Originally published on Forbes.com.
Pretty much everybody knows that if you bring over ten grand in cash to the bank and deposit it, the bank is going to send in a report that will get to the IRS. Projecting from there, you might figure they will put somebody on your case and be looking into you. That type of thinking might lead someone to break up their deposits or withdrawals into smaller amounts to avoid the reports going in. That is a very big mistake, but we will get into that later. Here is this week’s shocker. You could be depositing twenty grand every Thursday for a year and the chances that the IRS will take an interest in you are somewhere between slim and none, but probably closer to none. That is what seems to be the take-away from a recent TIGTA report –The Internal Revenue Service Still Does Not Make Effective Use of Currency Transaction Reports , TIGTA stands for Treasury Inspector General for Tax Administration.
Bank Secrecy – Not – Act
When I interviewed Ellen Zimiles, former Assistant US Attorney, back in 2015, one of her observations was that the Bank Secrecy Act was more about disclosure than secrecy. And that is what you get from the run-down of the law that is in the TIGTA report.
The Currency and Foreign Transactions Reporting Act of 1970, referred to as the Bank Secrecy Act, requires U.S. financial institutions to assist U.S. Government agencies by filing reports concerning currency transactions. One such report is known as the Currency Transaction Report (CTR), which financial institutions are required to file with the Financial Crimes Enforcement Network for currency transactions that exceed $10,000 or multiple currency transactions that aggregate more than $10,000 in a single day.
It is not just about taxes. Kent Hovind will often remark that it was meant for drug dealers. TIGTA notes that taxes were part of the package.
Congress believed that the reports required by the Bank Secrecy Act, including the CTRs, would be useful for numerous purposes, including tax compliance purposes.
The 2010 Report
TIGTA reported on this matter back in 2010. The report was titled “Currency Report Data Can Be a Good Source of Audit Leads”. I mean – who knew? Actually, back in 2010, TIGTA did see that IRS had been using CTR reports to good effect.
The Internal Revenue Service (IRS) recognizes the benefits of using Currency Transaction Reports (CTR) in its criminal and civil enforcement efforts. The IRS Criminal Investigation Division has obtained a number of convictions for tax evasion that either originate from CTR data or for which CTR data served as a roadmap to establish a crime was committed. Additionally, IRS examiners closed several hundred audits that were initiated from CTR data and, in the process, recommended additional taxes of $13.6 million.
$13.6 million doesn’t seem to be much of a number, though. Of course there is this practical problem.
TIGTA recommended that, as resources become available, the Director, Examination, Small Business/Self-Employed Division, explore the feasibility of making greater use of CTRs to pursue additional nonfilers and underreporters for audit. (Emphasis added)
The IRS somewhat agreed with TIGTA, but thought they might have gotten a little carried away.
We are pleased that IRS management agrees with the recommendation. However, we are surprised by the absence of a commitment to pursue additional underreporters for audit given the potential revenue at stake. Regarding the disagreement over the outcome measure, we maintain that the potential $1.3 billion of increased revenue is a reasonable estimate considering the assumptions used to make the estimate. Moreover, the accuracy and validity of sampling methodologies and estimate were confirmed by a statistician.
It’s Only Been Eight Years
I suspect if is mainly a matter of resources not becoming available, but TIGTA reports that the IRS is till not making systematic use of the reports.
The IRS still makes no systemic use of CTR data in examinations. Although IRS management agreed with TIGTA’s recommendation in a September 2010 report and cited steps taken to develop examination referrals from the CTRs, the IRS is still not systemically using the CTRs to identify and pursue potentially noncompliant individuals. It is also not effectively tracking information referrals from Bank Secrecy Act examiners to the Examination function. Finally, some examiners are not documenting that they are considering available CTR information in their audits.
Worse, they end up getting the numbers scrambled.
During the fieldwork for this review, TIGTA also found that CTR data stored in the Integrated Data Retrieval System incorrectly aggregated CTR amounts for multiple individuals and showed the same CTRs total dollar amount for these individuals. We have initiated a follow-up audit to determine the extent and potential causes of this issue.
Should You Start Worrying
IRS says it is going to put more time into studying those currency transaction reports, so if you have been up to shenanigans, maybe you need to be more compliant.
TIGTA recommended that the IRS 1) establish formalized procedures for processing Bank Secrecy Act Program referrals and begin tracking the time required to send referrals to the Field Exam Support Team, and 2) clarify formal Internal Revenue Manual procedures to assist examiners in their consideration of CTR data in examinations. IRS management agreed with the recommendations and plans to take corrective actions.
On the other hand, IRS promised to do that eight years ago and we see from this report how that turned out.
The Irony
People who thought they were being clever by breaking their transactions into smaller amounts to avoid bank reports were actually committing a crime. It is called structuring. And unlike tax evasion, which requires an element of willfulness, it is relatively easy to prove. Structuring can also subject people to civil forfeiture of the structured funds. IRS CI took advantage of this and having created some bad publicity backed off. TIGTA did a report on that also – Criminal Investigation Enforced Structuring Laws Primarily Against Legal Source Funds and Compromised the Rights of Some Individuals and Businesses.
Young Earth Creationist Kent Hovind is on something of a crusade against the injustice of his structuring convictions, although his narrative leaves out that he was convicted of other crimes also and subject to an enormous civil income tax deficiency. My theory about his outrage is that he had prepared himself to be charged with evasion by establishing a Cheek defense and was blindsided by structuring. The irony is that if he had just had his wife withdraw eleven grand when that is what they needed, the routine bank report might not have caused a ripple.
Here is Kent telling his story to Josh Bernstein earlier this month.
Other Coverage
Michael Cohn beat me to the punch on Accounting Today with IRS bank secrecy program has little impact on tax compliance, a nice summary of the report. Also there was The IRS Still Does Not Make Effective Use Of Currency Transaction Reports on Tax Times.