NETeller, You and the Feds

The good news is NETeller has announced it is going to give back money from U.S. players. The bad news is... I don't know exactly how much bad news there is. But here is some:

1) The announcement on March 21 dealt only with the $55 million or so that was seized by the U.S. Attorneys. It does not necessarily cover the other hundreds of millions of dollars from NETeller's American patrons. On the other hand, NETeller has always said it wants to give back all of its customers' funds. And the money is safe. Not only is it held in separate escrow accounts, but NETeller is so rich that it could pay back everyone with its own cash.

2) The announcement mentioned 75 days, which is only the time period for finalizing the plan. According to NETeller's statement, it "anticipates that within the next 75 days it will announce a plan by which the funds will be distributed to US customers." It could be months before anyone sees any cash. 3) Most troublesome -- some sort of deal has been struck with the U.S. Attorneys for the Southern District of New York, which had arrested the two founders of NETeller. American patrons' funds will only be returned after they have been scrutinized by an independent company, Navigant Consulting, Inc. Navigant is going to "provide financial consulting and forensic accounting services to the company, including oversight of the process of returning funds to U.S. customers."

According to Investopedia.com, "Forensic Accounting" "utilizes accounting, auditing, and investigative skills to conduct an examination into a company's financial statements."

Thus, providing an accounting analysis that is suitable for court. Dictionary.com continues, "Investopedia Commentary: Forensic accountants are trained to look beyond the numbers and deal with the business reality of a situation. They are frequently used in fraud cases."

So why is the $55 million seized from U.S. customers' accounts being subjected to this type of scrutiny? There is no allegation that NETeller was involved in anything fraudulent. It would be nice to think that the U.S. Attorneys are worried about money laundering by Islamic terrorists. But the reality is that the Department of Justice is running a war of intimidation against online poker players.

The DOJ wants to know who has been gambling on the Internet, scare them, and, more importantly, see if they paid taxes on their winnings.

I often get emails from players who want to know if they are going to go to jail for betting online. The answer is no. First, it is not against any federal law to make a bet, even with an illegal bookie. Second, although some states do make it illegal to gamble, none care enough to bring charges. But taxes are a different matter.

Every American who had large amounts of money flowing to, and especially from, NETeller should figure their tax returns for the past few years will be looked at. If the accountants say a person had received thousands of dollars more from NETeller than that person ever deposited, the I.R.S. is going to want to see whether that income was reported. So, big winners should immediately talk to their accountants. If you haven't yet filed your tax return for 2006, make sure it includes your gambling winnings (and you can deduct your gambling losses of any kind up to the amount of your winnings).

For prior years, look into filing a 1040X "Amended U.S. Individual Income Tax Return" for any year your gambling winnings were left out, "accidentally."