Report on IRS CI Use of BSA Filings in Financial Crime Investigations (4/6/24)

The IRS has posted this report on the use of the BSA filings.  IRS CI, Primary subject in nearly 88% of investigations opened by CI in FY23 had a BSA filing, here(1/17/24; last reviewed or updated 1/18/24 and viewed 4/6/24). The posting mentions specifically third-party reports such as suspicious activity reports and currency transaction reports. The report is short but I copy and paste a couple of key paragraphs:

The primary subject in nearly 88% of investigations opened by CI during fiscal year 2023 (FY23) had a BSA filing. From FY21 to FY23, BSA data was instrumental in securing average prison sentences of 39 months and seizing $7.4 billion in assets tied to criminal investigations. BSA data during this same timeframe also resulted in restitution orders totaling $434 million and forfeited assets totaling $629 million, nearly double and triple the amounts, respectively, from FY20 to FY22.

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Under the BSA, financial institutions must notify the federal government when they encounter instances of potential money laundering or tax evasion. Of the CI investigations that originated from BSA data in FY23, 77% used information from suspicious activity reports, and 63.6% used information from currency transaction reports. Additionally, 16.5% involved fraudulent Small Business Association loans tied to COVID relief programs, 7.1% involved skimming where the primary subject steals funds from a business or charity and 4.7.% involved employment tax fraud where taxes due were not paid.

The key information relates to “financial crime investigations” which is defined at the end to include “tax fraud, narcotics trafficking, money-laundering, public corruption, healthcare fraud, identity theft and more.” (Bold-face supplied by JAT.) I wonder whether the data set from which the 88% figure derives includes garden-variety tax crimes. My question is whether garden-variety tax crimes would generate such a high number of third-party BSA reports. Or, maybe the 12% remainder accounts for most of the garden-variety tax crimes.

A similar report came out last year. BSA data serves key role in investigating financial crimes, here (1/18/23, last reviewed or updated 11/9/23, and viewed 4/6/24),. That report showed an 83% figure over the past 3 years. The FY23 report mentioned above was at 88% but only related to a single year.

TIGTA Report on IRS Compliance Activity Bank Secrecy Act Delegated Authority Other than For FBARs (9/29/18)

TIGTA has issued a report titled "The Internal Revenue Service’s Bank Secrecy Act Program Has Minimal Impact on Compliance (Ref. Num. 2018-30-071 9/24/18), here.  Although included in the report, the highlights page is here.

The report note (p. 2) that the IRS has delegated authority over the following areas (emphasis supplied by JAT):

1) Enforce the criminal provisions of the BSA as provided in 31 C.F.R. § 1010.810(c)(2). 

2) Examine certain nonbank financial institutions to determine compliance as set forth under Title 31 BSA requirements in December 1992; however, the FinCEN retains the final authority to impose civil penalties.n3
   n3 Originally delegated under Department of the Treasury Directive 15-41, December 1, 1992, and as authorized under 31 C.F.R. § 1010.810(b)(8). This regulation authorizes the IRS to conduct most of its Title 31 BSA examinations, such as those with respect to nonbank financial institutions. It does not authorize the IRS to investigate Report of Foreign Bank and Financial Accounts violations; that authority is found in 31 C.F.R. § 1010.810(g). Also, final authority to assess civil penalties is delegated to the FinCEN per 31 C.F.R. § 1010.810. 

3) Examine and impose civil penalties for the Report of Foreign Bank and Financial
Accounts in April 2003.n4 (TIGTA’s review does not include a review of the Report of Foreign Bank and Financial Accounts program).
   n4 Memorandum of Agreement and Delegation of Authority for Enforcement of FBAR Requirements, April 2, 2003; and as authorized under 31 C.F.R. § 1010.810(g)

Accordingly, per 3), the report does not deal with the IRS's FBAR enforcement which has figured so prominently in this blog.  The report does cover other authorities related to tax crimes.

I cut and paste the highlights page:

Highlights

THE INTERNAL REVENUE SERVICE’S BANK SECRECY ACT PROGRAM HAS MINIMAL IMPACT ON COMPLIANCE 

Final Report issued on September 24, 2018 

Highlights of Reference Number:  2018-30-071 to the Commissioner of Internal Revenue. 

IMPACT ON TAXPAYERS 

The Currency and Foreign Transactions Reporting Act of 1970 requires U.S. financial institutions to assist U.S. Government agencies in detecting and preventing money laundering and to assist U.S. persons in reporting foreign bank and financial accounts.  The law has been amended several times and is now known as the Bank Secrecy Act (BSA).  The IRS received delegated authority to enforce the BSA’s criminal provisions and examine certain nonbank financial institutions.  The IRS also has authority to examine trades and businesses for compliance with Form 8300, Report of Cash Payments Over $10,000 Received in a Trade or Business, under Internal Revenue Code Title 26 and 31 and authority to assess penalties under Title 26.  However, the Financial Crimes Enforcement Network (FinCEN) retains the final authority to impose Internal Revenue Code Title 31 civil penalties. 

WHY TIGTA DID THE AUDIT 

This audit was initiated to evaluate the impact of the IRS’s compliance efforts related to its delegated authority under the BSA. 

WHAT TIGTA FOUND 

The IRS Small Business/Self-Employed Division conducts BSA compliance activities through its Specialty Examination function, which has a dedicated BSA Program.  TIGTA reviewed a statistically valid random sample of 140 compliance cases from a population of 24,212 closed cases worked by the BSA Program for Fiscal Years 2014 through 2016 and found that 105 (75 percent) were closed with 383 Title 31 violations in which the respective business only received a letter citing the violations found.  For the same fiscal year period, TIGTA found that 1) referrals to the FinCEN of Title 31 penalty cases go through lengthy delays and have little impact on BSA compliance; 2) the BSA Program spent about $97 million to assess approximately $39 million in penalties; and 3) while referrals were made to IRS Criminal Investigation, most of the investigations were declined and less than half of the cases were accepted. 

Additionally, a September 2016 TIGTA report addressed the need for the IRS to incorporate BSA Program personnel in developing its virtual currency strategy; however, the IRS has still not effectively used the BSA Program in this area.  TIGTA also found that until June 2017, the BSA Program did not require Publication 1, Your Rights as a Taxpayer, as a required enclosure to notify taxpayers of their rights when initiating a Form 8300, Title 26 examination, and some examiners still are unaware of the change that requires taxpayers to be notified of their rights. 

WHAT TIGTA RECOMMENDED 

TIGTA recommended that the IRS: 1) coordinate with the FinCEN on the authority to assert Title 31 penalties or reprioritize resources to more productive work; 2) leverage the BSA Program’s Title 31 authority and annual examination planning in the development of the IRS’s virtual currency strategy; 3) notify examiners of new appointment letter enclosures that includes Publication 1; 4)  evaluate the effectiveness of the newly implemented review procedures for FinCEN referrals; and 5) improve the process for referrals to IRS Criminal Investigation.  The IRS agreed with four of the five recommendations.  The IRS will incorporate its virtual currency strategy into its Title 31 compliance efforts; provide BSA examiners guidance on appointment letter enclosures; review and improve the FinCEN referral process; and review the BSA criminal referral criteria to maximize efficiency and enhance BSA referrals to Criminal Investigation.  However, the IRS disagreed with pursuing Title 31 penalty authority stating it was outside its purview and that the FinCEN intends to retain this authority.

Supreme Court Passes On Exessive Fines Issue with Regard to Restitution in a NonTax Case (4/24/14)

In Paroline v. United States, 2014 U.S. LEXIS 2936 (U.S. Apr. 23, 2014), here, the Court held (from Scotus Blog here):

Each individual — among hundreds and maybe thousands — found guilty of keeping and looking at images of a child being sexually abused must pay the victim something more than a “trivial” sum, but none of them can be required to pay for all that the victim has lost, the Supreme Court ruled Wednesday in a five-to-four decision.

Essentially, the Court read the statute to require proof of proximate cause -- a legal nexus concept applicable in other areas of the law -- to link the offense committed to the harm for which damages are awarded as restitution.  So a single offender, Paroline, may have caused the victim damage but not all of the damage caused by other independent possessors and viewers.

Paroline has no practical immediate applicability to the subject of federal tax crimes.  But, the Court did have some general statements about restitution and the possible application of the Excessive Fines Clause.

The reality is that the victim’s suggested approach would amount to holding each possessor of her images liable for the conduct of thousands of other independently acting possessors and distributors, with no legal or practical avenue for seeking contribution. That approach is so severe it might raise questions under the Excessive Fines Clause of the Eighth Amendment. To be sure, this Court has said that “the Excessive Fines Clause was intended to limit only those fines directly imposed by, and payable to, the government.” Browning-Ferris Industries of Vt., Inc. v. Kelco Disposal, Inc., 492 U. S. 257, 268 (1989). But while restitution under §2259 is paid to a victim, it is imposed by the Government “at the culmination of a criminal proceeding and requires conviction of an underlying” crime, United States v. Bajakajian, 524 U. S. 321, 328 (1998). Thus, despite the differences between restitution and a traditional fine, restitution still implicates “the prosecutorial powers of government,” Browning-Ferris, supra, at 275. The primary goal of restitution is remedial or compensatory, cf. Bajakajian, supra, at 329, but it also serves punitive purposes, see Pasquantino v. United States, 544 U. S. 349, 365 (2005) (“The purpose of awarding restitution” under 18 U. S. C. §3663A “is . . . to mete out appropriate criminal punishment”); Kelly, 479 U. S., at 49, n. 10.  That may be “sufficient to bring [it] within the purview of the Excessive Fines Clause,” Bajakajian, supra, at 329, n. 4. And there is a real question whether holding a single possessor liable for millions of dollars in losses collectively caused by thousands of independent actors might be excessive and disproportionate in these circumstances. These concerns offer further reason not to interpret the statute the way the victim suggests.

Article on Tax Crimes Subjects at Seminar (11/6/12)

Tax Notes Today reports on offshore account issues and other criminal tax issues discussed at the California Tax Bar and California Policy Conference, here.  Jeremiah Coder, CI Division Monitoring Voluntary Disclosures to Ensure Follow-Through, 2012 TNT 215-1 (11/6/12).  I do not have a link to the article or permission to post  it, but summarize key points:

1.  An IRS representative said that

CI checks to ensure that taxpayers who undergo a pre-clearance check for acceptance into the voluntary disclosure programs follow through with disclosure. "Those [taxpayers] are suspect, and we are looking at those who decided not to continue to come through. Will it be Criminal Investigation? I don't know; it could be a civil audit,"

2.  The IRS representative also \

warned that taxpayers who make only partial disclosures or don't supply all the information about their offshore activity to the IRS will face severe consequences. "When [the taxpayer] is not truthful, yes, CI will come back in," and the taxpayer may be criminally liable, she said, adding that the same is true if badges of fraud or lies are uncovered during an examination.

Fifth Circuit Falls in Line and Holds Required Records Trumps Fifth Amendment in Offshore Bank Case (9/22/12)

In In Re: Grand Jury Subpoena, ___ F.3d ___, ____ U.S. App. LEXIS ___ (5th Cir. 2012), here, the Fifth Circuit held that the Required Records Doctrine required the witness to produce the subpoenaed foreign account records required by the Bank Secrecy Act and implementing regulations for FBARs.  This is the third case in the Courts of Appeals and all have reached the same conclusion.  See In re M.H., 648 F.3d 1067, 1079 (9th Cir. 2011); In re Special Feb. 2011-1 Grand Jury Subpoena Dated Sept. 12, 2011, No. 11-3799, 2012 WL 3644842, at *5-6 (7th Cir. Aug. 27, 2012).  I have blogged on those prior cases:  Seventh Circuit Compels Production of Offshore Bank Under the Required Records Doctrine (8/27/12), here; and 9th Circuit Applies Required Records Doctrine to Defeat 5th Amendment Claim for FBAR Recordkeeping (8/19/11), here.  Here are the key excerpts in the analysis:

In Grosso, the Supreme Court identified three “premises” of the Required Records Doctrine: “[F]irst, the purposes of the United States’ inquiry must be essentially regulatory; second, information is to be obtained by requiring the preservation of records of a kind which the regulated party has customarily kept;  [*7]  and third, the records themselves must have assumed ‘public aspects’ which render them at least analogous to public documents.” 390 U.S. at 67-68.   [The court later refers to these premises as prongs.] 

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IRS Internal Procedure Document Discusses BSA Record (includingi FBAR) Access for Other Agencies (8/29/12)

In PMTA 2012-015 (5/9/12), here, the IRS discusses into the inner workings for access to BSA records (including FBARs), addressing specifically a change in procedure for requesting FBAR records.  Here are key points:

1.  "FinCEN owns and controls documents required to be filed pursuant to the Bank Secrecy Act (BSA), 31 U.S.C. § 5311 et. seq., including, but not limited to, currency transaction reports, casino transaction reports, registration of money services business, foreign bank account reports, suspicious activity reports, and, if filed after January 1, 2002, reports of over $10,000 received in a trade or business."

2.  As of 1/3/12, FinCEN now is the agency to which requests for FBAR records must be made.  The IRS no longer processes such requests.

3.  The consequence of that "fact" is that the FBAR records are not IRS records and thus not "return information" subject to Section 6103's secrecy / confidentiality requirements until and unless they are use in an IRS investigation.

If a copy of a BSA record is obtained by the IRS in the course of administering the internal revenue laws, then it becomes an IRS record, as well as return information subject to I.R.C. § 6103. As such, the IRS can certify the authenticity of such a record as a genuine copy of a record received from FinCEN. In order to obtain from the IRS a certified copy of a BSA record that has become part of a tax investigation file, and therefore subject to the confidentiality rule of I.R.C. § 6103, U.S. Attorneys must follow the procedures for obtaining an ex parte order pursuant to I.R.C. § 6103(i), if the record will be used in a nontax criminal investigation or proceeding. See I.R.C. § 6103(i)(1)(B).