DOJ (Finally) Reaches Agreement with Absolute Poker

The deafening silence has ended.  Yesterday, the Department of Justice issued a press release announcing an agreement entered into with Absolute Poker to facilitate the return of funds to U.S. players.  Read the actual agreement here.  The announcement comes just less than a month after the DOJ seized the U.S. domains of Absolute Poker, Full Tilt Poker, and PokerStars.

Unlike the agreements the DOJ reached with Full Tilt Poker and PokerStars, this agreement does not expressly allow for Absolute Poker to utilize its U.S. domain to facilitate the return of player funds.  Instead, the U.S. Attorney’s Office provides “all necessary assurances” to third-party entities engaged with Absolute Poker that these third-party entities may work with Absolute Poker to facilitate the return of funds to U.S. players.  Because the U.S. domain of Absolute Poker has not been restored, it appears that players will not be able to request withdrawal of funds directly through Absolute Poker, but instead via some third-party site.  Whether or not this structure makes it more or less likely Absolute Poker players will ever see their funds returned, I cannot say.  I suspect poker bloggers Grange95, Billrini, or F-Train to weigh in on this issue in the near future with quality insight.  These gentlemen possess as strong an understanding of the online poker industry as anybody.

One common aspect among all three agreements is the “Records Preservation” clause.  It is paragraph 3 in the Absolute Poker agreement.  The wording of this paragraph is unsurprisingly identical (besides the name of the companies, of course) in all three agreements.  Last night, I discussed various possible purposes of this paragraph with @AgentMarco on the live QuadJacks radio show.  In my opinion, there are two primary purposes:

• 1) The DOJ doesn’t want the companies to start shredding documents that may contain incriminating evidence pertaining to the allegations in the indictments;
• 2) The DOJ wants to leave open the possibility of handing these records over to the IRS.

Regarding #2, I explored the likelihood of this possibility at length by comparing the Poker Company case to a recent tax evasion case involving a giant offshore bank and many of its account holders.  My stance on the issue hasn’t changed since then, not that much time has passed.  While I haven’t heard of any online poker players recently receiving audit letters from the IRS, it’s still probably too soon to expect any that relate to the indictments.

As I say time and time again, the IRS typically treats taxpayers far more favorably when they voluntarily come forward to declare previously unreported income as compared to the IRS making that discovery.  Keep in mind that just because frozen online poker funds have not yet been withdrawn does not necessarily mean the funds are not considered income that tax should have already been paid on.  If a taxpayer has frozen funds that should have been reported as income in prior years, he/she should strongly consider consulting a tax professional experienced in the area to discuss particular facts and circumstances.

Shopping Tax Credits ’til You Drop

Taxpayers are naturally inclined to be giddy over refundable tax credits because of the ever so significant “R” word.  Problem is, some of these taxpayers fail to properly channel that excitement.  Dollar signs flash before their eyes, clouding judgment to the point of overindulgence via gross over-reporting and fraudulent schemes, ultimately resulting in time behind bars.

Such was the case of Justin Glynn French, of Richmond, Virginia.  Mr. French was the owner of French Consulting Company, a Richmond-based real estate development company.  One of his company’s projects involved the rehabilitation of a number of historic properties throughout the Richmond area.  The An incentive for such a project: federal and state tax credits.

The Federal Historic Preservation Tax Incentives program allows a property owner to receive a federal tax credit equal to 20 percent of the amount spent on eligible rehabilitation expenses.  The Historic Rehabilitation Tax Credit program offered by the State of Virginia allows a property owner to receive a state income tax credit equal to 25 percent of the amount spent on eligible rehabilitation expenses.

In order to obtain tax credits for these expenses, the taxpayer must submit applications to the tax agencies.  For one property, Mr. French represented rehabilitation costs as $1,571,503, despite paying only $700,000 to purchase the property.  The federal and state agencies approved the applications and awarded Mr. French tax credits of $314,300 and $392,875, respectively.

Mr. French then sold some these tax credits for over $200,000 to private investors to claim the credits on their own tax returns.  After transferring these funds from the bank account created for the property rehabilitation project to his personal savings account, Mr. French went on a spending spree including a beach house, a personal jet, and trips to Las Vegas.

Unsurprisingly, the Department of Justice came sniffing and determined that the authorized rehabilitation expenses for this particular project should have been approximately $403,200, or $1,168,303 less than reported on the tax credit applications.  After totaling the disparities among all properties owned by French Consulting Company, the Department of Justice calculated total losses for the scheme to be $11,266,622.

Mr. French stated at his plea hearing the rehabilitation expenses were grossly overinflated, and earlier this week he was sentenced to 196 months in prison.  He certainly can use the time away from fraudulently shopping around bogus tax credits in order to overindulge in his own rehab.

The UBS Case and Potential IRS Examination of Online Poker Company Records

One of the many popular questions currently circulating the pokerverse:  Is it possible the Department of Justice internet domain seizures of Full Tilt Poker, PokerStars, and Absolute Poker will result in IRS audits of poker players who were using these sites?

The simple answer:  Of course it is possible.

But that reply is far from enough to satisfy my curiosity.  As I recently discussed, the fact that FTP and PS agreed with the DOJ to, among other things, maintain all U.S. related business records only strengthens the possibility.  But to what extent?

I conveyed these points on Twitter shortly after reading the agreements.  This caught the attention of Alexander Ripps, a legal analyst in Washington, DC for the independent gambling market analysis firm Gambling Compliance.  He pondered how closely the settlement between the Department of Justice and UBS bank in 2009 may parallel the agreements reached by the DOJ with Full Tilt Poker and PokerStars, particularly in terms of making available customer information to the government (and hence possible audits for tax evasion).  Great question.

The UBS U.S. Tax Evasion Controversy

A brief background discussion about the UBS U.S. tax evasion controversy is first necessary.  UBS is a Swiss-based financial services firm.  It’s one of the giants.  In July 2008, UBS was accused by a U.S. Senate panel of assisting U.S. residents with committing tax evasion by shielding assets in offshore accounts.

In February 2009, as a result of the ongoing Department of Justice investigation of UBS’s U.S. cross-border business, UBS agreed to pay $780 million to the U.S. government in fines, penalties, interest and restitution.  A substantial portion of the $780 million represented U.S. taxes that UBS failed to withhold on the accounts.  UBS also entered into a deferred prosecution agreement on charges of conspiring to defraud the U.S.  As part of the agreement, UBS agreed to immediately provide the U.S. government with the identities of and account information for certain United States customers of UBS’s cross-border business.

The UBS case was purely one of tax evasion.  Back in 2000, UBS entered into an agreement with the Internal Revenue Service requiring the bank to report to the IRS income of its U.S. clients holding U.S. securities in UBS accounts.  UBS also agreed to withhold income taxes from United States clients who directed investment activities in foreign securities from the United States.  Ultimately, UBS failed to deliver on these promises to the IRS, and paid the price.  As did several UBS account holders.

The day after UBS entered into the deferred prosecution agreement with the DOJ, the U.S. government sued UBS to compel disclosure of the identities of up to 52,000 UBS U.S. customers.  After some jostling between the U.S. government and Swiss lawmakers, a final deal was reached in June 2010 to provide to the DOJ and IRS the identities of thousands of Americans accused of tax evasion.  Further investigations commenced, and many U.S. taxpayers were caught.  To make examples of these tax evaders, the IRS has listed the identities and corresponding ramifications for several previous UBS bank account holders.

Comparing the Primary Purposes of the UBS and Poker Company Investigations

Again, the driving force behind the Department of Justice’s investigations of UBS was alleged tax evasion; UBS broke its promises to the IRS.  Alleged tax evasion is NOT the driving force behind the recent indictments of the poker companies and their associated payment processors; the offshore poker companies did not enter into agreements with the IRS to withhold income tax from online poker players.

Instead, the case against the poker companies and their associated payment processors is for alleged bank fraud and money laundering.  Eleven individuals are charged with setting up sham companies to shield the nature of their financial transactions.

The purpose of evaluating these driving forces is to obtain a clearer sense of the DOJ’s intentions with the Poker Company case going forward.  Here, the DOJ didn’t commence investigations in order to punish tax evaders.  This point is further highlighted by the fact that, as far as we know, the DOJ hasn’t yet proceeded to obtain the identities of U.S. poker player accounts.  In the UBS case, however, the DOJ took such action the day after UBS entered into the deferred prosecution agreement.  The Poker Company case is to make examples of money launderers.

Also noteworthy:  In the UBS case, the DOJ knew that some account holders committed tax evasion because the evidence was there at the bank level.  Here, however, there is no evidence of tax evasion by U.S. online poker players on the surface.  It could take far more effort to locate tax evaders in this case.

Concluding Thoughts

To this point, the only indication that the DOJ may be interested in making tax evasion inquiries is the “Records Preservation” paragraph in both of the agreements with Full Tilt Poker and PokerStars, requiring them to maintain their U.S. related business records.  On the one hand, this aspect of the agreements leaves the door open for the IRS to also get involved.  On the other hand, it’s very possible the paragraph is merely a “just in case someday we feel like investigating” provision.  Ultimately, the extent of record review for tax evasion may require more manpower than the IRS can afford to commit.

We shall see.

DOJ Reaches Agreement with Full Tilt and PokerStars

Earlier today, the Department of Justice issued a press release announcing domain-name use agreements entered into with Full Tilt and PokerStars.  Read the respective agreements here and here.  The agreements restore access to these two sites to U.S. players only for purposes of facilitating the return of money that was frozen by the DOJ last friday.

This is great news for U.S. poker players who have funds frozen in accounts on these sites.  Although there hasn’t been any guarantee of fund retrieval, the news, at least on the surface, can’t be relatively any better, considering the state of affairs last Friday.  It’s looking much more likely the funds will be returned.

I say “on the surface” because of possible implications from the agreements.  In particular, observe paragraph 4 in each, entitled “Records Preservation.”  Essentially, Full Tilt and PokerStars are required to maintain all records relating to its business in the U.S.  Because the return of player funds will be overseen by a “Monitor” pre-approved by the DOJ, it is clear the DOJ will have access to these records of consumer activity on these sites.  Whether or not the DOJ decides to scrutinize the records or hand them over to the IRS, we probably won’t know for some time.

What’s also particularly interesting from the press release is the loud silence from the third offshore poker company whose domains were seized in the U.S., Absolute Poker.  The DOJ press release indicates that the same agreement offer was extended to Absolute.  I strongly suspect the reasons behind the delay of the agreement or rejection of the offer will emerge within the upcoming days.

All in all, a partial rebound from what my fellow Tweepers describe last friday as: #PokerPanic.

Department of Justice Seizes Domains of Major Online Poker Sites

Yesterday afternoon, shockwaves rippled throughout the online poker community following the U.S. Department of Justice’s seizure of the internet domains of three online gambling giants, Full Tilt Poker, PokerStars, and Absolute Poker.  Several of these sites’ principals as well as individuals processing financial transactions to and from these sites were indicted for bank fraud, illegal gambling, and money laundering.  For an excerpted version of the indictment, check out this press release issued by the DOJ yesterday.

The Unlawful Internet Gambling Enforcement Act (UIGEA) makes it a federal crime for gambling businesses to “knowingly accept” various forms of payment “in connection with the participation of another person in unlawful Internet gambling.”  Essentially, the indictment charges the defendants with “tricking” U.S. banks and other financial institutions into processing gambling transactions for the offshore online casinos, by disguising the nature of the transactions.  If the allegations are true, certainly laws were broken.

Yes, this is plainly horrible news for the online poker community in the United States.  At least in the short-term.  Simply put, U.S. players are now unable to play online poker.  I feel for those who make a living from online poker or its associated secondary markets of businesses and media coverage.

For the long-term, however, I view this DOJ crackdown as the major turning point towards facilitating the federal legislation of online gambling in the United States.  It’s more than evident that the principals of the major offshore gaming sites were up to no good.  There’s no way the DOJ would have allowed these companies run by dirty hands to take their operations to U.S. soil.  So, here we are, wiping the slate clean to start anew.  Something will happen.  The online gaming industry in the U.S. is too large to ignore.  It may just take awhile.

Back to Full Tilt, PokerStars, and Absolute Poker.  I’ve heard many players have been unable to withdraw funds post-DOJ website seizure.  A question becomes, are those funds currently sitting in the online gambling accounts taxable income?  Maybe.

Why yes: Prior to yesterday, you could have withdrawn the funds like usual.  Applying the tax law doctrine of “constructive receipt,” because those funds were easily accessible, it was as if they were sitting in your bank account.

Why no: Because now those funds aren’t accessible.

One can only speculate whether the funds will be returned, but past experience indicates that they ultimately will.  If that’s the case, then the answer is simply yes.  Given the potentially billions of total dollars deposited by consumers with these casinos, I certainly hope I’m right.

News surrounding the indictment is still flowing rapidly, so I’ll most certainly be keeping you apprised of major developments.  For faster receipt of news, follow me on Twitter.

VIP Host at Vegas Club Doesn’t Receive Tip from the IRS

Many of the taxpayers I represent before the IRS receive a significant portion of their income in the form of cash, check, or credit card, with no amounts withheld for tax.  When this occurs, the responsibility is on the taxpayer to set aside a portion of the income for taxes.  Poker players are no exception.

A typical problem is that the cash is sitting there, and they believe they can come up with the funds for the tax bill later.  When tax time comes, too often taxpayers either “forget” to report the income, or report it, but can’t pay the bill, because they lived far beyond their means.

Ali Olyaie was a “VIP host” at the popular Las Vegas nightclub Pure.  I’ve been to Pure, and their private cabanas are a great place to separate yourself from the raucous crowd.  It doesn’t take much common sense to deduce that a “VIP host” receives generous tips from VIPs looking to enter the club immediately (the line to get in during peak hours is usually ridiculously long) and get some privacy.  Sure enough, clubbers reportedly tipped him thousands of dollars a night.

Unfortunately for Olyaie, the IRS raided the nightclub after learning, among other things, that no taxpayers were claiming income from those tips.  According to court documents, Olyaie reported $42,358 of total income on his 2006 tax return, and he pleaded guilty to actually earning substantially more.  Olyaie’s sentence date is June 29.

Olyaie may have lived the high life serving VIPs in an upscale Vegas club, but now he’s about to pay the price for not properly serving Uncle Sam.

Survivor Winner Richard Hatch Behind Bars…Again

This one is mind boggling.

Back in 2000, the new reality television game show Survivor was a huge hit in the U.S.  “Who is going to get voted off the island this week” was a conversation staple with friends.  You may recall the winner of that first series, Richard Hatch.  He pocketed $1 million as a result.  Unfortunately, the $1 million has cost Hatch far more than he won.

Fast forward to 2005.  The U.S. Attorney’s Office reported that Hatch didn’t claim the $1 million on his U.S. tax return.  Yes, prize winnings are taxable income.  He also failed to report other income.  Hatch was indicted for various charges, including filing a false tax return.

In January 2006, Hatch was found guilty of tax evasion, and in May 2006, he was sentenced to 51 months in prison.  Hatch lost his appeal and the U.S. Supreme Court denied his request to hear his case.  Hatch served the time and was released from prison in May 2009.

You’d think Hatch did a lot of thinking while serving his time.  You’d think he would formulate a plan to set his life straight upon release.   Well, you thought wrong.

A year and a half after his release from serving time for filing a false tax return, Hatch was back in court in December 2010 for failing to amend the tax return that he was previously convicted of falsely filing.

Yesterday, he was sentenced to nine months in prison, and must surrender to the U.S. Marshal by noon this Monday, March 14.

It’s one thing to file a tax return and be unable to pay the tax bill due to financial problems.  It’s another thing to simply not report the income.

I have no sympathy for Hatch.  His actions are simply inexcusable.  Only time will tell whether during this prison sentence Hatch actually starts thinking about how to comply with the U.S. tax laws.  I’m not betting on it.

Exceptions to Privacy of Taxpayer Information: Disclosure to Federal & State Agencies

Last week I emphasized the general point that tax returns and tax return information are confidential and may not be disclosed to federal or state agencies under section 6103 of the Internal Revenue Code.

It’s not quite that simple, however.  Under certain circumstances, other public policy considerations lessen the importance of the voluntary disclosure assessment system in place.  Hence, the incorporation of exceptions to the general rule of IRC section 6103(a).

(Note:  The statute governing the exceptions is long and complex.  There are many nuances.  If concerned about the disclosure of your tax return information, consult a tax professional versed in the area.)

Scroll to the end of the post to see a summary of some of the exceptions listed and explained here:

A)  Disclosure of returns or return information at the taxpayer’s request

B)  Disclosure to State tax officials and State and local law enforcement agencies charged with the administration of State tax laws to assist in the administration of such laws

The provision governing this exception, IRC section 6103(d), is the only one that provides authority for IRS disclosure of tax return information to the states.  The purpose of the provision is to reduce duplicate government resource expenditures and to increase taxpayer compliance.

Ultimately, the only permitted disclosure of taxpayer information by the IRS to states is for the limited purpose of administering tax laws.  Don’t forget “administering tax laws” most certainly includes prosecution for the crime of tax fraud.  To simplify the information exchange process, virtually all U.S. states have entered into information sharing agreements with the IRS in conformance with this exception.

Can the states disclosure tax return information for non-tax administration purposes?  The short hand answer seems to be no, as each agency receiving the disclosed information is treated as if the agency received the information from the IRS directly (i.e. also subject to IRC section 6103).

This section of the Internal Revenue Manual (IRM) covers this provision statute in great detail.  Note, however, that the IRM is not binding law, but merely guidance.

C)  Disclosure to Certain Federal Officers and Employees for Purposes of Tax Administration

Section 6103(h) governs the disclosure of return information to federal officers and employees for tax administration purposes, including criminal and civil tax litigation.  The federal officers and employees entitled to access include those of the Department of Treasury and the Department of Justice.

So, for example, if there is a grand jury investigation for tax fraud, the Department of Justice may be able to access the information reported on the taxpayer’s return.  Makes sense.

Here’s a link to the IRM section covering this exception.

D)  Disclosure to Federal Officers or Employees for Administration of Federal Laws Not Related to Tax Administration

Pursuant to court order, tax return information may be shared with Department of Justice prosecutors  for investigation and prosecution of non-tax criminal laws under certain conditions.  The application for disclosure must establish four elements:

• (1) reasonable cause to believe that a specific non-tax criminal violation has occurred,
• (2) reasonable cause to believe that the return or return information is or may be relevant to a matter relating to the commission of the crime,
• (3) the return or return information will be used solely for the criminal investigation of the referenced crime, and
• (4) that such information cannot reasonably be obtained from another source.

As you can see, the only way the DOJ can obtain tax return information for non-tax administration purposes is if it already knows something about the taxpayer is up.  The IRS can’t say: “Hey, DOJ, this taxpayer is reporting illegal income, you better investigate him.”  The DOJ must find this out independently.

Two IRM sections cover this exception:

• Disclosure to Federal Agencies for Administration of Nontax Criminal Laws
• Disclosure to Federal Agencies for Administration of Nontax Laws

Summary of Exceptions to Privacy of Taxpayer Information

• State agencies may access federal tax return information for purposes of tax administration only;
• Federal agencies may access federal tax return information for purposes of tax administration; and
• Federal agencies may access federal tax return information for purposes of non-tax administration, but only pursuant to court order establishing reasonable cause of a non-tax crime (and other elements).

Disclosure to Federal Agencies for Administration of Nontax Criminal Laws