Many online gamblers are chewing their nails over the news that Paypal is opening its payment records to perusal by the US Internal Revenue Service. Ostensibly the IRS is looking for those who have hidden assets in offshore and foreign banks but online gamblers are afraid of getting caught up in the net. Not only is their concern with untaxed gambling winnings that may be found but there is the fact that internet gambling is illegal in the United States.

Paypal has gone to extensive lengths to distance themselves from online gambling, particularly in the US, but it wasn’t always that way. When the company first started out, they happily did business with many online gambling concerns for almost a year and a half – until 2002. At that point, Paypal was indicted for supplying services to offshore gambling sites which was against two sections of the US penal code. Paypal paid a hefty settlement of $10 million dollars which was to be representative of the profit earned on the illegal gaming transactions.

Earlier in July, through an ongoing investigation by the US Justice Department against Swiss bank UBS, one of their former private bankers, Bradley Birkenfeld, pleaded guilty to conspiracy charges. He admitted that the bank had assisted wealthy US citizens evade income tax laws and hide some $20 billion dollars worth of assets from the government. The Justice Department has requested a federal judge to require UBS to turn over any information on US customers that may have used the famous Swiss banking secrecy to escape paying taxes.

In 2006, a US federal court had ruled that the IRS could ask Paypal for records on any American customers that had financial accounts with foreign banks including credit cards, debit cards or bank accounts. In January of this year, Paypal sent a statement to any customers who fit that description, letting them know that the company would be opening those records to the IRS. All records were ordered to be turned over to the IRS by the end of April.

While the US government is supposedly after those evading taxes, there is nothing to stop them from prosecuting online gamblers retroactively. After passing a law known as UIGEA back in 2006, which called on banks and other financial institutions to block transactions resulting from illegal gambling activities, the Justice Department went aggressively after foreign gambling companies. Several have been prosecuted for acts committed prior to the UIGEA passage as the Justice Department has always maintained that the activities were always illegal even though even the US hasn’t figured out all the ramifications from the law nor figured out how to enforce the ban.

Now US gamblers are afraid that they are the next target and are incensed that Paypal would give up the records so easily. Paypal supposedly had policies in place guaranteeing the privacy and confidentiality of their customers financial details but apparently they feel these policies are superseded by the governmental request. After all, Paypal didn’t even wait for a court order or subpoena – they just handed over the information when the IRS requested it. Industry experts are expecting customers to start filing civil lawsuits against Paypal over what is viewed as their breach of contract.