The IRS Is Using Its Big Data and Reminds Us and Its Agents That They Have Access to Records of Large Cash Transactions at Financial Institutions By Steven Toscher
The IRS has recently provided interim guidance to clarify actions IRS Examiners musttake to analyze and document Currency Transaction Report (CTR) data during an audit. The Guidance, which is effective immediately, will be incorporated into IRM 4.10.4, Examination of Returns, Examinations of Income.
Prior to incorporation, IRM 4.10.4 provided very little guidance on when and how to use the Financial Crimes Enforcement Network’s (FinCEN) Currency Transaction Reports. However, this new guidance assists examiners during an audit of a taxpayer’s returns and income.
Financial institutions are required to report all transactions of currency that exceed $10,000 by filing a FinCEN CTR. Information from this filing may be used by an examiner to decide whether to use additional auditing techniques, question sources of income for which tax has not been withheld, and generate leads for potential unreported income, money laundering transactions, and other tax avoidance schemes.
The Guidance reminds examiners that while conducting the in-depth pre-contact analysis (during which examiners determine the scope of the audit), examiners should review Information Returns Processing Transcript Requests (IRPTR) for CTR data. However, when the information on an IRPTR does not provide enough information regarding the taxpayer’s CTR data, the examiner should request a FinCen Query (FCQ), which, if approved, will provide a full copy of the taxpayer’s CTR data.
An examiner may also request FCQ data when a CTR is not shown on the IRPTR. This request should be used when (1) there is an indication of fraud; (2) banking information is not located through traditional means; (3) there are an unusually large number of cash transactions or cash transactions that are of an unusually large amount; (4) a business’ activities remain consistent after a pattern of CTR filing stops; (5) there is suspicion of offshore bank accounts or entities; or (6) when a whistleblower reports a third-party’s alleged unreported income or offshore banking activities
A CTR provides information that an individual was involved in a transaction that exceeded $10,000. It does not provide information as to who the money belonged to. To remedy this situation, the Guidance has provided the following actions an examiner should take to determine whether the individual names on a CTR is the taxpayer in question:
- The examiner must confirm the information on the CTR is for the taxpayer in question.
- The examiner must confirm the bank account on the CTR is the taxpayer’s, or whether the bank account belongs to an entity related to the taxpayer.
- The examiner must trace the transaction on the CTR to the taxpayer’s bank account.
- The examiner must determine the origin of the transaction.
- If the examiner is unable to establish a relationship between the CTR and taxpayer through an analysis of the financial accounts, the examiner should ask the taxpayer if they were involved in cash transactions over $10,000.
- If the examiner cannot trace the transaction and the taxpayer denies involvement in transactions over $10,000, the examiner may consider issuing a summons for the bank account listed on the CTR.
Examiners must document the steps taken to trace a CTR and their conclusions.
It is important to note that although the examiner will not provide a taxpayer with a copy of the CTR, a taxpayer can still obtain the information from the CTR by submitting a Freedom of Information Act Request.
This Guidance is a reminder to all taxpayers that large monetary transactions are tracked by the government and, more importantly, that the IRS is taking steps to insure that its agents are following proper procedures to utilize the rich treasure trove of data in its possession.
Taxpayers thinking of avoiding leaving CTR footprints by depositing smaller amounts of currency in their bank accounts – say $9,500 – should think twice. Structuring bank deposits to avoid the CTR requirements is a felony punishable by prison.
STEVEN TOSCHER – For more information please contact Steven Toscher – firstname.lastname@example.org Mr. Toscher is a principal at Hochman Salkin Toscher Perez, P.C., specializing in civil and criminal tax litigation. Mr. Toscher is a Certified Tax Specialist in Taxation, the State Bar of California Board of Legal Specialization and represents clients throughout the United States and elsewhere involving federal and state, civil and criminal tax controversies and tax litigation.