IRS Audits - Part 4 Examining Process

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IRS Audits

Chapter 26. Anti-Money Laundering

Section 12. Examination Techniques for Form 8300 Industries

4.26.12  Examination Techniques for Form 8300 Industries

4.26.12.1  (01-01-2003)
Overview

  1. This Section discusses basic information and examination and auditing techniques for specific industries that fall under Form 8300/Internal Revenue Code (IRC) Section 6050I. It is a guide to assist Anti-Money laundering (AML) Program examiners in conducting a Form 8300 Compliance Review. AML examiners must remember though that all cases are subject to factual development. AML examiners should adapt the procedures in this section, as necessary, to each particular situation.

4.26.12.2  (01-01-2003)
Attorney Overview

  1. The examiner is responsible for supporting the goal of the Anti-Money Laundering (AML) program: to identify, detect and deter money laundering whether it is in furtherance of a criminal enterprise, terrorism, tax evasion or other unlawful activity. The examiner must be alert to efforts by customers or businesses to structure transactions to avoid the filing of Form 8300.

  2. Attorneys have the potential for receiving large amounts of cash for legal services or funds to be held in trust.

  3. Attorneys usually generate fees based either on retainer or contingency. See Terminology for definitions and discussion.

  4. In addition to general operating accounts, attorneys have trust or escrow accounts to hold funds in trust for their clients. Dollar amounts may be large and the potential for cash transactions is high.

  5. Attorney-client privilege is a legally recognized privilege that protects confidential communication between attorney and client. However, the identity of a client and the amount of cash paid by the client to the attorney are not generally considered privileged information under the attorney-client privilege.

  6. Attorneys may practice as sole proprietorships, in a partnership or as an employee of a corporation.

  7. Attorneys in a general law practice may handle everything from personal injury cases to corporate reorganizations. Others may specialize (e.g. patent law, criminal defense, estate or corporation law.) Generally, even specialists diversify to some degree.

4.26.12.2.1  (01-01-2003)
Law

  1. Internal Revenue Code (IRC) Section 6050I requires that any person engaged in a trade or business who receives cash in excess of $10,000 in one transaction, or two or more related transactions, in the course of their trade or business, must file Form 8300 within 15 days of receipt of the reportable cash. A copy of each filed Form 8300 must be retained for five years by the business.

  2. Any business filing a required Form 8300 must also furnish a written statement to each person identified on Form 8300 by January 31 of the succeeding calendar year. A copy of the filed Form 8300 should not be enclosed. A copy of the written statement must be retained by the business for five years. The statement must show:

    1. The name, address, and telephone number of the information contact for the business,

    2. The aggregate amount of reportable cash received during the calendar year, and

    3. That the information was reported to the IRS.

     

  3. There is no general exception from the reporting requirements of IRC Section 6050I for attorneys.

  4. In certain instances involving "special circumstances " preparation and filing of Form 8300 may violate attorney-client privilege. "Special circumstances" exist when disclosure of the Form 8300 information reveals a confidential communication, such as the motive or reason the client consulted the attorney, or provides a "last link " to such information.

  5. Cases in which extraordinary circumstances are present will be the exception. Thus far, invocation of the "last link" doctrine as a defense to the disclosure required by section 6050I has been unsuccessful. United States v. Goldberger & Dublin, P.C. 935 F.2d 501, 505 (2d Cir. 1991) finding no "direct linkage" [between the disclosure and the incrimination] is apparent in section 6050I. See In re Grand Jury Proceedings 88-9, 899 F.2d 1939 (11th Cir. 1990); In re Shargel, 742 F. 2d 61 (2d Cir. 1984) (disclosure of fee information and client identify are not privileged, even though it might incriminate the client). See also, In re Osterhoudt, 722 F .2d 591, 593 (9th Cir. 1983) (information regarding fee arrangement ordinarily not part of the subject matter of the disclosure of privileged information.)

  6. Generally, since attorneys are not involved in the retail sale of consumer durables, collectibles or travel and entertainment, reporting of monetary instruments is not required. However, if the attorney knew or should have known that the use of monetary instruments was for the purpose of avoiding the filing of the Form 8300, such monetary instruments become reportable. (Treas. Regs. 1.6050I-1(c)(1)(ii)(B)(2).)

  7. Several Federal Circuits have tested the attorney-client privilege as it relates to withholding information required by IRC Section 6050I. Decisions favorable to the IRS position are:

    • U.S. v. Goldberger & Dubin P.C., 935 F.2d 501 (2d Cir. 1991);

    • U.S. v. Leventhal, 961 F.2d 936 (11th Cir. 1992);

    • U.S. v. Sindel, 53 F.3d 874 (8th Cir. 1995); and

    • U.S. v. Blackman, 72 F.3d 1418 (9th Cir. 1995)

    • U.S. v. Ritchie, 15 F.3d 592 (6th Cir.), cert. denied, 115 S Ct. 188 (1994)..

     

  8. In two circuits the courts did not accept the IRS's representations that it was examining the summoned person, finding rather that the Service was attempting to examine the liabilities of the unknown payers. These cases were resolved in a manner at least partially unfavorable to the IRS position:

    • U.S. v. Gertner, 65 F.3d 963 (1st Cir. 1995); and

    • U.S. v. Ritchie, 15 F.3d 592 (6th Cir.), cert. denied, 115 S Ct. 188 (1994).

     

  9. One penalty case was resolved in the Service's favor, the court upholding the imposition of the intentional disregard penalty of IRC Section 6721(e)(2)(C):

    • Gerald B. Lefcourt, P.C. v, U.S., (1997, CA2) 80 AFTR 2d 97-6523, affg (1996, DC NY) 78 AFTR 2d 96-5051,96-2 USTC Para.50345.

     

4.26.12.2.2  (01-01-2003)
Records Commonly Found

  1. Records most commonly found include:

    • Bank statements

    • Case time records

    • Cash receipts journal

    • Client billing records

    • Client case file

    • Client identification or client card index

    • Daily log or receipts book

    • Duplicate deposit slips

    • Notary log

    • Trust fund or escrow account records, including segregated trust accounts and general trust accounts.

     

4.26.12.2.3  (01-01-2003)
Terminology

  1. Annual retainer -- an agreed fixed fee for legal services for a specific period of time, generally a year.

  2. Billing hours (a.k.a. billable hours)-- refers to the practice of billing the client by the hour or portion thereof for work in non-contingency cases. This would either be in addition to, or in fulfillment of, the retainer.

  3. Contingency fee -- a fee payable only upon the occurrence of the contingency, generally the winning or settlement of a lawsuit for damages. It generally represents a stated percentage of the proceeds of successful settlement of the case.

  4. General trust accounts - funds held for multiple clients in one accounts.

  5. Referral fee or forwarding fee -- an amount, often a percentage of the ultimate fee, paid to the attorney for referring the case to another attorney.

  6. Retainer -- a fee generally paid up-front, for "retaining " the services of the attorney;

  7. Specific retainer -- an agreed fee for a particular case, part of which may be payable in advance;

  8. Trust accounts -- may be called IOLTA (Interest on Lawyers Trust Account) or IOLA (Interest on Lawyers Account), depending on the state. Trust accounts may also be termed escrow or trust fund accounts. These accounts may be segregated, holding only the funds for one client or case.

4.26.12.2.4  (01-01-2003)
Identifying Businesses for a Form 8300 Compliance Review

  1. The examiner is required to identify trades or businesses that receive more than $10,000 in cash in one transaction or two or more related transactions.

  2. These currency transactions may be revealed through analysis of the Currency and Banking Retrieval System (CBRS). By reviewing the Currency Transaction Reports (CTRs) for substantial cash deposits the examiner is able to identify businesses that might be receiving more than $10,000. The examiner's personal knowledge, telephone directories, state and local licensing units, and physical observations of businesses are also ways of identifying businesses. For additional information see IRM 4.26.3.

  3. Any attorney may receive cash in the course of business activities. Attorneys that are compensated through third party payments (i.e. insurance settlements) are less likely to receive currency.

  4. Certain attorneys that are more likely to be paid directly by the client include:

    • Criminal defense attorneys,

    • Estate and trust attorneys,

    • Real estate attorneys, and

    • Tax attorneys.

     

  5. Prior to contact, all entities identified for potential Form 8300 compliance reviews must be forwarded to the anti-money laundering (AML) coordinator for clearance.

4.26.12.2.5  (01-01-2003)
Form 8300 Compliance Review Procedures

  1. The scope and depth of each Form 8300 compliance review will depend upon the facts and circumstances of each case.

  2. The following techniques are intended to be used as a guide and should not be considered all-inclusive.

4.26.12.2.5.1  (01-01-2003)
Preplan

  1. Prior to a Form 8300 compliance review the examiner should:

    • Review Currency and Banking Retrieval System (CBRS) for cash activity,

    • Review prior compliance review results,

    • Check for previous penalties; and

    • Review Integrated Data Retrieval System (IDRS) to verify that there are no assignments controlled to Collection, Criminal Investigation or Compliance.

     

  2. The examiner should become familiar with the common business practices of the trade or business.

4.26.12.2.5.2  (01-01-2003)
Initial Contact

  1. The initial contact may be made by telephone. An appointment letter with the scheduled time and date for the Form 8300 compliance review is required to be given to the business. The letter can either be mailed or hand delivered to the business. On occasion, cold calls may be appropriate with management approval. See IRM 4.26.11 for detailed information.

  2. The Form 8300 compliance review should be conducted at the place of business.

  3. Outreach is a critical part of a Form 8300 compliance review. In the initial contact with the business, the examiner must discuss with the owner/officer and the person responsible for cash transactions:

    • The filing requirements of Form 8300;

    • Notification to customer of any required Form 8300 filings;

    • The records to be maintained;

    • The civil and criminal penalties; and

    • Structuring.

     

  4. The examiner should explain the compliance review process and specifically state that a Form 8300 compliance review is NOT an income tax examination.

4.26.12.2.5.3  (01-01-2003)
Interview

  1. The examiner should interview both the owner and/or manager to obtain information on the operation of the business and the employee responsible for filing Form 8300.

  2. During the interview, the examiner should ascertain and/or verify:

    1. The TIN of the business;

    2. The names and titles of officers or employees who handle cash transactions and are responsible for filing Form 8300;

    3. The owner/officer's knowledge of Internal Revenue Code (IRC) Section 6050I and its regulations and that of the employee(s) designated by the business to identify and file Form 8300 on reportable transactions;

    4. The internal controls of the business with regard to cash transactions;

    5. Determine who handles received cash, prepares bank deposit slips, and makes the bank deposits;

    6. The number and types of bank accounts;

    7. The type of records maintained on transactions required to be reported on Form 8300;

    8. Whether or not the business has filed any Form 8300

    9. For attorneys, it is important to determine if any prior Form 8300 has been filed blank or incomplete because of a claim of attorney-client privilege, professional ethical obligations or Constitutional protections. If so, the examiner must coordinate with Area Counsel through the Anti-money laundering (AML) coordinator before proceeding with any summons or penalty actions.

    10. Procedures used by the business to ensure that the information contained in the Form 8300 was complete and correct; For example, did the recipient verify the identity of the person from whom the cash was received by a driver's license, passport or other document?

    11. Procedures used by the business to notify transactors.

    12. The entity's membership in various trade associations; and

    13. Related entities.

     

  3. The interview and records inspection must be solely for the purpose of the Form 8300 compliance review. No inquires should be made as to the filing of other returns required by Title 26 or whether a specific item is reported on any such returns. The latter inquiries could result in the opening of an income tax examination.

  4. Reference should be made to additional questions relating to knowledge and intent in IRM 4.26.11.

  5. The examiner should advise the trade or business that we might use the information from their records for any tax matter permitted by the Internal Revenue Code.

4.26.12.2.5.4  (01-01-2003)
Review of Records

  1. The examiner should examine the appropriate documents and accounting records to determine:

    1. Transaction involving the receipt of reportable cash in excess of $10,000,

    2. Consecutive or related reportable transactions in excess of $10,000; and

    3. Whether Form 8300 were filed on such transaction.

     

  2. The examiner should be alert to identifying transactions that attempt to avoid the reporting requirements of Internal Revenue Code (IRC) Section 6050I, such as:

    1. A single transaction structured as multiple transactions of less than $10,000.

    2. Transactions in excess of $10,000 where cash and non-cash payments appears to be combined to avoid the filing requirements.

    3. A pattern or series of transactions of less than $10,000 conducted over a relatively short period of time by or for the same person.

     

  3. If a computerized system is utilized, the examiner must perform testing to ensure its integrity before relying upon such records for the Form 8300 compliance review.

  4. Depending on the initial findings of the Form 8300 compliance review, the examiner may need to expand the scope and/or depth of the review to include additional periods.

4.26.12.2.5.5  (01-01-2003)
Closing

  1. A closing conference should be held with the owner, corporate officer, or general partner. Other employees, such as the person responsible for filing Form 8300 may be asked to attend to assist in addressing specific items.

  2. The examiner should first review with the business the transaction not reported, filed incomplete or incorrectly.

  3. Obtain an explanation for any non-filed or incorrect Form 8300.

  4. If systemic deficiencies have been identified, ask the business to provide a written statement of the corrective actions they will undertake to address the deficiencies noted.

  5. There may be a need, on a case by case basis, to interview the client to obtain all the facts as required by the anti-money laundering (AML) coordinator, or examiner's group manager.

  6. When the intentional disregard penalty is not being proposed and no referral to Criminal Investigation (CI) is warranted, the examiner should secure delinquent Form 8300. (See IRM 4.26.11 for detailed information.)

  7. Structuring or other violations may be discovered at this time.

  8. For a discussion of penalty consideration, see IRM 4.26.11.

  9. For attorneys, note that any penalty or summons enforcement action that may include claims of attorney-client privilege, professional ethical obligations or Constitutional protections must be coordinated with Area Counsel through the AML coordinator before proceeding.

  10. For details regarding case content, assembly and procedures, see IRM 4.26.11.

4.26.12.2.6  (01-01-2003)
Money Laundering Trends

  1. The business and/or the customer can be involved in potential money laundering schemes. The examiner must focus on both the business and the transactor(s) during the Form 8300 compliance review.

  2. Money laundering techniques which could be used by the business include:

    1. Failing to maintain complete records,

    2. Failing to maintain accurate records,

    3. Failing to record specific transactions,

    4. Failing to file Form 8300 on reportable transactions, and

    5. Structuring a transaction by breaking one transaction into several to circumvent the reporting requirements.

     

  3. Money laundering techniques which could be used by the customer/transactor include:

    1. Using multiple locations to conduct transactions,

    2. Using several individuals at one or more locations to conduct a transaction,

    3. Using aliases when conducting transactions,

    4. Conducting numerous transactions at the same location at different times during one day, and

    5. Using a combination of currency and monetary instruments to conduct transactions.

     

  4. Evidence uncovered of potential money laundering schemes should be referred to Criminal Investigation (CI) on Referral Report for Potential Fraud Cases (Form 2797).

4.26.12.2.7  (01-01-2003)
Form 8300 Review Techniques

  1. Ensure that sources of cash received are properly identified in the books and records. Claims of unknown or unidentified sources should be scrutinized.

  2. Ensure that trust fund ownership is properly identified on filed forms. If filed Currency Transaction Reports (CTRs) do not fully identify the owner of trust funds; there should be a Form 8300 filed by the attorney. (The exception of Treas. Reg. 1.6050I-1(a)(3)(ii) only applies if the principle in the transaction is fully identified and all cash is transferred within 15 days.)

  3. Ensure that any claim of attorney-client privilege, professional ethical obligations or Constitutional protections is properly coordinated with Area Counsel through the anti-money laundering (AML) coordinator before proceeding with any summons or penalty actions.

  4. Ensure that trust funds are clearly identified on filed reports. One widespread practice, which may obscure the ownership of funds, involves attorney trust accounts. Accounts are established in the name of the state bar association to hold trust funds. (These accounts are alternatively termed IOLTA - Interest on Lawyer's Trust Account, or IOLA - Interest on Lawyer's Account, depending on the state.) Attorneys deposit funds into the account. Interest from such accounts accrues to the benefit of the bar association. However, the identity of the attorney depositing funds or the true owner of the funds may not be identified on Currency Transaction Reports (CTRs) filed by the bank. There are often no Forms 8300 filed. While this practice is not necessarily indicative of money laundering, it does effectively obscure the ownership of the funds.

4.26.12.3  (01-01-2003)
Casinos and Card Clubs Overview

  1. The examiner is responsible for the three aspects of the Anti-Money Laundering Program: Identify, Notify, and Enforce. The examiner must be alert to efforts by customers or businesses to structure transactions to avoid the filing of Form 8300.

  2. Casinos and card clubs, which have gross annual gaming revenues (GAGR) of $1,000,000 or less, are subject to the requirements of Internal Revenue Code (IRC) Section 6050I. They are not required to comply with the reporting and recordkeeping of the Bank Secrecy Act (BSA) also known as Title 31.

  3. For casinos and card clubs operating in Nevada, state Regulation 6A replaces the BSA. Regulation 6A has a threshold of $10,000,000 in GAGR. Nevada casinos and card clubs with GAGR of $10,000,000 or less are subject to IRC Section 6050I.

    Note:

    For procedures and policies relating to casinos with GAGR greater than $1,000,000, and a discussion of Nevada casinos, please see Section 9, and 31 CFR 103.

     

  4. Since tribal governments do not have to file Forms 8300, but tribal members and others do, the examiner should determine the ownership structure of a tribal casino before proceding with a Form 8300 review.

  5. Wherever the term casino is used in this section, it includes card clubs.

  6. Non-gaming financial services such as check cashing, currency exchange and wire services are regulated by Title 31. If the casino is providing these services notify the anti-money laundering (AML) coordinator. However the disclosure provisions of IRC Section 6103 apply if such information is obtained during a Form 8300 compliance review.

  7. Casinos vary in size. IRC Section 6050I and the filing of Form 8300 only apply to the smaller casinos. It is imperative the examiner not confuse the multitude of requirements in 31 CFR 103 BSA with the requirements under IRC Section 6050I.

  8. Some casinos may also maintain separate rooms or parlors that offer other games such as Keno, Bingo, Poker, Race Betting, Sports Betting, etc.

  9. In addition to a gambling casino, the casino complex may include hotel facilities, restaurants, bars and lounges, theaters and showrooms, sports and health facilities, convention space, and various exclusive shops and stores.

  10. Casinos are licensed and regulated by state, tribal, and local governments. Their organizational structure may vary depending upon applicable laws and regulations, and management needs within each individual casino. Generally, a typical gambling casino is organized into two separate, yet related operations, the casino floor and the casino cage. Larger casinos may have more than one casino floor and/or more than one casino cage. (See Exhibit 4.26.12-1.)

4.26.12.3.1  (01-01-2003)
Law

  1. Internal Revenue Code (IRC) Section 6050I requires that any person engaged in a trade or business who receives cash in excess of $10,000 in one transaction, or two or more related transactions, in the course of their trade or business, must file Form 8300 within 15 days of receipt of the reportable cash. A copy of each filed Form 8300 must be retained for five years by the business.

  2. Any business filing a required Form 8300 must also furnish a written statement to each person identified on Form 8300 by January 31 of the succeeding calendar year. A copy