If you think that you can get away with reporting income on your tax return in a manner that is different from what your bank deposits show – think again. The IRS and the banking industry are on the same team, and in an attempt to deter tax crimes, the IRS requires banks to report all large cash transactions.
Additionally, the Department of Treasury has an entire division that focuses specifically on analyzing bank reports to uncover finance-related criminal activity.
If an individual reports income on a tax return in an amount that is significantly lower than deposits that were made to his bank accounts, an IRS or Federal tax audit will seek out this unreported and misrepresented income. Wrongly reporting income or claiming false deductions, expenses and credits is simply not worth the risk of the severe penalties that may result from doing so. Here are some of the reasons why:
Beginning in 1980, in an effort to detect money laundering, it became required for financial institutions to report large cash transactions to the IRS. In 1996, reporting regulations were modified to include “any activity deemed suspicious or fraudulent.”
Banking institutions are mandated to submit a Currency Transaction Report (CTR) whenever a large transaction – any amount exceeding $10,000 – takes place. Strangely enough, wire transfers, check transactions and non-cash transactions of $10,000 or more are not subject to the same IRS reporting requirements. Financial institutions are responsible for combining all transactions made on the same business day from a single account, and if the total amount of all daily transactions totals or exceeds $10,000, the bank is then required to submit a CTR as well. CTRs can be submitted to the IRS electronically, and most institutions are set up to automatically create the required reports whenever the qualifying criteria is met.
Additionally, the Suspicious Activity Report (SAR) is filed with the IRS whenever a bank suspects or knows that a transaction of $5,000 or more is from illegal activities.
When law enforcement officials receive the CTR filings from financial institutions, they use them to track potentially illegal and fraudulent activities. The reports can make it possible for law enforcement officials to track down money laundering activities, drug trafficking, terrorist financing and tax fraud or evasion.
In some cases, a financial institution may file a request with the IRS to exempt some of their account holders from currency transaction reporting requirements. It could be that the bank knows the nature of an individual’s financial situation, and it is not unusual that he or she would have transactions exceeding $10,000 in a single business day. Financial institutions request CTR exemptions from more than 60,000 people each year, but it is unknown how many of the applications are approved or under what circumstances approval takes place.
This post was published on August 3, 2011