Neteller, the DOJ, and the IRS

[REOdeathwagon]

Neteller, the DOJ, and the IRS

One of my practice areas is professional gambling. Many gamblers maintained an account with the e-wallet firm Neteller. Neteller served as a financial intermediary between US customers and online gambling firms. In January, the Department of Justice arrested the two founders of Neteller and charged them with multiple offenses, including money laundering. Neteller then pulled out of the US market. Neteller announced today that they are cooperating with the DOJ, and that $55 million in funds had been seized by US law enforcement.

Neteller, in one swell swoop, lost over half of its business. Ignoring whether or not such business was legal, assume you were running Neteller. The Department of Justice has arrested your two founders, has decided to fight you, and you no longer have any means to make financial transactions to the United States. What would you do? Fight the US DOJ, or make the best deal you can? It's clear from the Neteller press release that they are in negotiations with the DOJ, and that transaction records are being sent from Neteller to the DOJ.

Indeed, it's clear what's likely to happen. Neteller and the DOJ will likely come to an agreement. Neteller will announce that they will no longer do business with Americans, and they may have to pay a fine; the DOJ won't indict the company, or any of its current stockholders. The DOJ might even accept some sort of plea bargain for the two founders who were arrested. It's also certain that as part of such a deal Neteller will agree to release details of all transactions between American customers and Neteller.

What does the DOJ want with thousands of pieces of data? Well, Neteller required the customer's name, address, and for many accounts, their social security number. The details of those transactions will undoubtedly be sent to a government agency that's in the revenue collection business: the IRS.

So what does that mean for the customer who used Neteller?

If you complied with the law—you reported all of your gambling income and your foreign bank accounts—you have nothing to worry about. But probably fewer than 5% of taxpayers report their gambling transactions as income.

First, Neteller is considered to be a foreign financial institution. If you have a foreign bank account, and have $10,000 or more in a foreign bank account(s) at any one time, you are required to file Form TD F 90-22.1 by June 30th of the following year with the Department of the Treasury and check the box at the bottom of Schedule B. If you have a foreign bank account and don't declare it, you can face civil and/or criminal penalties. Anyone who received $10,000 or more in one transaction from Neteller had a foreign bank account. I expect the Treasury Department to check their records and come after those who didn't declare their Neteller account. A few individuals may even face criminal prosecution over this, if they had extremely large transactions from Neteller.

Second, the IRS will check their records and see if individuals receiving funds from Neteller declared gambling winnings. The IRS will almost certainly target those receiving large amounts. If an individual received large amounts from Neteller, and didn't declare any gambling winnings, now is the time to amend your return, and pay the tax, interest, and penalties. It's almost always better to come forward to the IRS than to have the IRS knock on your door.

The IRS's first targets will be those with large (in dollars) transactions. But given the ability of the IRS to conduct computer matching, if you received funds from Neteller and didn't declare any gambling winnings, you might receive a "letter audit" from the IRS. ("Dear taxpayer, we've added $xxx [the amount of money you received from Neteller] to your income. If you agree, pay the tax, interest, and penalties....')

I believe that a few individuals will likely face criminal prosecution over this. If the IRS can find an online gambler who earned over $100,000 and didn't declare his gambling income (and I think the IRS will have several to choose from, and might even find someone who earned over $1 million) that individual could find himself facing jail time for tax evasion.

But what if you used Neteller for non-gambling activities? Interestingly enough, I know of one firm that paid individuals through Neteller. If you declared the income on your tax return (and can show that), there's nothing to worry about. You may have to spend some time responding to an IRS notice, but if you've paid your taxes, you're fine.

However, I believe that many (if not most) online gamblers have thought that since Neteller was based on the Isle of Man (a known tax haven), the IRS would never be able to see their records. You've just lost that gamble. It will take some time, probably several months at a minimum, for the IRS to conduct their matching of records. If you're one of those who just lost the first gamble, do you want to double-down and bet that the IRS won't find you or do you want to amend your return(s) and pay the tax that you knew you owed...and the interest and penalties?

As I've said many times, gambling income is taxable. The Tax Code isn't fair to gamblers, but the alternatives if you don't pay your taxes are worse than paying the tax that you owe. - From Russ Fox of Clayton Financial and Tax of Irvine, CA - Thursday February 8, 2007

Copyright © 2006 and 2005 by Clayton Financial and Tax

http://www.taxabletalk.com/posts/1170966022.shtml

[Casinomeister]

Oh barf.

I can hear the IRS "goosestepping" down Main Street USA already.

[winbig]

How are they going to prove NET winnings? It's impossible.

[REOdeathwagon]

How are they going to prove NET winnings? It's impossible.

Withdrawals - Deposits = Net winnings

I would doubt the burden of proof is on the IRS. I would think that the burden of proof falls on the taxpayer?

[footdr]

My Bank advised me that they have no means of determing the source of incoming EFTs, ACH; to my Bank Account. I was told this when I questioned several of the transactions on my Bank Statement.

I was under the belief that for instance, Click2pay, was a 3rd party payer, payment processor, they told me that they are not the originating Financial Institution. So technically, they are an intermediary. I believe that they use a German Bank, we "customers" don't hold an account at that Bank.

I also know Neteller was not the Originating Financial Institution, all their transactions went through their Bank Account who then sent them to the ACH who passes them through to the Recieving Financial Institution.

DOES THAT MAKE SENSE. I am just going by what I read and questions I asked C2P and Neteller.

If they are considered Foreign Bank Accounts, then niether one was, is following international banking laws.

JUST MY THOUGHTS, MIGHT NOT BE WORTH A HILL OF BEANS

[REOdeathwagon]

First, Neteller is considered to be a foreign financial institution. If you have a foreign bank account, and have $10,000 or more in a foreign bank account(s) at any one time, you are required to file Form TD F 90-22.1 by June 30th of the following year with the Department of the Treasury and check the box at the bottom of Schedule B. If you have a foreign bank account and don't declare it, you can face civil and/or criminal penalties. Anyone who received $10,000 or more in one transaction from Neteller had a foreign bank account. I expect the Treasury Department to check their records and come after those who didn't declare their Neteller account. A few individuals may even face criminal prosecution over this, if they had extremely large transactions from Neteller.

Yup, it does make sense footdr. Correct, NETeller is not a bank, it's a third party processor. I think that Mr. Fox's interpretation is that the IRS / DoT may consider a players NETeller account as a Foriegn Bank account. Not that we as players or the banks themselves consider NETeller a 'bank'.

Also, when you file Form TD F 90-22.1, and check the box at the bottom of Schedule B on your tax return, you are very likely to trigger an audit.

As I've said many times, gambling income is taxable. The Tax Code isn't fair to gamblers, but the alternatives if you don't pay your taxes are worse than paying the tax that you owe.

[Mousey]

While I do not think NETeller could be considered a foreign bank, (and I realize I am repeating myself here) given the fact that the DoJ and FBI and all those other Federal acronyms have subpoenaed a crapload of documents from NETeller and banks, I fully expect to see many, many U.S. online gamblers and affiliates to be audited by the IRS within the next year or two.

If you gamble at B&M casinos, you might want to get those end of year Win/Loss statements. And don't forget all those losing lottery tickets, either.

[footdr]

subpoena from the US Bank demonstrate that, from in or about March2006 up to and including in or about April 2006, a total ofapproximately $50 million was transferred from an account in thename of the Payment Company at the US Bank in the United States toan account in the name of Cardload Inc. at National Bank of Canadain Calgary, Alberta, Canada. Neteller PLC’s 2004 annual reportstates that Cardload Inc. is a wholly-owned subsidiary of Neteller
Records of automated clearinghouse (“ACH”)transactions obtained pursuant to subpoena from an automatedclearinghouse located in the United States demonstrate thatNeteller processes a significant amount of customer transactionsthrough the automated clearinghouse system, including transactionsfrom customers in Manhattan. The ACH system permits Neteller tohandle internet-based customer transactions. These records furtherdemonstrate that Neteller uses a payment service company (the“Payment Company”) to conduct its customers’ ACH transactions inthe name of the Payment Company. By doing so, Neteller PLCconceals the nature of these financial transactions. The PaymentCompany receives funds in the United States on behalf of NetellerPLC, and then transfers the funds out of the United States toaccounts controlled by Neteller PLC in Canada.b.Records of wire transfers obtained pursuant tosubpoena from a bank in the United States (the “US Bank”)demonstrate that, from in or about January 2006 up to and includingin or about March 2006, a total of approximately $98 million wastransferred by wire from an account in the name of the PaymentCompany at the US Bank in the United States to an account in thename of JSL Systems Inc. at National Bank of Canada in Calgary,Alberta, Canada. --------------------------------------------------------------------------------
Page 6
6c.Records of wire transfers obtained pursuant tosubpoena from the US Bank demonstrate that, from in or about March2006 up to and including in or about April 2006, a total ofapproximately $50 million was transferred from an account in thename of the Payment Company at the US Bank in the United States toan account in the name of Cardload Inc. at National Bank of Canadain Calgary, Alberta, Canada.

http://www.moneylaundering.com/Subsc...n_20070116.pdf

SO IN AROUND ABOUT WAY IT SEEMS FUNDS WERE ACTUALLY PROCESSED TO OUR BANK ACCOUNTS BY A U.S. BANK. SINCE NETELLER WAS USING A U.S. BASED PAYMENT COMPANY TO PROCESS U.S. TRANSACTIONS

[winbig]

Withdrawals - Deposits = Net winnings

I would doubt the burden of proof is on the IRS. I would think that the burden of proof falls on the taxpayer?

Who's to say that they used Neteller solely for depositing and withdrawing?

And you're right. It's the taxpayers duty to prove otherwise...

America: Guilty until proven innocent.

[REOdeathwagon]

America: Guilty until proven innocent.

Sad, but true.

People gotta be informed first, then use the power of their vote. It's the only way things can ever be changed. (unlikely)