In a recent conference the Director of theFinancial Crimes Enforcemnt Network (FinCen) discussed the use of Currency Transaction Reports (CTR's) and Suspicious Activity Reports (SAR's) which are required to be filed by financial institutions under the Bank Secrecy Act (BSA). The purpose of this note is to illustrate how SARs are used in tax cases by the IRS.
As Californians evaluate the potential for legalization of Marijuana it is important to consider the current state of conflict between state and federal laws and regulations regarding the production, distribution and sale of Marijuana. As MillarLaw specializes in tax issues this note will focus on tax and related financial problems. The public policy debate about the social and personal costs versus the potential revenue benefits of legalization are outside the scope of this analysis.
A recent indictment by the United States Attorney's office in California illustrates the inter-relationship between curency transfer restrictions, (such as those involving Iran), foreign financial account reporting (the FBAR requirement) and the failure to report taxable income (filing of a false tax return ).
The Department of Justice has released the signed Non-Prosecution Agreement NPA) with Swiss bank BSI SA. The Non-Prosecution Agreement is likely the precursor to enhanced enforcement efforts by the DOJ and IRS against those taxpayers who have not yet come forward and disclosed previously unreported offshore accounts. The DOJ has publically stated that it will treat recalcitrant (non-reporters) and/or leavers (those taxpayers who have closed account only t move funds to another offshore bank) as "Willful" and therefore assess maximimum civil and possibly criminal penalties under the Internal Revenue Code (IRC) and the Bank Secrecy Act (BSA).
A recent Tax Court case (Kunkle v. C.I.R.) reiterates the need for cash businesses to maintain proper books and records.
In what is becoming an increasingly used attack vehicle, the Department of Justice (DoJ) is using the "required records doctrine" to compel taxpayer's to produce what may be incriminating evidence of ownership or control of foreign financial accounts. The DoJ process involves the issuance of a Grand Jury subpoena for records and then compelled testimony. A case now on petition to the U.S. Supreme Court is illustrative of the governments' position.
The U.S. Department of Justice is considering actions against taxpayers who wrongfully used the Streamlined Procedures to assert non-willful conduct. As quoted in Tax Notes Today:
"Speaking at the Federal Bar Association Section on Taxation annual tax law conference in Washington, Caroline Ciraolo, acting assistant attorney general in the Tax Division, said, "We are taking particular interest if we find evidence of an account holder claiming non-willful conduct in a streamlined compliance filing or delinquent submission only to find that evidence produced by the Category 2 banks suggests otherwise. We are using information gleaned from the program to open new investigations, pursue new targets around the globe, and we will continue to do so as the information is developed"
The use of Bitcoin has both legal and potentially illegal applications. Bitcoin is just a contemporary version of the Informal Value Transfer System, ("IVTS") which in some countries is known as the Hawala. The IVTS has been used for international money transfers according to the Financial Crimes Enforcement Network (FinCen) for the following reasons:
"IVTS-type networks operate in parallel with formal financial institutions or as a substitute or alternative for them. United States citizens, persons (legally or illegally) residing in this country from foreign countries, and individuals living in other nations may prefer or need to use IVTS in lieu of formal financial institutions for various reasons as described below:
What happens when a taxpayer operates a cash based business and lacks adequate books and records according to the IRS? The IRS can use any reasonable method to reconstruct the taxpayers income and expenses. (See, Estate of Rodrigo F. Fenta, et al. v. Commissioner, TC Summary Opinion 2015-4 )
In the opinion the court states the applicable rule:
"Taxpayers are required to maintain such "permanent books of account or records, including inventories, as are sufficient to establish the amount of gross income, deductions, credits, or other matters required to be shown by such person in any return of such tax or information." Sec. 1.6001-1(a), Income Tax Regs"
According to Tax Notes Today (January 23, 2015) Boris Johnson the Mayor of London has settled tax claims of the IRS. The claim arose because Johnson who holds U.S and U.K. citizenship sold his residence at a gain and failed to report the gain for U.S. income tax purposes. Johnson, who apparently travels to the U.S. and had pending travel plans must have feared that the IRS/DOJ would detain Johnson on entry into the U.S. under Internal Revenue Code Section 7402. As stated in Tax Notes Today,
"Section 7402 provides U.S. district courts with jurisdiction to enforce orders, processes, judgments, and summonses related to revenue laws. If a taxpayer visited the United States, a federal court "could issue a writ ne exeat republica at the behest of the DOJ's Tax Division and keep the taxpayer in the U.S.,"