Posted by: evanjdavis | October 28, 2018

Treasury Inspector General Reports Show IRS Is Squandering Bank Secrecy Act Data by Evan J. Davis

The Treasury Inspector General for Tax Administration (“TIGTA”) is always on the lookout for the IRS’s flaws.  They hit the agency with both barrels last month, finding in consecutive audit reports that: (1) the IRS effectively ignores currency transaction reports (“CTRs”) in IRS civil cases; and, (2) even when civil auditors use bank-filed CTRs and suspicious activity reports (“SARs”) to identify possible tax cheats, most criminal referrals wither on the IRS-Criminal Investigations vine.

Under the Bank Secrecy Act (“BSA”), banks and other financial institutions are legally obligated to report cash transactions exceeding $10,000 in CTRs.  These same institutions are also required to file – in secret, without telling the taxpayer – SARs when the institutions identify suspicious patterns or activity, such as unusual cash transactions or repeated deposits of $9,900.  Avoiding the CTR reporting by always depositing less than $10,000 is itself a crime (structuring), but the reporting is also to try to detect illegal-source income and terrorist financing.  The CTRs and SARs are filed with another arm of the Treasury Department, the Financial Crimes Enforcement Network (“FinCEN”), but the IRS’s civil auditors and criminal investigators can access CTRs and SARs.

One might think that using SARs to identify viable civil audit targets and criminal investigations is like fishing with dynamite: a bank has already told the government that something looks fishy about the taxpayer.  The problem is the number of SARs filed: more than 2 million in 2017.  The number of CTRs presumably is much higher, so the IRS has struggled with ensuring that CTR and SAR data is integrated with other tax data.

TIGTA warned the IRS in 2010 that it was missing the boat regarding using CTRs to identify tax non-filers.  The IRS pledged to do better, and TIGTA conducted a progress checked in eight years later.  In its September 21, 2018 report,, TIGTA noted little improvement.

When it is conducting BSA examination under Title 31, not the Title 26 tax code, the IRS can’t use the BSA exam as a pretext to do a tax examination.  However, if the BSA examination happens to reveal a possible tax violation, the BSA group refers the matter to IRS civil auditors in the Small Business/Self-Employed Division.  TIGTA wanted to find out what happened with the 3,000 or so referrals between 2015 and 2018.  TIGTA’s findings:

  • First, for most of the period, the IRS didn’t bother establishing procedures to process the referrals. In an organization so wedded to process, this caused referrals to fall into the expected bureaucratic black hole.  No one knew how long it was taking to process the referrals, and no tracking means no consequences for delay.  In the overworked IRS, this pushes the referrals to the bottom of the work pile.  Some referrals sat for three years between receipt and forwarding for possible audit.
    • The IRS agreed in response to TIGTA’s findings that it should start tracking BSA referrals, not surprisingly.
  • Second, one third of IRS auditors didn’t review CTRs before issuing no-change determinations, even when doing so would have revealed more than $100,000 of currency transactions.
    • The IRS disagreed with the percentage of missed CTRs but agreed with TIGTA’s recommendation to update the Internal Revenue Manual to emphasize that auditors should consult CTR information.


In the second report, issued three days later, TIGTA took the IRS to task for the terrible return-on-investment demonstrated in BSA cases, which included cases involving Forms 8300 (essentially CTRs for businesses, not banks).


Given that its budget has been cut to – and even into – the bone, the IRS tries to get the most bang for its criminal enforcement buck.  If that’s true, the IRS should pull the rip cord on its BSA enforcement efforts and move the resources to more-lucrative cases.

The title of TIGTA’s report says it all: “The IRS’s Bank Secrecy Act Program has Minimal Impact on Compliance.”  Why did it reach that conclusion?

  • Referrals from the IRS back to FinCEN for Title 31 (BSA) penalty cases go through long delays and don’t seem to change BSA compliance;
  • The BSA program spent nearly $100 million to assess (let alone collect) approximately $40 million (an abysmal rate, given that spending on tax assessments is always a good deal for taxpayers), in part because the IRS lets many violations slide and just issues warning letters instead of penalties because FinCEN and not the IRS has exclusive penalties authority;
  • Those tasked with BSA compliance called their efforts “a waste of time” because the IRS didn’t track whether anyone complied with the IRS’s warning letters, and the frequency of repeat offenders who suffered no consequences, was stark evidence of this fact;
  • The few (about 5 cases per year) referrals to IRS-CI for BSA prosecutions were mostly declined by IRS-CI, showing they don’t prioritize these cases; and
  • The IRS continues to separate virtual currency from BSA work, when it should be integrated with other Title 31 BSA work, and it only opened about 10% of a small number of virtual currency cases were even assigned to a BSA examiner (the upshot being that virtual currency violations remain nearly untouched by the IRS).

The upshot of the report is that it appears no person at the IRS has taken responsibility to ensure that the BSA program gets results.  Therefore, there have been no consequences for failure, no rewards for success, and no incentives for efficiency.  The lack of leadership equals lack of focus and results.

Will the new IRS Commissioner kill the BSA program in the name of directing scarce resources to higher-impact cases, or improve it as recommended by TIGTA?  It’s too early to tell.  Having both prosecuted legal-source structuring and, more recently, having represented targets of legal-source BSA investigations, I am of two minds as to the best outcome for the IRS and taxpayers.  The IRS has a lot of priorities and needs to direct its resources to get the most bang for the buck, but BSA violations can be the tip of an important iceberg of criminal activity and the IRS will never know how deep the criminal conduct goes without investigating.

EVAN J. DAVIS – For more information please contact Evan Davis – or 310.281.3288. Mr. Davis is a principal at Hochman Salkin Toscher Perez, P.C., a former AUSA of the Tax Division of the Office of the U.S. Attorney (C.D. Cal) handling civil and criminal tax cases and, subsequently, of the Major Frauds Section of the Criminal Division of the Office of the U.S. Attorney (C.D. Cal) handling white-collar, tax, and other fraud cases through jury trial and appeal.  He served as the Bankruptcy Fraud coordinator, Financial Institution Fraud Coordinator, and Securities Fraud coordinator for the USAO’s Criminal Division, and the U.S. Attorney General awarded him the Distinguished Service Award for his work on the $16 Billion RMBS settlement with Bank of America.

Mr. Davis represents individuals and closely held entities in criminal tax investigations and prosecutions, civil tax controversy and litigation, sensitive issue or complex civil tax examinations and administrative tax appeals, and federal and state white-collar criminal investigations including money laundering and health care fraud.  He is significantly involved in the representation of taxpayers throughout the world in matters involving the ongoing, extensive efforts of the U.S. government to identify undeclared interests in foreign financial accounts and assets and the coordination of effective and efficient voluntary disclosures (Streamlined Procedures and otherwise).


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