Tuesday, March 25, 2014

Civil FBAR Penalty Case in Process -- Government Motion for Summary Judgment (3/25/14)

I have previously reported on a taxpayer named John C. Hom who got caught up in an FBAR investigation.  IRS Not Liable for Opening FBAR Investigation Based on Return Information Subject to Section 6103 (Federal Tax Crimes Blog 10/3/13), here.  There has been a subsequent development - the United States sued for judgement on the FBAR penalty.  See United States v. Hom (No. C 13-03721 WHA - ND CA).  On March 16, 2014, the district court dismissed here Hom's amended answer and counterclaim because the issues raised in those pleadings had already been litigated, thus leaving just the suit to obtain judgement on the FBAR penalty.  The Court's dismissal order is here.

The Government also filed a motion for summary judgement upon which the Court has yet to act.  The motion is here.

The facts alleged in the Government's motion for summary judgement, highly summarized, are:

Hom was an internet gambler.  Internet gambling is illegal for U.S. persons.  He maintained certain accounts related to the gambling with foreign institutions, FirePay.com, PokerStars.com, and Partypoker.com, not traditional financial accounts but functioned like them.  And, of course, they were offshore.

The IRS picked up the issue in an income tax audit.  The IRS issued a summons, the taxpayer did not comply, the IRS sued to enforce the summons, the district court ordered enforcement on 9/27/10, and thereafter the taxpayer complied.
On September 20, 2011, the IRS assessed Defendant with civil penalties under 31 U.S.C. § 5321(a)(5) for his non-willful failure to submit FBARs, as required by 31 U.S.C. § 5314, regarding his interest in his FirePay, PokerStars, and PartyPoker accounts. Id., Exs. 1-2; Ex. 5, RFA Nos. 24-25. The IRS assessed a $30,000 penalty for 2006, which was comprised of a $10,000 penalty for each of the three accounts, and a $10,000 penalty for 2007 based on only Defendant’s PokerStars account. Id. As of July 26, 2013, Defendant owed $45,178.09. Id., Ex. 3. Interest and penalties continue to accrue until paid in full pursuant to 31 U.S.C. § 3717.
The issues presented on the motion for summary judgment are (number is the number of the issue as presented)
1. Was Defendant a United States citizen or resident during 2006 and 2007? 
2. Are Defendant's accounts at FirePay.com, PokerStars.com, and Partypoker.com "bank, securities, or other financial account[s]" under 31 U.S.C. §§ 5412, 5314 and 31 C.F.R. § 103.24(a)? 
3. Are Defendant's FirePay.com, PokerStars.com, and Partypoker.com accounts "in a foreign country under 31 U.S.C. §§ 5212, 5314 and 31 C.F.R. § 103.24(a)? 
4. Are the asssets from Defendant's FirePay.com, PokerStars.com, and Partypoker.com  accounts held in "foreign commingled funds" under IRS Notice 2009-62 (and modified by IRS Notice 2010-23) such that the filing deadline for FBARs for those accounts for 2006 and 2007 was extended to June 30, 2010? 
5. Was Defendant’s failure to timely file his FBARs due to reasonable cause and the amount of the transaction or the balance in the account at the time of the transaction was properly reported as set forth in 31 U.S.C. § 5321(a)(5)(B)(ii)? 
6. Did the IRS assess the FBAR penalties at issue within the six-year statute of limitations found in 31 U.S.C. § 5321(b)(1)?
Blog readers interested in specific issues can download the pdf.  I will note that the penalty seems relatively light, at least compared to some of the Government's swashbuckling assertions of the willful penalty in far less egregious cases.


  1. Michael J. MillerMarch 25, 2014 at 7:12 PM

    Some other issues that should be considered (forgive me if they're mentioned in the docs -- I couldn't access them):

    1. Is the foreign internet-gambling company a "financial agency"?

    2. For 2006, may multiple $10,000 penalties be imposed? I know the IRS thinks so, and they may be right, but it's not clear.

  2. ...... I will note that the penalty seems relatively light, at least compared
    to some of the Government's swashbuckling assertions of the willful
    penalty in far less egregious cases.....
    Jack , I disagree with the first part of your opinion and you have become very cynical indeed !
    1. "aggregate amounts exceeded $10,000 at some point in 2006 and 2007"....... no mention of specific $details here, like max. account balances etc.
    2. 2006 ... $44K 1 online poker tournament winning

    The IRS went for the max. statuatory NW penalties of $10K per account and violation.
    Are you saying "relatively light" because you think it could have been willful penalties because of the Schedule B Part III 7b) question or because online gambling is a crime for USPs or because of other title 26 penalties already assessed in the earlier tax audit ?

    Since the account balances seem relatively low the penalties are disproportionate both in amount and severity.
    Shows again the clear bias in favor of asserting FBAR penalties and the trend away from voluntary compliance as the primary purpose of civil tax penalties .

  3. uscitizenshipnightmareMarch 26, 2014 at 5:24 AM

    Interesting, if not slighty scary. I wonder if a lot of US persons who played online poker during its heyday might be hoping that the SOL has run out on those "accounts". As for the penalty being "relatively light", I guess that depends on how much he had in the accounts and (you would hope) the extent of any tax loss relating to the funds held in those accounts. It would appear he was engaged in a fairly intense legal battle with the IRS, including the assessment of almost $200k in tax deficiencies/penalties over a 5-year period (see this blog link: http://www.procedurallytaxing.com/irs-says-hom-gonna-getcha-on-fbar-too/ ).

  4. uscitizenshipnightmareMarch 26, 2014 at 7:16 AM

    Thoughts on whether the accounts with offshore poker portals are still FBAR reportable under the revised 2011 rules? From a quick google search, it would seem some blogs are saying, no not anymore, but based on the DOJ's argument above, I would think they may still fall under Other Financial Accounts, as "an account with a person that is in the business of accepting deposits as a financial agency."

  5. Your comments are very good. I don't know that I would have made the argument you made for me. But the argument is well stated.

    Jack Townsend

  6. uscitizenshipnightmareMarch 26, 2014 at 9:05 AM

    I posted a comment earlier on the case (but it might have gotten lost, so will post again). It does seem the penalty is harsh, without any further information on the total account values or any actual tax loss. On the other hand, it appears that the defendant was engaged in a larger battle with the Service, who had assessed a 5-year delinquency of penalties of ca. $200k (see http://www.ustaxcourt.gov/InOpHistoric/johnc.hom&associates,inc.div.cohen.TC.WPD.pdf ). Having said that, (again with any additional information on the offshore accounts), one could conclude that the IRS is using the FBAR here to impose additional penalties that could not be imposed under Title 26.

  7. I had intended my comment to mean that the IRS is getting carried away with its power under the FBAR statute. Not that his facts are really egregious or warrant even the penalty the IRS seeks, but that, in at least one other fact situation of which I am aware involving facts far more benign than Hom, the IRS is asserting multiple year willful FBAR penalties. The fat lady has not sung in that case yet, nor in Hom's case.

    I could give more illustrations of arbitrary and grossly punitive IRS actions on FBAR penalties, but I am holding my fire on those in the hopes that the IRS mitigates its angst.

    Jack Townsend

  8. ......"I could give more illustrations of arbitrary and grossly punitive IRS actions on FBAR penalties"........

    Jack and others if you want to really understand how the deck is stacked against you in arguments with the IRS….....
    Important lesson from a Tax case unrelated to FBAR penalties…

    Lesson #2: Incredibly, an ordinary taxpayer can’t use the IRS’ own publication
    to win a fight with an IRS auditor according to the manual used to
    train those auditors.

    See this about a disallowed IRS rollover :


  9. ........"in at least one other fact situation of which I am aware involving facts
    far more benign than Hom, the IRS is asserting multiple year willful
    FBAR penalties"....
    Jack, as you know my IRS thesis has been now for a long time that many FBAR penalties are disproportionate both in amount and severity and that a cost-benefit analysis is performed around whether or not to assert penalties, and that only penalties that have high (what is high seems to change every quarter now) $ amounts attached to them are worth enforcing. This imo. leads not to a policy based on the deterrent value of penalties, but rather a policy that says that penalties most likely to be imposed should be high because the cost of asserting and defending them will be offset by the proceeds of the penalty.
    know that you would like to stay neutral with regards to your "old friends" at the DOJ etc. and concentrate on tax law or representing your clients.
    But please keep in mind that there are 1000s of Minnows out there, old and new cases that had and have devastating life-altering experiences because of the FBAR statute.
    It would be really helpful for your readers if you would share some of these fact situations with regards to the assertion of NW or willful FBAR penalties !!

  10. uscitizenshipnightmareMarch 27, 2014 at 10:11 AM

    For me, this case raises two points that many expats have been complaining about for some time: 1) the ambiguity in the definition of a financial account and 2) the tremendous downside risk if you get the definition wrong. Relying on IRS leniency in this area is scary. One question: is there any sense that the IRS will "mitigate its angst" or are things going in the opposite direction, with the Service becoming more aggressive?

  11. Re. US TAx's comments:

    "seeking professional advice was by no means a guarantee in 2006/07 to be of any help with regards to the filing of FBARs." Even after 06/07 many so-called professionals didn't know much. For example MR. Zwerner sought advice in early 2008 to initiate a voluntary disclosure, but he filed the 2007 FBAR when he filed his tax return by the Oct. 15 extended tax deadline, but not before the 6/30/08 deadline. Then in 2012 one of my lawyers told me to submit the FBAR for 2011 with the package (which was submitted after 6/30/2012) but luckily I had been reading this blog, questioned him, and filed the 2011 FBAR by the 6/30/12 deadline.

    You include PFICs under exotic financial instruments. I don't consider them exotic; they're just like US mutual funds except that because they're foreign, the tax accounting is incredibly complicated.

    "bet that > 75% of CPAs and EAs in 2007 would have not told him about his filing obligation" Not just in 2007; when I had my amended returns prepared five years later in 2012 around 90% of the CPAs I contacted had no clue what a PFIC was.

  12. ij, I believe that even if they paid no interest they could still be considered financial account; however (this is the important point you brought up) under the terms of OVDI tax-compliant accounts would be excluded from the penalty base. I would assume that tax compliant would mean not just that no interest was earned but also that no untaxed funds were deposited, and I don't know about the situation as far as that.


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