Author: sommers

Why I Replaced Traditional Legal Research Platforms with LLMs 

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LLM - Large Language Model image

 In 2025, after more than 35 years of using traditional legal research platforms, I made a major change in how I perform legal research. My practice involves deep, complex, and often theoretical applications of U.S. tax law, especially U.S. international tax matters. 

I moved my law office to my home and decided to eliminate an expensive online legal research service. The annual cost had reached approximately $8,500. Instead, I began using large language model platforms, principally ChatGPT and Gemini, at a combined cost of about $40 per month. 

The result surprised me. 

For my purposes, the traditional large-scale legal research platforms are no longer worth keeping. Their search model is stale and outdated. Their search capabilities are awful. Their content, once you can find it, is often excellent, and their citations are trustworthy. But the old research model has been overtaken by a faster, more flexible, and more analytically useful approach. 

1. Speed and Practical Usefulness 

With the traditional legal research platform, I often had to begin with Boolean searches, a relic developed in the 1960s that obtained widespread adoption in the 1970s, more than 50 years ago. Yet my high-priced legal research platform still relied on it at least through 2024. For the type of legal research I perform, I found Boolean searches virtually worthless. Finding the information in the platform could take 10 minutes or more and often required scrolling through pages of information to locate the right section. 

With ChatGPT or Gemini, I can describe the facts, identify the legal issues, and ask for an integrated legal analysis. In many cases, a comprehensive first response appears in under two minutes. Of course, that response is only the starting point, akin to a brainstorming session rather than a finished project, but it is incredibly useful. It is surprisingly good at finding hidden issues. 

 It gives me: 

  1. A structured issue list; 
  2. A summary of the governing legal principles; 
  3. Potential authorities to verify; 
  4. Arguments on both sides; 
  5. Practical risks and consequences; and 
  6. A roadmap for deeper research. 

2. Integrated Analysis 

Real legal problems rarely present themselves as isolated issues. A single client matter may involve contract law, fiduciary duties, tax consequences, procedural rules, evidentiary issues, limitations periods, damages, disclosure obligations, and litigation risk. Those issues often interact. 

The strength of LLM platforms is that they can process multiple issues together. They can analyze the fact pattern as a whole, identify hidden issues, present alternative theories, and explain how changing one fact may change the legal result. 

For example, I can ask an LLM to analyze: 

“Whether a foreign transfer should be treated as a gift, compensation, trust distribution, capital transaction, or reimbursement, and what reporting forms, penalty risks, and disclosure positions may follow from each characterization.” 

An integrated analysis is extremely helpful and eliminates time-consuming research that otherwise is often required with the old legal research methods. 

3. The Essential Warning: Verify Everything 

The major drawback is citation reliability. 

A lawyer must verify every citation. Statutes, regulations, cases, administrative guidance, procedural rules, quotations, and case holdings all must be checked. 

Sometimes an LLM will cite a case that is not on point. Sometimes it will describe a real case too broadly. Sometimes it will identify the correct legal principle but attach it to the wrong authority. Sometimes the “perfect” case simply does not exist. 

That is not a minor concern. It is by far the biggest drawback to using LLMs. For that reason, use ChatGPT and Gemini as powerful legal research assistants, challenge them with follow-up questions, and never, ever treat them as final authorities. They excel at issue spotting, organizing analysis, developing arguments, and identifying possible sources. But they are not lawyers, and they should never be considered anything more than researchers. 

The proper standard is simple: Treat the answers as a starting point, and never trust the citations without verification. 

4. Online Free Resources Fill Much of the Gap 

One reason the traditional paid services have become less necessary is that lawyers now have access to excellent online resources outside those platforms. 

For example, Google Scholar contains federal and state court decisions and is easy to search. It also has a very useful feature to check a case’s history and verify whether the case is still valid. There are other online platforms, including Justia, CourtListener, Cornell Law Information Institute, FindLaw, and Caselaw Access Project, available for double-checking and verifying LLM-generated research. 

I will address Google Scholar in a separate article because it deserves its own discussion. 

5. Better Instructions Produce Better Research 

The quality of the LLM answer depends heavily on the quality of the instruction. 

A vague prompt produces a vague answer. A detailed legal research instruction produces a much better result. For general legal research, I suggest using an instruction similar to this: 

General Legal Research Instruction for LLM Platforms 

Please provide a careful legal analysis, not merely a surface-level summary. Identify the governing legal issues, relevant statutes, regulations, cases, administrative guidance, procedural rules, and practical consequences. 

Analyze the facts in an integrated way. Do not treat each issue in isolation if the issues affect one another. Identify factual uncertainties and explain how different facts could change the result. 

Where appropriate, discuss: 

  1. The strongest arguments supporting the client’s position; 
  2. The strongest opposing arguments; 
  3. How a court, agency, regulator, or opposing party might characterize the facts differently; 
  4. The difference between positions that are well-supported, reasonable, aggressive, uncertain, or weak; 
  5. Procedural risks, penalties, deadlines, burden of proof, evidentiary problems, and disclosure considerations; 
  6. Practical drafting, negotiation, litigation, or compliance consequences. 

Please cite only real legal authorities. Do not invent cases, statutes, regulations, administrative rulings, quotations, or citations. If you are uncertain whether an authority exists or whether it stands for the stated proposition, say so clearly. 

For each important authority, provide enough identifying information so that I can independently verify it. Where possible, include citations to the relevant statute, regulation, case, agency ruling, or official source. 

Do not overstate the conclusion. Distinguish settled law from arguable positions. If there is no clear authority directly on point, say so and explain the closest available authorities by analogy. 

Use a conservative professional tone suitable for review by a lawyer, court, government agency, client, or opposing counsel. 

6. My Practical Conclusion 

The legal research process has changed. For my practice, the large traditional paid research platforms are no longer worth the cost. They are expensive, slow, and tied to an older search model. LLM platforms are faster, more flexible, and better at the early stages of legal analysis. 

But lawyer beware: Do not trust, and always verify. The future is not traditional legal research versus AI. It is LLM-assisted legal research, lawyer-verified authorities, and professional judgment. That is the new model, and it works. 

FBARS – THE BASICS

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The FBAR Filing Requirement

With certain limited exceptions, U.S. taxpayers with ownership or signature authority over one or more foreign bank and investment accounts containing at least $10,000 (in cash or assets) in the aggregate on one or more days during the calendar year must file an FBAR (Report of foreign bank and financial accounts), FINCIN Form 114.1 This obligation is separate from your obligation to file an income tax return.

Taxpayers with an ownership interest or signature authority over foreign financial accounts (bank and brokerage accounts, corporate, trust and other entity accounts, certain retirement plans and life insurance with a cash value) are required to file an annual Foreign Bank and Financial Account Reports (FBARS) on-line with FinCEN.  Starting with the 2016 FBAR, the due date is the due date of the 2016 income tax return, with regard to extensions.  Both current and delinquent FBARs must be filed on-line. 

For example, assume on January 1 a U.S. taxpayer has $9,001 in one foreign bank account, $525 in another foreign bank account and $600 in a foreign brokerage account for a total of $10,126.   On January 2, taxpayer transfers $200 to his U.S. bank account and makes no other deposits in the foreign accounts (and assume there is no income in those accounts) for the remainder of the year.  Although for 364 days, the total sum in the foreign accounts is less than $10,000, taxpayer still has an FBAR obligation because during the calendar year, there was more than $10,000 on January 1st.  Taxpayer is required to file an FBAR reporting all foreign accounts by the due date for the Form 1040, April 15th of the following year; however, if a valid and timely extension is filed for the Form 1040, the due date for the FBAR is also extended until October 15th.

To determine the value of a foreign account during the year, the highest value of the account in the foreign currency during the year is multiplied by the U.S. dollar exchange rate at the end of the year, using the U.S. Treasury Rates.  If the rate is not available, then use any recognized exchange rate service.

Penalties

The maximum fine for a non-willful failure to timely file an FBAR is $10,000 and there is a six-year statute of limitations for assessment of the penalty (thus, there can be $60,000 in penalties, one for each delinquency).  The penalty may be reduced or eliminated upon a showing of “reasonable cause,” which means, basically, that taxpayers were not negligent in their failure to comply. Note:  Meeting the reasonable cause standard is a high hurdle to clear and merely forgetting to file the FBAR or lack of knowledge about the FBAR filing requirement does not meet the reasonable cause standard. Currently, there are several IRS amnesty programs available to taxpayers who voluntarily file delinquent FBARS, but it is strongly advised to hire an experienced tax professional with expertise in this area; otherwise, you could wind up with large penalties.

For willful violations, the penalty can be as high as 50% of the highest amount in the accounts during the past six years or $129,210 (increased for inflation), whichever is greater, and IRS has a string of recent federal court victories upholding the imposition of willfulness penalties.  Willfulness includes objectively reckless behavior in addition to intentional conduct.  In a recent case, Horowitz,No. 19-1280 (4th Cir. 10/20/20), the court of appeals upheld a willfulness penalty where taxpayers failed to disclose to their accountants the existence of foreign accounts and checked the box “no” on Schedule B, Part III (that asks whether you have foreign accounts).  Note:  Checking the box “No” when you have foreign accounts generally negates a reasonable cause argument because you are stating under penalties of perjury that you do not have foreign accounts,2 which is a false statement of fact.

Conclusion

If you have failed to timely file an FBAR, get expert tax advice before proceeding, since there are techniques to minimize or eliminate your potential exposure to penalties.  If you just send in a delinquent FBAR, using one of the excuses on the form, you can expect an automatic penalty and an uphill battle to reduce it, as well as a costly and stressful endeavor to boot.

  1. FinCEN means Financial Crimes Enforcement Center and is part of the U.S. Treasury. the year, using the U.S. Treasury Rates. If the rate is not available, then use any recognized exchange rate service.
  2. Above your signature line on Form 1040, it reads, “Under penalties of perjury, I declare that I have examined this return and accompanying schedules and statements, and to the best of my knowledge and belief, they are true, correct, and complete.” This statement applies to Schedule B, Part III where it asks if you have any foreign accounts.


Is your on-line gambling or virtual currency account reportable?

Watch Video

The Unresolved Tax Consequences Involving Cybercurrency Staking

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Introduction:

There is a raging debate on social media about whether the activity of cybercurrency
staking is similar to a baker who creates a cake using raw ingredients and is not taxed until the
cake is sold, or whether staking involves personal services and the taxpayer is receiving assets
(new coins) as compensation, in which case, receipt of the coins is immediately taxable.

The Controversy:

The current controversy involves a Tennessee Federal District Court case, Jarrett v. US in which a taxpayer who paid taxes on “staking rewards” (new coins he received for his activities), sued for a refund claiming his actions were comparable to the baker making a cake. IRS agreed to pay the refund and has moved to have the case dismissed. Many commentators, without the slightest clue as to how IRS operates, have erroneously concluded that staking is akin to making a cake, because IRS decided to issue a refund in the Jarrett case and have the case dismissed

Potential Reasons for the Refund:

First, the amount in controversy involved a refund claim of $3,000 and is would cost the government probably ten times, if not twenty or thirty times the refund claim the litigate the matter. More importantly, IRS is working on the issue of how to tax staking activities and has not reached a conclusion. The issue involves potential hundreds of millions, if not billions in future tax revenue and, logically, IRS did not want a federal judge (who may or may not have substantial federal tax experience) making a potential adverse decision that would cause massive confusion, before it establishes a position on the matter. Thus, the issuance of a $3,000 refund should not be considered definitive win for those participating in staking.

Based on current law, staking income should be realized when there is payment for the services, in the form of an asset, whether a virtual asset or otherwise. In the Jarrett case, the taxpayers received Tezos tokens worth approximately $9,000, so they received property with an ascertainable value for work performed and taxpayers should be taxed upon receipt of the coins.

Taxpayers’ Argument:

Taxpayers’ claim that newly created property is not an accession to wealth that is clearly realized — the making a cake analogy– so they should not be taxed until the coins are sold. Taxing them when the coins are received is analogous to taxing a baker when the cake is finished and for sale, whether or not someone buys it. But were taxpayers actually making the Tezos coins? They reviewed and validated new blocks within an existing block chain, but did not actually create the Tezos coins in the sense that a baker creates a cake or an author writes a book.1 They were paid for their services with coins.

The” Central” Issue:

The core question is the value of the asset when received. In many cases, the asset’s value is zero, in which case the taxpayer does not have income when the asset is received (the taxpayer has a zero basis in the asset). When the asset has an ascertainable fair market value upon receipt, the asset should be immediately taxable; thus, if the asset’s value is $10 when received, taxpayer has $10 in compensation income and a $10 basis in the asset for determining future gains or losses. In Jarett’s case, the coins were worth $9,000 upon receipt, so they should be taxed on that amount as ordinary compensation income.

Conclusion:

It will be interesting to see whether IRS decides that staking is like making a cake or is just another form of payment for personal services.

1 Of course, they had a small role in the creation of the coins, but the same can be said of an auto assembly-line working making a car. If the worker received a car as payment, could the worker claim the car is not taxable under the “making a cake, writing a book” rationale?

Foreign Gift of an NFT, Part 1

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Introduction:

What are a U.S. taxpayer’s reporting duties when receiving a foreign gift of a non-fungible
token (NFT)? Let’s say your rich foreign uncle, who made a bundle buying NFTs, transfers one
of them to you as a gift. The good news is foreign gifts are not immediately taxed; however, there
could be current IRS filing obligations with potentially large penalties.

Example: Assume as a U.S. taxpayer you receive an NFT from your foreign uncle
worth $500,000.

Reporting Obligations:

Form 3520: I’ve discussed in a separate video the Form 3520 filing requirements when you
receive one or more foreign gifts in a calendar year exceeding $100,000 in total. Here, you need
to file Form 3520 to report your NFT.

Form 1040 Disclosure: On the first page of Form 1040, IRS asks about any transactions
involving virtual currency that must be answered Yes or No. An NFT is not a virtual currency, it
is an asset, a collectible, so you answer the question no, unless you had other transactions
involving virtual currencies.

FBAR: An FBAR is required when you have more than $10,000 in one or more foreign financial
accounts during the year that you own or have signature authority over the account). An NFT is
an asset, it is not a foreign financial account; therefore, an FBAR is not required, unless it is
stored on a foreign exchange or platform, or with a foreign financial institution, which is unlikely
but could happen.

Form 8938: Form 8938 is filed with your tax return if you hold foreign financial assets exceeding
certain thresholds. These thresholds depend on whether you are living outside the U.S. and
whether you file a joint return. An NFT is not a foreign financial asset for Form 8938 purposes.

Conclusion:

Because an NFL is an asset (it is property) that is not a financial asset, the reporting
requirements are much less onerous than receipt of money, securities or cybercurrency. In this
case, only Form 3520 is required. In Part II, I discuss the tax consequences when you sell an
NFT.

Form 3520: Foreign Gift of Cryptocurrency and Other Assets

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Global Crytocurrency image

Introduction:

Say you receive a gift or inheritance1 from a foreign individual of cryptocurrency, or other assets, including cash: First, the good news – the gift is not taxable to either the foreign donor (giver) or the done (recipient) – you receive the gift tax free. The bad news, check out these potential filing and disclosure requirements (including Form 3520)!

Example: Assume you are a single U.S. taxpayer (note, your citizenship or visa status is irrelevant– these rules apply to every U.S. taxpayer).2 In calendar year 2020 your foreign parent makes you three gifts on different dates, of: (i) $50,000 in cash; (ii) stock in a foreign company worth $75,000; and (iii) cryptocurrency worth $100,000, for a total of $225,000.3 Assume the cash was deposited into a foreign bank account owned jointly by you and your parent. What were your U.S. tax obligations?

Tax Reporting Obligations:

Form 3520: This form is required whenever you receive one or more gifts from one or more foreign individuals during the calendar year when the aggregate fair market value exceed $100,000. [See my Form 3520 video for more details] In our example, you received foreign gifts worth $225,000 reportable on or before the due date of your 2020 income tax return, either April 15, 2021 or October 15. 2021. Since you did not timely file Form 3520, you could be subject to huge penalties, 5% per each month the return is late, to a maximum of 25%. Form 3520 is a separate and independent filing obligation and must be paper-filed with the IRS in Odgen, Utah. The statute of limitations for IRS to assess this penalty is suspended until three years after the return is filed.

FBAR: Because there was more than $10,000 in your jointly-held foreign bank account in 2020, you were obligated to file an FBAR (Report of Foreign Bank and Financial Account) by the due date of your income tax return, with regard to extensions, similar to the deadline for filing Form 3520. The FBAR is filed on-line and is a separate and independent filing obligation. The FBAR also applies to stock held in a bank or brokerage account (or similar institution). There is a six-year statute of limitations for FBAR penalty assessments.4

Form 8938: Your foreign financial assets exceed the $50,000 threshold for single filers ($100,000 for joint filers residing in the U.S.); therefore, you needed to file Form 8938 with your income tax return. Your foreign bank account and stock holdings are foreign financial assets and your cryptocurrency might be a foreign asset if it is held by a foreign exchange or foreign $100,000, whichever is higher, if IRS concludes you willfully failed to file the FBAR. Penalties may be reduced or eliminated if you can show IRS that the failure was due to “reasonable cause” (a much-litigated concept) and there may be voluntary disclosure programs to mitigate the penalty. financial institution. The penalty for failing to file Form 8938 is $10,000 per year and there is no statute of limitations for assessment of the penalty until three years after the form is filed.5

Form 1040: On the first page of Form 1040, IRS asks, “At any time during 2020, did you receive, sell, exchange, or otherwise dispose of any financial interest in any virtual currency? Yes or No.” You must answer this question “Yes” because you received a gift of cryptocurrency. Note receipt of cryptocurrency (other than by purchase), whether from a U.S. or foreign person and whether by exchange, gift or inheritance requires a “Yes” answer. Although there is not a specific penalty for failing to accurately answer this question, it is clearly a badge of fraud if you supply a false or misleading answer and remember, you file tax returns under federal laws of perjury. In short, there are criminal tax fraud implications if you deliberately falsify your answer to this question. Failing to answer the question in circumstances where you were required to answer “Yes” amounts to fraud, so don’t be clever and not answer the question.

Other issues: If your ownership interest in the foreign corporation is 10% or more, you could have a Form 5471 filing obligation. There is a similar, although not identical rule for foreign pass-through entities, such as partnerships or limited liability companies. If the foreign stock was held in a foreign mutual fund or other passive investment, you could have a PFIC (Passive Foreign Investment Corporation) Form 8621 tax issue. The PFIC rules can be extremely complex and only a handful of CPAs are qualified to handle them. Also, PFICs may have potentially punishing tax rates.

Conclusion:

What appeared to be a simple foreign gift/inheritance transaction with no immediate tax consequences may generate a multitude of reporting duties. A foreign gift/inheritance of —

a. Cryptocurrency could trigger Form 3520, Form 8938 and FBAR filing requirements, as well as a Form 1040 virtual currency disclosure.

b. Cash or assets could trigger Form 3520, Form 8938 and FBAR reporting obligations.

c. Foreign stock or securities could spark Form 3520, Form 8938, FBAR (if the stock is held in a foreign financial account). Form 5472 and PFIC filing duties.

  1. Note: The rules apply with equal force to foreign inheritances.
  2. Note: Those who are physically present in the U.S. illegally still must comply with U.S. tax law and these rules apply to illegal assets or substances as well. In general, the tax code makes no distinction between legal or illegal activities or assets.
  3. Note: non-cash gifts are priced at fair market value at the time of the gift.
  4. The penalties range from $10,000 for a non-willful failure to as much as 50% of the amount in the account or $100,000, whichever is higher, if IRS concludes you willfully failed to file the FBAR. Penalties may be reduced or eliminated if you can show IRS that the failure was due to “reasonable cause” (a much-litigated concept) and there may be voluntary disclosure programs to mitigate the penalty.
  5. As with other international form filing penalties, Form 8938 penalties may be reduced or eliminated if you can show IRS that the failure was due to “reasonable cause” (a much-litigated concept) and there may be voluntary disclosure programs to mitigate the penalty.

Taxation of Cybercurrency Exchanges

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Internal Revenue Code Section 1031 defers taxation involving exchanges of like-kind property held for investment or business. If a taxpayer traded one parcel of real estate for another, the transaction is, in general, tax-free. Congress changed Section 1031, commencing January 1, 2018, applying it solely to real estate. But what about exchanges of cryptocurrency prior to January 1, 2017; did they qualify for tax-free treatment? Tax experts reasoned that a swap of one cryptocurrency for another probably fell within Section 1031 and was not taxable.

IRS Memorandum

On June 8, 2021, IRS published a Memorandum (Number 2021124008, appended to this article) stating that exchanges involving swaps of Bitcoin, Litecoin, and Ether were not covered by Section 1031 because of differences in overall design, intended use and actual use. This Memo should apply to practically all pre-2018 cybercurrency swaps. Note: although the Memo is not law and the courts are not bound by it, it is followed by IRS so expect audits of pre-2018 cryptocurrency exchanges.

While the like-kind exchange rules are broadly interpreted for real estate, the same is not true for other assets. IRS has ruled that gold is not like-kind to silver and a bull is not like-kind to a cow. Cybercurrencies are intangible assets and the exchange rules for intangibles are much more restrictive than real estate; thus, successfully challenging the Memo could be problematic, if not futile.

Amending Your Return

So, should you amend your pre-2018 tax return to report cybercurrency exchanges? The answer may depend on whether the applicable statute of limitations for tax assessments has expired. The usual rule is three (3) years from the date the return was filed, so assessments for the 2017 tax year (assuming the return was filed on the due date, April 15, 2018), would have expired on April 1, 2021 (or will expire on October 15, 2021 if an extension was filed). There is a special six (6)-year statute of limitations when, in general, taxpayers fail to report more than 25% of their gross income1. Unless the exchanges were properly reported on Form 8824 or IRS was otherwise adequately notified of the transactions, expect the six (6)-year statute to apply.

As a practical matter, taxpayers claiming exchange treatment would have filed Form 8824 so the 3-year statute should apply for pre-2018 exchanges2. Note; If there was tax fraud with the return, there is no statute of limitations for assessment.

Conclusion

Taxpayers who timely and accurately reported their cryptocurrency exchanges for tax years prior to 2018, the statute of limitations for assessment will have expired (or will expire on October 15, 2021 if the return was on extension). If they failed to report their exchanges and the omitted gross income amount exceeding 25% of the income reported, the special six (6)-year assessment period applies, which means IRS could assess back taxes, penalties and interest for tax years 2015, 2016 and 2017.

1 Example: If a taxpayer files a return reporting $100,000 of gross income the omitted income must be at least $25,000 for the six(6)-year statute of limitations to apply.

2 The 6-year statute does not apply when IRS has been adequately apprised of the potential omitted gross income and filing Form 8824 puts IRS on notice of the exchange transactions.

Taxation of Student Athletes

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With the recent Supreme Court decision in NCAA v Alston (decided June 21, 2021), student athletes may now capitalize on their name, image and likeness (NIL), similar to professional athletes. Depending on the annual revenue, athletes may need to engage in complex and sophisticated business and tax planning, as this income, along with associated deductions, must be reported on federal and state tax returns.

The first major issue involves state income taxes. The default rule is that a student’s residence is where they lived before attending college; thus, a student living in California (a high-tax state) who plays football for the University of Miami (a no-tax state), will be taxed as a California resident, even though they are living in Florida. The athlete may change residence to Florida, but there are detailed steps to this process, including, in most cases, a waiting period and a showing of financial independence.

Student athletes earning NIL money are treated just like anyone else. This means reporting and paying taxes on the income and the potential for being sued; therefore, they should consider forming a limited liability company (LLC) or corporation for asset protection. Depending on the future earnings and whether the athlete wants to grow their brand, a traditional C corporation may be the best tax-planning option. Keep in mind that if you are coaching someone and they are injured, you could be liable for damages, that’s why you want to have a limited liability entity handling your business affairs. Another realm for potential legal liability is intellectual property (including trademark) infringements and contract disputes.

Even if an athlete successfully changes residence to Florida, many states will tax income derived from being physically present in that state. For instance, if the Florida resident comes to California for an autograph signing event, California could tax the revenue because the athlete was physically present in the state earning income.

Also, watch out for in-kind payments: the car dealer who gives the athlete a car – the value of the car is considered income so unless there are other sources of income to pay the taxes on this income, they could have a large tax liability without the funds to pay it. This applies to many types of non-cash property and benefits, such as non-business-related airline flights, hotels and meals, gift bags, clothing and assorted bling.

Although not a tax issue, to successfully capitalized on your NIL, consider the advice David Grohl (Foo Fighters) received to grow his fortune to more than $300 million. The story goes that he asked Paul McCarthy (Beatles) how to prosper in his musical career and was told never to sell anything he created1 and retain total control over every revenue source, especially his musical catalog. The lesson: never, ever, sell or transfer any ownership of your NIL, always license it.

Conclusion: Capitalizing on your NIL is fraught with potential pitfalls and traps. Obtain the best tax and legal advice before moving forward. Protect yourself with a limited liability entity (an LLC or corporation) and always retain full ownership and control of your NIL.

1 The Beatles music catalog was sold to Michael Jackson in 1985 for $47.5 million. It is now currently worth around one billion.

FBARS: Is Your On-Line Gambling Or Virtual Currency Account Reportable?

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With certain limited exceptions, U.S. taxpayers with one or more foreign bank and investment accounts containing at least $10,000 (in cash or assets) in the aggregate during the calendar year must file an FBAR (Report of foreign bank and financial accounts), FINCIN Form 1141. This obligation is separate from your obligation to file income tax return. See Appendix “A” for a detailed explanation regarding FBAR filings. 

What is a foreign financial account for FBAR purposes? 

If you have an on-line gambling account hosted in a foreign country in which you deposit funds to gamble, is it a foreign bank account? A federal district court said yes, but it was overruled by the Ninth Circuit Court of Appeals in U.S. v Hom (decided in 2016), in which the court held that merely having a foreign account that primarily facilitated online gambling, without additional characterizes of a financial account or bank – such as the transfer of funds from one financial institution to another, or providing interest-bearing accounts or lending services – was not a bank for FBAR purposes. Unfortunately, the Hom case was designated as “unpublished” and cannot be used for legal precedent; although, it appears that FinCEN has backed off challenging on-line gambling accounts for the time-being. 

What about a foreign virtual currency account? 

The same reasoning under Hom should apply to these accounts. But there is good news and bad news concerning virtual currency accounts: Currently, FinCEN’s position is they are not reportable on an FBAR; the bad news – FinCEN is drafting regulations to make them FBAR reportable. Expect the regulations to be finalized in 2021 or 2022. 

 Conclusion: 

If you currently have unreported on-line foreign gambling or virtual currency accounts that lack any traditional banking attributes, you probably do not have a FBAR filing requirement. For virtual currency accounts, this will change once Fin CIN publishes regulations requiring FBAR reporting in the near future. 

 1 FinCEN means Financial Crimes Enforcement Center and is part of the U.S. Treasury. 

Appendix “A” 

Taxpayers with an ownership interest or signature authority over foreign financial accounts (bank and brokerage accounts, corporate, trust and other entity accounts, certain retirement plans and life insurance with a cash value) are required to file an annual Foreign Bank and Financial Account Reports (FBARS) on-line with FinCEN. Starting with the 2016 FBAR, the due date is the due date of the 2016 income tax return, with regard to extensions. Both current and delinquent FBARs must be filed on-line: FBAR On-line. 

To determine the value of a foreign account during the year, the highest value of the account during the year is multiplied by the U.S. dollar exchange rate at the end of the year, using the U.S. Treasury Exchange Rates. If the rate is not available, then use any recognized exchange rate service. 

The maximum fine for a non-willful failure to timely file an FBAR is $10,000 and there is a six-year statute of limitations for assessment of the penalty (thus, there can be $60,000 in penalties, one for each delinquency). The penalty may be reduced or eliminated upon a showing of “reasonable cause,” which mean, basically, that taxpayers were not negligent in their failure to comply. There is an amnesty program if taxpayers reported their foreign financial account income and gains, but failed to file FBARS. 

For willful violations, the penalty can be as high as 50% of the highest amount in the accounts during the past six years or $129,210 (increased for inflation), whichever is greater, and IRS has a string of recent federal court victories upholding the imposition of willfulness penalties. Willfulness includes objectively reckless behavior in additional to intentional conduct. In a recent case, Horowitz, No. 19-1280 (4th Cir. 10/20/20), the court of appeals upheld a willfulness penalty where taxpayers failed to disclose to their accountants the existence of foreign accounts and checked the box “no” on Schedule B, Part III (that asks whether you have foreign accounts).

Understanding Form 3520, Reporting Foreign Gifts

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Little-known Form 3520 is required for reporting gifts or inheritances received from one or more foreign individuals totaling $100, 000 or more during the calendar year. Attorney Robert L. Sommers is based in San Francisco and is a Certified Tax Specialist, California Board of Legal Specialization, State Bar of California. He has represented hundreds of U.S. and foreign individuals and small companies on a variety of U.S. and foreign tax, business, and estate planning matters. A major portion of his practices involves foreign tax issues and obligations, including unreported foreign income, assets, gifts/inheritances and accounts. Bob explains the requirements and severe penalties if Form 3520 is not timely and accurately filed. This is the first in a series of Boomer Bob’s Tax Cafe and Coffee Bar videos, providing tax news you can use.

U.S. Tax Laws Involving Foreign Income, Assets and Financial Accounts

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1. U.S. Taxpayers (generally individuals physically present in the U.S. 121 days or more during a calendar year, long-term residents and citizens) must report their world-wide income, credits and deductions on U.S. tax returns (Form 1040) and, in general, are entitled to foreign tax credits for income taxed by a foreign country. Non-residents are subject to U.S.: (i) income tax on their U.S. source income; and (ii) estate tax on their U.S. property, including real estate and securities (stocks, bonds and debt instruments) of U.S. companies and individuals. See IRS Publication 54 (also available as a .pdf) for details. 

2. U.S. Taxpayers with an ownership interest or signature authority over foreign financial accounts (bank and brokerage accounts, corporate, trust and other entity accounts, certain retirement plans and life insurance with a cash value) are required to electronically file an annual Foreign Bank and Financial Account Reports (FBARS) on or before the due date of their income tax return for the following year. The maximum fine for non-willful failure to timely file an FBAR is $10,000 and there is a six-year statute of limitations for assessing the penalty. The penalty may be reduced or eliminated upon showing “reasonable cause.” 

3. In addition to the FBAR requirement, starting in 2011 U.S. taxpayers with foreign financial account and certain other financial assets (generally, stock or securities, including certain employee stock benefit plans) must report those assets on Form 8938, which is filed with the Form 1040. The threshold filing requirements start at $50,000 for single taxpayers ($100,000 1 for married couples filing joint returns) living in the U.S. 

4. U.S. Taxpayers who have a 10% or greater interest in a foreign corporation must file Form 5471 with the Form 1040. There are equivalent filing requirements for 10% or more ownership in a foreign partnership. 

5. U.S. Taxpayers who receive a foreign gift or inheritance from an individual of more than $100,000 during the calendar year must file Form 3520 to report the gift or inheritance. The due date of Form 3520 is the same as the Form 1040, and is extended if a valid extension is filed for the Form 1040. The threshold reporting requirement for a gift from an entity or trust is much lower. 

6. U.S. Taxpayers who earn wages or self-employment income while residing outside the U.S. may be entitled to a foreign earned income exclusion if they are considered residents of a foreign country or remain outside the U.S. for a period of 330 days during any 12-month period. The maximum income exclusion is $104,100 for 2018. The exclusion must be claimed on a timely filed U.S. tax return, it is not automatic. There is also a partial exclusion for housing costs, if they exceed a certain minimum.