between accounts, the court concluded that FirePay was a foreign financial agency as it was a money transmitter. Thus, the court concluded that the IRS was correct in assessing the FBAR penalty for this account.
What About Online Poker Websites?
The FBAR rules also do not address websites that collect funds from taxpayers that can be pool or stored before being used. The court also addressed this in <em>Hom</em> in the context of poker websites. The IRS argued that these entities were functioning as banks. The court did not agree. It looked to the ordinary meaning of the term “bank,” which lead it to conclude that the poker websites were not banks. The court reasoned that these websites were intended to facilitate poker playing, not for transmitting money. So these websites were not foreign financial agencies that triggered FBAR filing requirements. As such, the court sustained the IRS’s FBAR penalties for these accounts.