STRUCTURING

Monday, January 19th, 2015

Structuring is the act of breaking up financial transactions to get around the federal reporting requirements that kick in for transactions over a specific amount of money. These federal reporting requirements require banks to report any deposits, withdrawals, or transfers of more than $10,000. These reporting requirements were first created by the Bank Secrecy Act (the “Act”), enacted in 1970, and its amendments; but have not seen broad enforcement until recent years. Today, structuring is one of the most commonly reported suspected crimes.

Background

The Act was originally intended to make it easier for the government to track tax cheats, money launderers, illegal gambling operations and other criminal enterprises. Indeed, unless currency is smuggled out of the United States or commingled with the deposits of an otherwise legitimate business, any money laundering scheme that begins with a need to convert the currency proceeds of criminal activity into more legitimate-looking forms of financial instruments, accounts, or investments will likely involve some form of structuring.

Bank Reporting Required By The Act

Banks must also report any suspicious activity of its customers or any customer activity that might be construed as manipulating deposits or withdrawals to avoid these reporting requirements. Banks are prohibited from letting their customers know that they have made a report to the government. Bank employees are aware of and alert to structuring schemes. Banks and their employees risk financial sanctions if they fail to sufficiently police their customers or if they notify customers that they’ve been reported for suspicious deposits. Bank employees found to have neglected their duties to report suspicious customer behavior can also be criminally charged and sent to prison. Banks and their employees have quite a bit of incentive to cast a wide net around what constitutes “suspicious activity” with virtually no risk of losing customers due to a policy of over-reporting “suspicious activity” to the government.

Applicable Statute, Regulations and Caselaw

Under the Act, codified at 31 U.S.C. § 5324, et. seq., no person shall, for the purpose of evading the Currency Transaction Report (“CTR”), a geographic targeting order reporting requirement, or certain other of the Act’s recordkeeping requirements: (1) cause or attempt to cause a bank to fail to file a CTR…, (2) cause or attempt to cause a bank to file a CTR…that contains a material omission or misstatement of fact or (3) structure, attempt to structure or assist in structuring, any transaction with one or more banks. The definition of structuring, set forth in 31 C.F.R § 103.11(gg), states, “a person structures a transaction if that person, acting alone, or in conjunction with, or on behalf of, other persons, conducts or attempts to conduct one or more transactions in currency in any amount, at one or more financial institutions, on one or more days, in any manner, for the purpose of evading the [CTR filing requirements].” The term “in any manner” includes, but is not limited to, breaking down a single currency sum exceeding $10,000 into smaller amounts that may be conducted as a series of transactions at or less than $10,000.

In the mid-1990s, the United States Supreme Court addressed concern that the enforcement of the criminal sanctions, related to the crime of structuring which required willful intent, could result in conviction of morally blameless people. The Court interpreted the word “willfully” to mean that the defendant knew that structuring was illegal. Notwithstanding the concern expressed by the Supreme Court, within ten months, Congress deleted the term “willfully”” from the statute. Now, the government need only show that a defendant knows about the $10,000 reporting requirement and makes deposits of currency less than that amount in order to avoid it.

Examples of Structuring Transactions

Many ways to structure large amounts of currency to evade the CTR filing requirements have been developed over the years, for example:

A customer may (1) structure currency deposit or withdrawal transactions, so that each transaction is less than the $10,000 CTR filing threshold; (2) use currency to purchase official bank checks, money orders, or traveler’s checks with currency in amounts less than $10,000 (and possibly in amounts less than the $3,000 recordkeeping threshold for the currency purchase of monetary instruments to avoid having to produce identification in the process); or (3) exchange small bank notes for large ones in amounts less than $10,000.
These transactions need not exceed the $10,000 CTR filing threshold at any one bank on any single day in order to constitute structuring. So, if you have $100,000 to deposit in your bank account, and you deliberately choose to deposit that money in increments of $9,999 so your bank won’t automatically notify the federal government, you’re guilty of structuring. It’s a felony punishable by a fine and/or up to five years in prison.

In addition, structuring may occur before a customer brings the funds to a bank. In these instances, a bank may be able to identify the aftermath of structuring. Deposits of monetary instruments that may have been purchased elsewhere might be structured to evade the CTR filing requirements or the recordkeeping requirements for the currency purchase of monetary instruments. These instruments are often numbered sequentially in groups totaling less than $10,000 or $3,000; bear the same handwriting (for the most part) and often the same small mark, stamp, or initials; or appear to have been purchased at numerous places on the same or different days.
However, two transactions slightly under the $10,000 threshold conducted days or weeks apart may not necessarily be structuring. For example, if a customer deposits $9,900 in currency on Monday and deposits $9,900 in currency on Wednesday, it should not be assumed that structuring has occurred. Instead, further review and research may be necessary to determine the nature of the transactions, prior account history, and other relevant customer information to assess whether the activity is suspicious. Even if structuring has not occurred, the bank should review the transactions for suspicious activity.

Potential Civil and Criminal Liability

Structuring transactions to evade reporting required by the Act and certain of its recordkeeping requirements can result in civil and criminal penalties.

Civil Penalties

Greater emphasis on enforcing the anti-structuring statute has resulted in a rise in money seizures, civil-forfeiture cases, penalty assessments and criminal charges against small businesses and the people who own them. Typical targets handle a lot of cash, such as, gas stations, liquor stores, grocery stores, convenience stores, and used-car dealerships. The problem, of course, is that when banks are forced to cast such a wide net, they are going to report a lot of people who have done nothing wrong, but become targets nonetheless; those morally blameless people whose circumstance worried the Supreme Court. And some of those people are going to find themselves in legal trouble. The government may, without notice, seize everything in the account(s) at issue. This can lead to financial ruin for business owners. Targets may be forced to agree to a civil-forfeiture settlement agreement so no criminal charges are filed or to ensure return of at least some of the seized money. Always important, but particularly so here, where the target wishes to recover seized funds, a condition precedent to release of the funds, is complete disclosure to the IRS of the client’s financial affairs.

Criminal Penalties

Some of those reported for engaging in “suspicious activity” may be targeted for structuring prosecution. Historically, the criminal charge of structuring has been used as an ancillary charge in criminal prosecutions of drug dealing, money laundering, illegal gambling, terrorism, and the like. It continues to serve this purpose. After all, it is a technical violation of a criminal regulatory statute for which the only “criminal act” is making frequent deposits of under $10,000.

Over the last few years, however, prosecutorial interest in structuring has taken new focus. Structuring is becoming a favored standalone charge. Many defense counsel do not recognize this shift, to detecting evasion of CTR requirements, from formerly using the massive amounts of data collected under the Act to discover the transfer of large sums of money. Several reasons for this shift are of interest. The elements of the crime structuring are fairly easy to prove. The evidence resides within this country, within the possession and control of the financial system or already within the possession of the government. Few defenses are available to the accused, and, those that may be available to the accused are somewhat complex to develop and present. Finally, one of the more relevant reasons is the elimination of “willfully” as an element of the crime structuring.

A defendant can be prosecuted for structuring, without being aware that it is illegal, without trying to cover up an underlying crime or criminal activity, or without running any kind of illegitimate business. It does not matter if the cash was received or earned legitimately. It does not matter that the cash was dutifully reported at tax time. It does not matter that every penny of tax due required under the law was timely paid. If the defendant knew about the reporting requirement and deliberately deposited less than $10,000 in order to avoid it, he or she is guilty of a federal felony. Under the asset forfeiture statutes, the government can seize everything in the account. There is a potential for abuse by the government. Some suggest the emphasis is basically seizing money.

Epilog

The government has been known to eventually back off, but usually only after the services of an attorney have been retained. Our practice is to fully evaluate each client’s unique circumstances so that we can give our client a complete risk assessment. As previously mentioned, this is particularly important where the IRS requires complete disclosure of the client’s financial affairs as a condition precedent to recover seized funds.

Offshore Tax Enforcement

Monday, January 19th, 2015

The IRS continues aggressive enforcement of civil and criminal penalties for failure to disclose foreign bank accounts. U.S. taxpayers, with previously undisclosed interests in foreign bank and other financial accounts, continue to seek advice regarding the most appropriate methods of coming into compliance with their U.S. filing and reporting obligations.

Today, simultaneous voluntary disclosure programs exist for account holders of foreign bank accounts and for the banks that “sponsor” the accounts. While voluntary disclosure for account holders has been relatively favorable for several years, the benefits have steadily diminished. The risks of dire consequences to non-disclosing foreign bank account holders have steadily risen, particularly with respect to the prospects of criminal prosecution.
With respect to the banks themselves, more than 77,000 banks, located in a number of countries, including France, Germany, United Kingdom, Mexico, Ireland, Russia, Switzerland, Israel and India, have agreed to disclose the identities of U.S account holders. The success of this program for the banks may well foreclose the availability of voluntary disclose for account holders. To the extent the IRS learns of an undisclosed foreign account from the sponsoring bank, voluntary disclosure likely will no longer be available to the account holder.

IRS Enforcement Initiatives

Disclosure of foreign bank accounts is required by the Bank Secrecy Act of 1970, codified in Title 31 of the United States Code. Taxpayers comply with this law by noting the existence of the account on their income tax return and by filing, every June 30th, the Report of Foreign Bank and Financial Accounts (“FBAR”) for each financial account in a foreign country with a value exceeding $10,000 at any time during the calendar year.
Based on a perceived degree of noncompliance, the IRS began, in the mid-2000s, to focus on the lack of disclosure of foreign bank accounts. The IRS centered this offshore work on people hiding illegal source income or money not exposed to tax in overseas accounts. Typically, the mere fact that a person checked the wrong box, or no box, on a Form 1040, is not sufficient, by itself, to establish that an FBAR violation was attributable to willfulness. What usually happens is that the IRS, on audit or investigation, finds some evidence of skimming and evidence of correspondence with an offshore bank. This is viewed as evidence of intent to commit an FBAR violation with respect to a foreign account even if the individual didn’t know what was in account.
In 2008, a UBS bank official, involved with U.S. customers engaged in illegal offshore activity, was caught in Florida. Based on the disclosures made by this bank official, the IRS, for the first time, had proof that banks were complicit with illegal offshore activity.

Offshore Voluntary Disclosure Programs

As a result of UBS, in 2009, the IRS initiated the first of three Offshore Voluntary Disclosure Programs (“OVDP”), similar to the longstanding IRS voluntary disclosure program. Among other requirements, under the 2009 OVDP, the FBAR-related penalty was 20 percent of the highest balance in the prior six years. The 2009 program had a life of six months; that was extended for three additional months.

In 2011, the IRS offered a second voluntary disclosure program. Under the 2011 OVDP the FBAR-related penalty was 25 percent of the highest account value during the prior six tax years. This program was in effect for less than a year. An on-going OVDP was initiated in 2012. The program has been modified yet again in August, 2014.
The 2012 OVDP generally requires that taxpayers must extend the audit and collection statute of limitations for the past 8 years (beyond all legal statute of limitations, but must be waived by individuals in the program), agree to file amended returns and file FBARs for eight tax years, pay the appropriate taxes and interest together with an accuracy related penalty equivalent to 20 percent of any income tax deficiency and an “FBAR-related” penalty (in lieu of all other potentially applicable penalties associated with a foreign financial account or entity) of 27.5 percent of the highest account value that existed at any time during the prior eight tax years. Like the previous programs, the benefits of voluntary disclosure only inure to the foreign account holder when disclosure occurs prior to any contact by the IRS. The 2012 OVDP is ongoing and does not have a stated expiration date but it can be terminated by the IRS at any time either entirely or as to specific classes of taxpayers. Accounts with small dollar balances can be subject to lesser penalties.

Foreign Account Tax Compliance Act

In 2010, Congress enacted Foreign Account Tax Compliance Act (“FATCA”), which, among other provisions, imposes considerable penalties on foreign banks that, by June 30, 2014 now extended, do not disclose the names of the account holders of heretofore secret bank accounts. FACTA requires U.S. financial institutions to impose a 30% withholding tax on payments made to foreign banks and other financial entities that do not agree to identify and provide information on U.S. account holders.

In February, 2014, the Canadian government announced that it had signed an intergovernmental agreement with the U.S. regarding FACTA. In April, India agreed in substance to sign a FACTA agreement. Upon approval, Indian financial institutions (banks, insurance companies and mutual funds) must carry out a detailed due diligence on all clients which includes persons from the U.S. who have invested in India and report the details of all offshore accounts and assets to Indian government agencies who, in turn, will provide to the IRS access to this data. Specifically included as a “person” for this purpose are citizens of the U.S. (including an individual born in the U.S., resident of another country, but has not renounced U.S. citizenship); lawful residents of the U.S. (U.S. green card holders); persons residing in the U.S.; persons spending a considerable portion of time in the U.S. on a yearly basis; and American corporations, trusts and estates may also be a U.S. person for FACTA purposes.
The U.S. has signed similar agreements with France, Germany, United Kingdom, Mexico, Ireland and Switzerland. The Caribbean Community and the Chilean Association of Banks and Financial Institutions have sent requests to be included in FACTA discussions. Financial institutions in Israel and India continue to be a focal point for the IRS. More than 70 countries have entered into FACTA agreements with the United States. Foreign Financial Institutions (“FFI”) in these countries do not need to enter into separate agreements with the U.S., but must register on the IRS FACTA Registration Portal or file IRS Form 8957.

FFIs in countries which have not entered into an Intergovernmental Agreement with the U.S. may enter into their own FFI Agreements. Since individual FFIs may be subject to fines and/or prosecution for their own actions or for being complicit in a U.S. person’s tax evasion, an FFI Agreement permits the FFIs not engaged in criminal conduct or deemed to be “compliant” under U.S. tax rules to receive a non-target letter and not face fines. FFIs who sign their own FFI Agreement and who have reasonable belief that they have committed U.S. tax offences, become eligible to receive a non-prosecution letter if they come clean and pay fines.

The disclosure by foreign banks of accounts and their holders, soon to be precipitated by FATCA penalties; likely will, as a practical matter, curtail the availability of benefits under the current voluntary disclosure program for foreign bank account owners. The DOJ view is that FACTA disclosure forecloses the availability of OVDP to the FACTA “disclosed” account holder.

Compliance and Civil Penalties Under the Current OVDP

Civil penalties for willful failure to comply with the reporting requirements of Section 5314 can be imposed under 31 U.S.C. § 5321(a) (5). For violations involving the willful failure to report the existence of an account, the maximum amount of the penalty that may be assessed under Section 5321(a) (5) is the greater of $100,000 or 50 percent of the balance in an unreported foreign account, per year, for up to six tax years. Willfulness is shown by the person’s knowledge of the reporting requirements and the person’s conscious choice not to comply with the requirements. In the FBAR situation, the person need know is that she/he has a reporting requirement. If a person has that knowledge, the only intent needed to constitute a willful violation of the requirement is a conscious choice not to file the FBAR. The failure to learn of the filing requirements coupled with other factors, such as the efforts taken to conceal the existence of the accounts and the amounts involved may lead to a conclusion that the violation was due to willful blindness.

Issues regarding undeclared foreign source earnings and financial accounts will continue to be a priority of the IRS and the Department of Justice. The IRS continues to encourage participation in the voluntary disclosure process by taxpayers with interests in offshore accounts. DOJ maintains a somewhat similar policy regarding the non-prosecution of taxpayers who have made a timely voluntary disclosure. The IRS policy concerning voluntary disclosure provides that a taxpayer’s voluntary disclosure is a factor that “may result in prosecution not being recommended.” To obtain this qualified benefit, the disclosure must be “truthful, timely, complete,” must demonstrate willingness by the taxpayer to cooperate, and actual cooperation, in determining the tax liability, and must include “good faith arrangements” by the taxpayer to pay the tax, interest, and any penalties in full.
If you fail to enter the Offshore Voluntary Disclosure Program, there are other avenues available.
Disclosure may mitigate the possibility of a future criminal prosecution under the current IRS OVDP. There are, however, unique procedural processes to consider not normally found in tax litigation. Unlike most civil tax matters, litigation regarding FBAR penalties is within the jurisdiction of the U.S. District Court (rather than the Tax Court). One should also note that Title 11 of the U.S. Bankruptcy Code does not provide relief from an assessed FBAR penalty.

If you fail to enter the OVDP for procedural or substantive reasons related to your particular circumstances, there are other viable avenues available despite various potential risks of not coming into compliance through the OVDP: the longstanding voluntary disclosure practice or a quiet disclosure.

IRS Voluntary Disclosure Practice.

One voluntary disclosure practice of the IRS is set forth in Internal Revenue Manual: a letter from an attorney which encloses timely amended returns from a client which are complete and accurate (reporting legal source income omitted from the original returns) and which offers to pay the tax, interest, and any penalties determined by the IRS to be applicable in full), These practices and policies provide protection from a criminal investigation and prosecution but do not determine the outcome of any civil examination proceedings.

Quiet Disclosures.

Some continue to disclose their offshore accounts outside the OVDP in a “quiet disclosure” by simply filing amended income tax returns for the tax years otherwise covered by an offshore program, report previously unreported income, pay any tax due and hope the IRS does not notice. At the same time, taxpayers attempting a quiet disclosure typically file late FBARs, if they had not previously filed FBARs, or amended FBARs, if they had, to disclose the previously unreported offshore accounts. While the IRS has publicly stated that they are purposely watching for quiet disclosures, it may still be a viable, used with caution, in the right circumstances.

Challenges, Complications and Future Developments

Disclosure in some circumstances may have ancillary impacts that could cause strife for the taxpayer who wishes to become compliant with the IRS filing requirements. A best practice would be to advise all concerned about the implications offshore account disclosure. What is it going to be like to describe these circumstances to your spouse or business partner?

Implications that arise from divorce or a business relationship require tailored advice based on the specifics of each individual circumstance. FBAR penalties apply and are assessed individually and not jointly (there should only be one individual under examination per FBAR case file). Married couples under FBAR examination, therefore, are treated as individual cases. Imagine the client who begins the conversation; I’ve got offshore account because I’ve been hiding money: from my husband, or, from my business partners? The IRS has practically no useful guidance for dealing with these circumstances.

Divorce

OVDP requires amended tax returns that back directly into the filing of joint returns in the years at issue. So, one may just have to answer the question; what lies have you been telling your spouse? Multiple issues arise. Once a joint return has been filed, one cannot amend a joint return with a married filing separate return; an amended joint return must be filed. No bargaining here. This is a fixed rule.

Perhaps of more concern, IRS Examination recently implemented new processes under which each taxpayer filing a joint return receives separate notice of matters that affect the joint return that was filed. Correspondence may read something like this, “with respect to the recently filed offshore voluntary disclosure in which a previously secret foreign bank account was disclosed, we are increasing your taxable income by $1,000,000….” This could be a somewhat problematic surprise to the spouse unaware of the hidden funds.

Other issues may also arise under the financial disclosure aspects of the divorce and/or the terms of any settlement agreement or other judicial document arising from the divorce proceeding. It is unlikely one voluntarily wishes to crack open a closed divorce proceeding, but there may be little choice. Counsel must be advised of all circumstances so you can receive comprehensive advice.

Business Relationships

Equally sticky issues can arise with respect to business relationships. OVDP requires amended tax returns that could easily come from a flow through entity: LLC or partnership. K-1s change. Now your business partner must file an amended tax return. Not telling is not a good option, because the IRS will undoubtedly send the usual flurry of notices and demand letters. One’s rights and obligations may well be dictated by partnership agreements or LLC Operating Agreements.

Next Steps

Now that the IRS and DOJ are forcing offshore banks to disclose the identity of U.S. account holders, reliance on audit roulette to avoid risk of exposure provides little or no protection. Those with interests in foreign financial accounts that have not previously been disclosed should immediately consult competent counsel.
The IRS is convinced they have a good program. They are in aggressive pursuit of enforcement. There are those who suggest that the IRS is a bully in this area. The “typical” penalties guilty plea of one inside the OVDP is 50% highest balance in one year. The possible penalties if one is not in OVDP include: all IRS criminal violations and civil penalties of 50% in offshore account each year. The DOJ attorneys who try these cases nationwide have been referred to as “law books will travel.” Why get to this point?

The IRS does not acknowledge where the gaps and weaknesses are. In fact, the process has shortcomings, however, most attorneys don’t know IRS techniques, procedures and processes well enough to identify these gaps and weaknesses. Nonetheless, several techniques, favorable to the taxpayer, have been developed by knowledgeable defense counsel to avoid the severe sanctions that may be imposed by the IRS.

Jack Fishman, Attorney At Law, P.C.

This firm has a long history of bringing offshore issues and voluntary disclosure issues to resolution. Jack Fishman dealt with these issues in the early 1980s as an IRS Special Agent and, after he retired from the IRS in 1997, as a defense attorney. Our goal is to make recommendations for you on the civil tax issues you face and get you to where the possibility of criminal prosecution is lessened or eliminated.

If you engage our firm, we need to go to ground zero. We must have in-depth understanding of your facts, all your transactions and your risk profile. There just cannot be any gaps in what you file as an amended return under OVDP. We recommend this to save you from criminal sanctions. Once we know all the facts, we can deal with certainty with IRS issues. We can then give the tax answer on voluntary disclosure. Good returns that disclose your issues can be prepared. You can pay what tax is due.

Opting out of OVDP is a good useful tool, if used correctly. We took the lead on dropping out on IRS civil penalties. While we will not disclose clients, in one recent matter, the IRS wanted penalties of $250,000. We opted out. The IRS dropped the penalty and the audit and now seeks $7,500 on FBARs. We believe there are good reasons to reduce this further.

There may be circumstances where leaving Disclosure may mitigate the possibility of a future criminal prosecution under the current IRS OVDP or perhaps the longstanding IRS voluntary disclosure program. This approach to opting out of OVDP is to get a “CI waiver.” You receive an agreement from DOJ that you did nothing criminally illegal. Then, you may opt out any at point prior to signing. One may want to stay in the program at least until the IRS determines what penalties it will apply.

One should consult with competent legal counsel about this possibility. Competent counsel can also advise about the quirky procedural nuances of litigating these matters. Unlike most civil tax matters, litigation regarding FBAR penalties is within the jurisdiction of the U.S. District Court (rather than the Tax Court). One should also note that, Title 11 of the U.S. Bankruptcy Code does not provide relief from an assessed FBAR penalty.

Epilog…

In announcing the 2009 OVDP, then IRS Commissioner Doug Shulman stated, in part,
“My goal has always been clear — to get those taxpayers hiding assets offshore back into the system. . . . we draw a clear line between those individual taxpayers with offshore accounts who voluntarily come forward to get right with the government and those who continue to fail to meet their tax obligations. People who come in voluntarily will get a fair settlement. . . . Those who truly come in voluntarily will pay back taxes, interest and a significant penalty, but can avoid criminal prosecution.

At the same time, we have also provided guidance to our agents who have cases of unreported offshore income when the taxpayer did not come in through our voluntary disclosure practice. In these cases, we are instructing our agents to fully develop these cases, pursuing both civil and criminal avenues, and consider all available penalties including the maximum penalty for the willful failure to file the FBAR report and the fraud penalty.
We believe this is a firm, but fair resolution of these cases. . . . For taxpayers who continue to hide their head in the sand, the situation will only become more dire. They should come forward now under our voluntary disclosure practice and get right with the government.”

Indeed, the noose tightens.

In 2014, the IRS reduced the amount of penalty abatement that had been made available under previous versions of OVDP and now requires that the taxpayer submit financial account statements, among other changes. Under the modified OVDP penalty structure, the miscellaneous offshore penalty for unreported accounts is equal to 27.5% of the foreign financial assets that are subject to the offshore penalty. The penalty increases to 50% if, before the taxpayer applies for the OVDP, it becomes public that the IRS or DOJ is investigating the financial institution where the taxpayer holds an account.

Conclusion

The IRS is committed to enforcement concerning offshore accounts. The changing environment concerning bank secrecy arising from the specter of FACTA penalties may lead the government to many taxpayers with undisclosed interests in foreign financial accounts. For those with undeclared foreign financial accounts, do not wait. Now is the time to come into compliance.

Legal Disclaimer. This discussion provides general information about the law and is not intended, and does not, constitute legal advice. The facts of each situation are unique. You should not act or refrain from acting based on information contained or referenced within this discussion without first obtaining the advice of competent legal counsel.

Bank Deposit Analysis In Tax Controversies

Monday, January 19th, 2015

The IRS attempts to identify and reduce non-compliance through increased efficiency in its core business operation, the conduct of taxpayer examinations, and enforcement. Within Examination, the IRS maintains internal processes that identify issues and returns having significant audit potential for the assessment of deficiencies. The IRS has modified its Examination process to increase resources available to and experience of its agents. Toward this end, a primary process modification the IRS has implemented is increased reliance on bank deposit analysis.

Bank deposit analysis is an indirect audit, or investigative technique, whereby a Revenue Agent determines that an understatement of income exists based on analysis of the deposits to the taxpayer’s bank account, rather than on return information related to specific substantive issues. At one time, this investigative technique was reserved for cash intensive businesses that received a significant amount of receipts in cash. This could be a business such as a restaurant, grocery or convenience store that handles a high volume of small dollar transactions. It could also be an industry in which its practices include cash payments for services, such as construction or trucking, where independent contract workers are generally paid in cash.

Today, our experience is that a majority of business and personal audits conducted by the IRS use the bank deposit method of computing deficiencies; which, on its on face, represents a simple, straight forward approach; but underneath is one that is very complex. Bank deposit analysis is very complicated to apply and analyze without a thorough understanding of the technique. Fact is, the vast majority of users inside the IRS and those defending taxpayers against deficiencies determined by use of bank deposit analysis do not understand it, fail to analyze the underlying data in the context of the applicable tenets of this investigative technique and generally use the calculation incorrectly.

Taxpayer’s representative must review and correctly analyze the Revenue Agent’s figures and computation. Inquires must address questions such as those that follow. Did the Revenue Agent properly investigate each deposit? Did the Revenue Agent correctly take into account beginning and ending cash on hand? Were year-end deposits and withdrawals properly considered? Is money deposited income from a prior year? Did the Revenue Agent remove non-taxable amounts, such as loan proceeds? It is this process that we refer to as the forensic accounting review of the IRS’ work product.
The reality is that it is difficult to fight bank deposit analysis in the initial administrative, civil examination. While one would hope a detailed analysis of the Revenue Agent’s bank deposit methodology always results in appropriate changes to the Revenue Agent’s report, all too often, the administrative pressure to close files results in proposed deficiencies based on simple, yet flawed, methodologies. In this case, the client is best served when the Revenue Agent’s errors are preserved for appeal.

In a criminal context, charges based on bank deposit analysis raise complications for both the taxpayer and the government. Early review by counsel of the government’s figures and computation can often save the client the embarrassment of arrest or the notation of a dismissed criminal indictment. Indeed, a flawed bank deposit analysis used as the predicate of a criminal prosecution, properly analyzed by counsel and timely addressed with prosecuting counsel at the United States Attorney’s Office, the United States Department of Justice or the state Attorney General’s office, may well result in dismissal of the matter, hopefully, prior to indictment because errors in the government’s case-in-chief totally change the nature of their case.
A flawed bank deposit analysis, properly analyzed by counsel, may be easy to defeat at trial; however; should the Government proceed to trial, the client must be indicted and incurs the expense of trial. Perhaps more problematic is that an unrealistic deficiency, based on flawed methodology, skews plea negotiations. The overstated tax at issue may translate into a higher perceived risk of jail time under the Federal sentencing guidelines because the suggested duration of incarceration is based on the amount of tax at issue. For the same reason, the inflated amount of tax at issue may embolden the Government’s resolve to proceed to trial. The client may thereby be wrongly intimidated into agreement with the Government’s case.

If the matter goes to trial, the taxpayer may benefit from having had the deficiency determined by the bank deposit method. The government must prove its case beyond a reasonable doubt. This is sometimes difficult because the bank deposit method is only an indirect method of proving intent and often confuses a jury. On the other hand, where the Government proves guilt on a subset of the facts that might be at issue, say by evidence developed by the specific identification methodology, the use of the much greater amount of tax at issue, determined by the bank deposits methodology, often serves to increase the range of sentencing because the Government need only support its range of recommended time of incarceration based on a determination of tax at issue by a preponderance of the evidence, rather than the higher burden required to prove guilt, a result approved by the federal judiciary.
We bring to the table seasoned IRS professionals, who retired from the IRS, who are well versed in the application of forensic accounting principles in tax controversies. The experience, preparation and diligence with which we serve clients help resolve the controversies that arise from the IRS Examination process.

Do you have an offshore bank account?

Sunday, November 20th, 2011

If you have an offshore bank account, please watch this:

[youtube_sc url=”http://www.youtube.com/watch?v=khOAqLOnmGk” title=”IRS%20Offshore%20Voluntary%20Disclosure%20Program” modestbranding=”1″ iv_load_policy=”3″ rel=”0″]

Voluntary Disclosure to the IRS

Monday, October 31st, 2011

Click above to watch – How to turn yourself into
the IRS and face the least possible penalties.

7 Things They Don’t Tell You About IRS Agents.

Thursday, October 13th, 2011

7 Things They Don’t Tell You About IRS Agents.

– By Jack Fishman, Retired IRS Special Agent

1. An IRS agent has the authority to administer an oath. ( How is that important? If a person tells an IRS agent a lie it is perjury. )

2. An IRS agent has the authority to sign a summons. ( How is that important? It does not require an independent judicial authority – a judge – and in some cases does not even require a supervisor’s approval. )

3. IRS Special Agent reports are not available to be reviewed by the person being accused. Federal courts have ruled that these reports are not available even in criminal cases…

(more…)