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.

In her talk Director Calvery first described what a financial institution is under the BSA.

“The term “financial institution” is quite broad. It includes:

1. Traditional depository institutions like banks and credit unions;

2. Money services businesses;

3. Casinos and some card clubs;

4. Insurance companies;

5. Securities and futures brokers;

6. Mutual funds;

7. Operators of credit card systems;

8. Dealers in precious metals, stones, or jewels; and

9. Certain individuals and trades or businesses, transporting or accepting large amounts of cash.”

Each of these financial institutions must file either a CTR or SAR depending on which of the two following fact patterns are met.

“The first is the Currency Transaction Report, known as the CTR. CTRs must be filed on all cash transactions exceeding $10,000. In 2014, there were over 15 million CTRs filed by financial institutions around the country.

The second report is called the Suspicious Activity Report (SAR). SARs are reports of suspicious transactions. While the dollar thresholds differ slightly by industry, generally speaking, if a financial institution “knows, suspects, or has reason to suspect” that any transaction or attempted transaction is suspicious, and the transaction or attempted transaction involves or aggregates to funds of $5,000 or more, a SAR is required”

The IRS  operates under the Internal Revenue Code is authorized, pursuant to written agreement with FinCen (under the BSA) to access SAR’s for at least the following purposes as stated in the Internal Revenue Manual:

1. SAR information may be helpful in examination and collection activities when:

A. The Web Currency and Banking Retrieval System (WebCBRS) reflects a Currency Transaction Report (CTR);

B. Routine means of locating banking information is exhausted;

C. Potential fraud indicators are present; or

D. It appears the taxpayer may be engaging in an unusually large number of cash transactions or cash transactions of unusually large amounts to avoid proper reporting of income or to evade collection.

2. IRS employees may want to use SAR information to:

A. Summon new bank accounts;

B. Attempt to locate taxpayer at new location; or

C. Levy newly-identified sources

The power to obtain taxpayer information through the use of SAR’s is a very powerful tool and has undoubtedly lead to many prosecutions and many more audits of cash based businesses. The fact that the SAR filing criteria is $5,000 in the aggregate (deposits made over the course of a month makes it very difficult for taxpayer’s to avoid civil tax penalties or criminal charges if an SAR is filed.

The most important factor for a cash based business is to openly and honestly communicate with their financial institution at the time the account is established and regularly, thereafter, about the nature of the business, the reason for, amount of and anticipated frequency of cash deposits. Failure to be open and forthright with your financial institution can be a troublesome and expensive mistake.

We at MillarLaw can help cash intense businesses meet their tax and other compliance requirements. We can help from start-up through audit representation. Remember, an SAR is not a przie ribbon worth winning.