The Treasury Inspector General for Tax Administration (TIGTA) published a report in September 2018 entitled The Internal Revenue Service’s Bank Secrecy Act Program Has Minimal Impact on Compliance. The report’s findings are based on an audit TIGTA performed to “evaluate the impact of the IRS’s compliance efforts related to its delegated authority under the Bank Secrecy Act (BSA).” This authority includes “enforce[ing] the BSA’s criminal provisions and examin[ing] certain nonbank financial institutions,” in addition to “examin[ing] trades and businesses for compliance with Form 8300,” which must be filed any time an institution accepts a cash payment of more than $10,000. TIGTA made several recommendations in this report, which all focused on ways the IRS can change the way it performs its BSA enforcement activities to make the program more effective, especially considering the cost of these IRS functions as compared to the money they generate in penalty and tax assessments.
The primary recommendation is intended to address the discrepancy between labor costs to administer the BSA Program and the revenue it generates (e.g., penalties). For the years 2014-2016, labor costs for the program’s Title 31 investigations exceeded penalties assessed by nearly $55 million. TIGTA made two alternative suggestions: (1) the IRS BSA Program should coordinate with the Financial Crimes Enforcement Network (FinCEN) to ensure more Title 31 penalties are collected; or (2) the IRS should reprioritize BSA Program resources because the program spends much more money than it generates. The IRS disagreed with this recommendation because, per regulatory delegation of authority, the only action the agency can take is issuing a warning letter; the authority to assess Title 31 civil penalties lies with the FinCEN.
The root of the discrepancy in spending versus revenue from penalties is the high standard for referring Title 31 cases to the FinCEN. Violations considered technical, minor, infrequent, isolated, or nonsubstantive are not referred to the FinCEN. Because of this enforcement scheme, many of the cases the BSA Program spends time and money investigating do not result in referral to the FinCEN and, therefore, no civil penalties can be assessed. TIGTA found that, based on the 140-case sample it analyzed, 75% of cases closed by the IRS BSA Program (and not referred to the FinCEN) had Title 31 violations, and 41% of those had prior compliance reviews during 2011-2016. Further, 95% of the cases with prior reviews had Title 31 violations in both the current and prior reviews, and in 63% of the cases with prior reviews, the same violation was found in both reviews. In the 105 cases with violations, there were a total of 383 violations, which would have resulted in $191,500 in penalties. Extrapolating this to the total population of cases closed by the IRS, there could have been more than $33 million in additional civil penalties over the years 2014-2016.
This is not only a spending problem though. If the same entities are repeatedly making the same mistakes, the program is not serving its purpose, i.e. ensuring compliance with the BSA. TIGTA argues that the IRS should consider more carefully whether violations warrant a referral to the FinCEN, especially due to the high rate at which entities were found to have the same violation in multiple years. Because the businesses in these cases have already received a letter putting them on notice that the conduct violates the BSA, TIGTA states that these violations should be considered willful and result in a referral to the FinCEN.
Next, TIGTA recommended the IRS use the BSA Program to develop and implement a virtual currency strategy. Virtual currency exchanges are considered money services businesses and, therefore, have certain reporting obligations under the BSA. While the IRS has classified virtual currencies as property for tax purposes, the agency has yet to develop a comprehensive virtual currency strategy to manage tax noncompliance. The Small Business/Self-Employed (SB/SE) Division BSA Program already has virtual currency cases available for selection but has assigned and reviewed very few. In 2016, TIGTA recommended the Large Business and International Division adopt a similar practice, yet this suggestion has not been implemented. The BSA Program is an ideal division to manage virtual currency because virtual currency exchanges are already under the purview of the BSA.
The third recommendation was related to Form 8300 Title 26 examinations. TIGTA suggested the Commissioner of the SB/SE Division issue guidance to ensure BSA examiners know they are now required to include Publication 1 and Publication 5264 when issuing Letter 2277 at the beginning of an IRS Form 8300 examination. Publications 1 and 5246 notify taxpayers about various rights that they have in the exam process, so their inclusion is important to ensuring equitable outcomes. While this policy modification was made in June 2017, nine of the fourteen BSA examiners interviewed by TIGTA were not aware of the change.
TIGTA did not offer a recommendation regarding BSA Program referrals to the SB/SE Division Examination function. When the Examination function closes cases referred by the BSA Program, they frequently result in tax assessments, so changes do not need to be made to this referral process. However, TIGTA pointed out that a majority of these assessments made between 2014-2016 are not paid in full.
Next, the report discusses timeliness issues affecting BSA compliance efforts. Specifically, IRS policy analysts are taking too long to review FinCEN referrals. More than half of the cases referred to the FinCEN were with the policy analysts for longer than 180 days, and some cases took more than two fiscal years to be reviewed by an analyst. In 2017, the BSA Program established a time frame commitment for these reviews which requires the review to be completed in no more than 180 business days. FinCEN management cites the age of the case as one of the main reasons for not proceeding with enforcement action, so shortening the timeframe for analyst review could significantly improve the FinCEN’s ability to assess civil penalties. However, the policy analysts complained of having to send some referrals back to the BSA examiner due to errors made during the exam process, hindering the analysts’ ability to promptly review referrals. TIGTA’s recommended the Commissioner have process experts review the referral process and determine ways to improve referral review efficiency.
Finally, TIGTA made a recommendation to address the low acceptance rate of referrals to Criminal Investigation (CI). Out of 40 fraud referrals made to CI from 2014-2016, 25 had been declined by November 12, 2017. Of the 15 accepted cases, only three had been forwarded to the Department of Justice. There were two main reasons CI rejected referrals from the BSA Program: (1) priorities of the U.S. Attorney Office regarding the cases it wants to pursue, and (2) lack of clear evidence of money laundering or potential for the business owner to use ignorance of law as a defense. TIGTA suggested that the IRS work with CI to make sure both agencies are on the same page regarding referral requirements. This should reduce resources spent on referrals that CI will not consider pursuing.
The main takeaway from these recommendations is that the BSA Program does not operate as efficiently as it could, whether it is referring to the FinCEN or to other IRS divisions. Resources are wasted on examinations that will not and cannot result in assessments, and the same businesses are making the same mistakes due to lack of enforcement. Improved compliance with all parts of the BSA would require a reworking of many of the IRS’s processes.