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.

Selected Items from ABA Tax Section Civil and Criminal Penalties Session (5/9/16; 5/10/16)

On 5/10/16, I added item 7 regarding whether, in Streamlined, the IRS might require adjustments for earlier years where the statute of limitations might otherwise be open.

I attended the ABA Tax Section May Meeting this past week.  My favorite session at these meetings is the Civil and Criminal Tax Penalties Meeting on Saturday.  I cover here the highlights from my perspective, but do not cover those items that I have previously covered in earlier blog entries:

1. Panama Papers.  Not much new was provided regarding the Panama Papers Disclosures.  See my  posting from last Friday, Articles on ICIJ's Panama Papers and Ramifications (Federal Tax Crimes Blog 5/6/16), here.  I expect to offer soon more on the President's and related initiatives announced.

2. Luis v. United States, No. 14-419, 578 U.S. ____, 130 S. Ct. 1083, 2016 U.S. LEXIS 2272 (March 30, 2016), here.  The Supreme Court held that untainted assets -- assets not obtained from the alleged illegal conduct -- could not be forfeited or restrained in violation of the owner's Sixth Amendment  right to retain counsel.  Prior cases permitted forfeiture or restraint of tainted funds.  See Kaley v. United States, 571 U.S. ___, 134 S. Ct. 1090 (2014), Caplin & Drysdale, Chartered v. United States, 491 U.S. 617, (1989), and United States v. Monsanto, 491 U.S. 600, (1989).  The Government wanted to preserve the untainted funds for payment of restitution and penalties.  The Court adopted a balancing of interest approach rather than a clear rule.

3. Anecdotal evidence indicates that the IRS may be focusing on attorney Form 8300 compliance.  Form 8300 if a joint IRS and FinCEN form to report cash payments over $10,000 received in a trade or business.  Exams are focusing on aggregation issues, correct and timely filing of Form 8300, and timely notice to the payor of the currency.

4. The key recent inclusion in the Domestic Voluntary Disclosure Program is the requirement for preclearance, a procedure clearly inspired by preclearance in OVDP.  If the preclearance clears (meaning the IRS has no disqualifying indication), the IRS sends for completion a 10 question "intake" letter.  Rather than focusing on others involved as the OVDP intake letter does, the Domestic Voluntary Disclosures intake letter focuses on the actions of the taxpayer.  Assuming the intake responses clear, the taxpayer will be directed to send amended or delinquent returns to an IRS office in Massachusetts.  It is reported that the IRS has been reasonable in the number of years of amended or delinquent returns required.  It is not clear where "quiet disclosures" fit in the new scheme, but presumably the formal program with preclearance and intake letters would be appropriate only for the "nonwillful." (JAT conclusion)  I will try to do a blog entry on the state of domestic voluntary disclosures this week.

5. There was discussion of potential criminal prosecution of false Streamlined Certification.  It was generally agreed that a streamlined certification (Foreign or Domestic) which has a robust narrative of the material good and bad facts should not generate a criminal action for false certification even if the IRS disagrees with the taxpayer's conclusion that those facts support nonwillfulness.  Where, however, the taxpayer fails to properly and fairly disclose the material facts-- good and bad -- the taxpayer may be at risk of prosecution.  I suppose the one caveat would be where the facts fully and fairly disclosed do not in any reasonable way support nonwillfulness, there might be prosecution or some other untoward response.

6. With regard to Streamlined Voluntary Disclosures, there was some noise that the IRS will be deploying incoming information from other sources to ensure that the Streamlined Voluntary Disclosures are complete.  If the amended returns and FBARs submitted in the Streamlined Voluntary Disclosure process are not reasonably complete, the taxpayer will be at considerable risk to explain why.

7. One key discussion at the meeting involved whether the Streamlined Program which requires three years of amended returns (and in the case of SFOP, delinquent returns) and 6 years of FBARs effectively closes out exposure for earlier years.  Years other than the latest three years for which amended returns are required could be open for a couple of reasons.  Since the predicate for Streamlined qualification is that the taxpayer acted nonwillfully (same as civil fraud), I assume that the earlier years are not open under the fraud exception that keeps the statute open forever.  So, absent fraud, why would earlier years be open, keeping in mind that the general statute is three years and the taxpayer is delivering 3 years of amended or delinquent returns?  First, all years in which the taxpayer failed to file a return could be open.  For example, if the taxpayer moved overseas 10 years ago for legitimate reasons but failed to file returns after the move, all of those years would otherwise be open.  Second, for those taxpayers filing returns (and assuming no fraud), the statute could be open for 6 years rather than the normal three years for two years -- a 25% income omission or a $5,000+ income omission for Form 8938 assets.  So, the question was whether, as to any year before the covered three years in the Streamlined program that might otherwise be open, is there any assurance that the IRS will not require adjustments for those years?  The Streamlined programs textually offer no such assurance, but most practitioners have assumed that, given its design and the way voluntary disclosure programs have worked in the past, earlier years would not be subject to adjustment.  John McDougal, an IRS attorney who has been a major player in the IRS's offshore initiatives since the inception, said that, while he could only speak for himself and not the IRS (the standard disclaimer), he thinks there is practical assurance because that is the design of the program and seems to be implicit.  He said that, should the IRS choose to go after earlier years, that action would impede the effectiveness of the program that encourages people to get back into the system to the extent they have not in the past.  Fewer people would join the program, and the IRS will have shot itself in the foot.  While Mr. McDougal is a lone voice not speaking for the IRS, he is an authoritative voice whose comments need to be considered by taxpayers and practitioners.

IRS and FinCEN Form 8300 and Geographic Targeting Order (11/2/14)

Recently, FinCEN issued a Geographic Targeting Order, here, imposing additional reporting and recordkeeping requirements on a relatively small (but apparently financially active) area of Los Angeles, California.  The order and the cover communication for the order is here.  Key excerpts of the order are:

GEOGRAPHIC TARGETING ORDER 

The Director, Financial Crimes Enforcement Network (FinCEN), U.S. Department of the Treasury, is authorized to issue an order that imposes certain additional reporting and recordkeeping requirements on one or more domestic financial institutions or nonfinancial trades or businesses in a geographic area to carry out the purposes of and prevent evasions of the Bank Secrecy Act. See 31 U.S.C. § 5326(a); 31 C.F.R. § 1010.370; Treasury Order 180-01,  

IT IS HEREBY FOUND that reasonable grounds exist tor concluding that the imposition of the additional reeordkeeping and reporting requirements described in this Geographic Targeting Order ("Order") upon the Covered Businesses described below is necessary to carry out the purposes of and prevent evasions of the Bank Secrecy Act. See 31 U.S.C. § 5326(a); 31 C.F.R. § 1010.370. 

THEREFORE, IT IS ORDERED THAT: 

Part 1 - Definitions. 

** * * 

1.2 ''Covered Business" means the following trades and businesses located in the Covered Geographic Area, including their agents, subsidiaries, and franchisees:
(a) garment and textile stores;
(b) transportation companies;
(c) travel agencies;
(d) perfume stores;
(e) electronic stores (including those that only sell cell phones):
(I) shoe stores;
(g) lingerie stores;
(h) flower/silk flower stores;
(i) beauty supply stores; and
(j) stores bearing "Import" or "Export" in its name. 

1.3 "Covered Geographic Area" means the area in the City of Los Angeles, California, south of East 8th Street, north of East 16th Street, and between Santee Street and South Central Avenue. 

1.4 "Currency" shall have the same meaning as provided in 31 C.F.R. § I 0 I 0.330(c)(I). 

* * * * 

1.10 "Order Period" means the 180-day period beginning, October 9, 2014 and ending the close of business on April 6, 2015. 

Part 2- Special Reporting, Recordkeeping, nnd Customer Identitification Obligations of the Covered Businesses. 

2.1 A. Covered Business which, in the course of a trade or business in which such business is engaged, receives currency in excess of $3,000 in 1 Transaction (or 2 or more related Transactions in a 24-hour period) shall make a report of each such Transaction or Transactions by filing a FinCEN Form 8300. Each such FinCEN Form 8300 must be:
(a) completed in accordance with the terms of this Order and the FinCEN Form 8300 instructions (when such terms conflict, the terms of this Order shall apply): and
(b) e-filed through the Bank Secrecy Act E-filing system. 

* * * * 

2.3 It shall be unlawful for the Covered Business to process, accept, or receive funds for, or otherwise participate in a Transaction that is the subject of this Order unless the Customer conducting the Transaction provides an officer, director, employee, or agent of the Covered Business with identification in one of the following forms:
(a) a driver's license or an identification card issued by a State of the United States, the District of Columbia, or a Territory or Possession of the United States;
(b) a military or military dependent identification card;
(c) a non-resident alien registration card:
(d) a foreign national identity card:
(e) a passport n2/ or
(f) a combination of other unexpired documents, with an individual's name and address, and a photograph.
   n2 Because a passport does not contain an individual's permanent address, when a Customer provides a passport as form of identification, a Covered Business would need to review additional identification that specifies the Customer's address. 

Rettig Article on CTR Form 8300 and Its Context in Tax and Criminal Law Enforcement (3/11/13)

In my Federal Tax Procedure Book, I devote a short section to Form 8300, Report of Cash Payments Over $10,000 Received in a Trade or Business, often referred to as a Currency Transaction Report or "CTR."  The Form is here.  The short discussion is adequate for the book that must cover so much other ground.  However, there is a lot of detail behind the summary.  Fortunately, Chuck Rettig, a prominent practitioner, provides that detail in a recent article, Form 8300: Reporting Domestic Currency Transactions (J. Tax Prac. & Proc. December 2012-January 2013).  His article is posted on his website and may be linked here.  In addition to developing the nuances relating to the CTR, Chuck's article places in the CTR in the universe of federal reporting requirements and enforcement initiatives relating to money laundering activities.  To be sure, the Form 8300 is in the Internal Revenue Code and plays a prominent role in tax enforcement.  But it also plays a more prominent role in detecting money laundering and the crimes behind money laundering.

I strongly recommend Chuck's article to the readers of this blog interested in the Form 8300 and its criminal enforcement context.

I offer the following which is my summary description of the Form from my Tax Procedure Book (footnotes omitted).

(2) Currency Transaction Reports (“CTRs”).

There are still other return reporting requirements that are designed to identify income of types that might easily escape the tax system or that might evidence nontax illegal conduct.  The broadest example is § 6050I which requires that persons involved in a trade or business who receive cash payments in excess of $10,000 in one transaction (or more than one transaction, if the transactions are related) to report the receipt to the IRS.  The report is made by Form 8300 (sometimes referred to as a currency transaction report or “CTR”), which in its latest iteration is called both IRS Form 8300 and FinCEN Form 8300.  This means that the information is available to each of those agencies and may be used for congressionally approved purposes, most specifically federal law enforcement (not just tax law enforcement).  FinCEN is the acronym for the Government’s Financial Crimes Enforcement Network which gathers information useful in investigating and prosecuting financial crimes.  As most pertinent to this class, of course, the information is available to the IRS for both civil and criminal tax purposes.  But, ultimately, the information may be most useful for money laundering enforcement in which the IRS is a principal investigative and information source.