IRS bank secrecy program has little impact on tax compliance

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The Internal Revenue Service’s Bank Secrecy Act program, in which it is supposed to safeguard against money laundering, is having only a minimal impact on tax compliance, according to a new report.

The report, from the Treasury Inspector General for Tax Administration, noted that the Currency and Foreign Transactions Reporting Act of 1970 requires U.S. financial institutions to help federal government agencies detect and prevent money laundering and to help people report foreign bank and financial accounts. The law has been amended numerous times and is now known as the Bank Secrecy Act, or BSA. The IRS has been delegated the authority to enforce the BSA’s criminal provisions and examine some nonbank financial institutions. The IRS also has the authority to examine trades and businesses for compliance with Form 8300, Report of Cash Payments Over $10,000 Received in a Trade or Business, as well as the authority to assess penalties under Title 26. However, the Financial Crimes Enforcement Network, or FinCEN, has the final authority to impose civil penalties under Title 31.

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 referrals to FinCEN of Title 31 penalty cases go through lengthy delays and have little impact on BSA compliance; the BSA Program spent about $97 million to assess approximately $39 million in penalties. While referrals were made to the IRS’s Criminal Investigation unit, most of the investigations were declined, while less than half of the cases were accepted.

An earlier TIGTA report from September 2016 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.

TIGTA recommended that the IRS coordinate with FinCEN on the authority to assert Title 31 penalties or reprioritize resources to more productive work. The report also suggested the IRS leverage the BSA Program’s Title 31 authority and annual examination planning in the development of the IRS’s virtual currency strategy. The IRS should also notify examiners of new appointment letter enclosures that includes Publication 1, TIGTA recommended. It should also evaluate the effectiveness of the newly implemented review procedures for FinCEN referrals, and improve the process for referrals to IRS Criminal Investigation.

The IRS agreed with four of TIGTA’s 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 FinCEN intends to retain this authority.

“We do not agree with your assertion that our BSA program has minimal impact on compliance,” wrote Mary Beth Murphy, commissioner of the IRS’s Small Business/Self-Employed Division, in response to the report. “Our BSA Program is a crucial and significant component of the United States’ and international anti-money laundering strategies. Although we do not have statutory, regulatory or delegated authority to assert penalties against NBFIs [non-bank financial institutions] for Title 31 violations, our examiners provide an important BSA enforcement presence, performing NBFI transactional analyses, ensuring NBFI are registered, and evaluating entities’ compliance programs to determine if there are weaknesses or violations.”

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Tax fraud Money laundering AML IRS TIGTA