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 (Cont. 2)

4.26.12  Examination Techniques for Form 8300 Industries (Cont. 2)

4.26.12.8 
Other Service Occupations Overview

4.26.12.8.5 
Compliance Review Procedures

4.26.12.8.5.2  (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. Education 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 or 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.

4.26.12.8.5.3  (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. 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 official document?

    10. Procedures used by the business to notify transactors;

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

    12. Related entities

     

  3. The interview and records inspection must be solely for the purpose of the Form 8300 compliance review. No inquiries 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 may constitute 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 may use the information from their records for any tax matter permitted by the Internal Revenue Code.

4.26.12.8.5.4  (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 identify 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. Upon completion of the interview, conduct a random sample of transactions, tracing the customer's payment through the banking and accounting records. The review of sample transactions should be used to confirm the information given in the interview about the records and also to test that the records to be reviewed are complete and include all sales. Note any discrepancies.

  4. Adjust pre-plan to include information gained from the interview and the random sample.

  5. The records selected to be reviewed should be appropriate for the compliance review.

    • If the value of the services are consistently over $10,000, then starting with the customer receipts that identify both the amount and type of payment may be appropriate.

    • If only some of the services provided are valued at over $10,000, then beginning with trip tickets, bail bond certificates, contracts, or customer accounts receivable may be more appropriate.

    • If the definition of reportable cash is only currency, then starting from duplicate deposit slips may be the best approach. However, note that cash will include monetary instruments in any transaction in which they are used to avoid the reporting requirements of IRC Section 6050I.

     

  6. When recording potential cash transactions it is important to note:

    • The date funds were received;

    • The amount,

    • The date funds were deposited;

    • The name of the transactor,

    • The receipt number; and

    • Account number and account owner (if different from transactor)

     

  7. For any transaction the examiner believes was reportable and a Form 8300 was not filed, the examiner should copy the receipts, contracts, and any documentation which provides evidence to support the examiner's workpapers. The examiner should record the location of the original records pertaining to these transactions.

  8. 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.

  9. 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.

4.26.12.8.5.5  (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, or filed incompletely 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 customer 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 details regarding case content, assembly, and procedures, see IRM 4.26.11.

4.26.12.8.6  (01-01-2003)
Money Laundering Trends

  1. he 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 Forms 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. Using a combination of currency and monetary instruments to conduct transactions.

4.26.12.8.7  (01-01-2003)
Form 8300 Review Techniques

  1. Consider special scrutiny of contracts cancelled. Those paid in cash, cancelled in close proximity to the initial payment, and refunded by company check may be an indication of money laundering.

  2. Different individuals making multiple deposits for one transaction may be an indication of structuring.

  3. In real estate transactions, consider close scrutiny of the trust fund account. Patterns of trust fund deposits just below the reporting threshold may be an indication of structuring. In this instance, the structuring could involve the broker or agent, as well as the client.

  4. A good method for determining currency thresholds is to ascertain the number of payments generally made for the type of transaction and business. Then divide $10,000 by the number of payments and round to the next highest thousand. (For example, if there would normally be 3 payments in a transaction, divide $10,000 by 3, and round up to the next thousand = $4,000).

  5. Payments for service using certain monetary instruments in amounts less than $10,000 in regular patterns need special scrutiny. This is an indication of the potential structuring of the transaction to avoid the Form 8300 reporting requirements.

  6. Be alert to patterns of monetary instruments purchased in blocks to avoid the identification requirement of Bank Secrecy Act (Title 31) and then tendered as part of a payment in excess of $10,000. The monetary instruments may not only identify a violation of Internal Revenue Code (IRC) Section 6050I, but also of Title 31.

  7. For travel agencies and entertainment, cash includes money orders and cashiers checks with a face value of $10,000 or less.

  8. Bail bond firms will require the receipt of "good" funds for posting of a bond. Therefore, currency may be seen more frequently in this service occupation than others. Be alert to the use of monetary instruments to avoid the filing of Form 8300. Also, In addition to the amounts required under the bond, bail agents may also require additional collateral. Such collateral is related to the posting of the bond and is considered part of the transaction.

4.26.12.9  (01-01-2003)
Other Retail 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. Other retail businesses sell items in exchange for cash, checks, wire transfer of funds and/or financing arrangements. These businesses include, but are not limited to, the following:

    • Antique Dealers

    • Art Dealers

    • Auctions

    • Coin & Precious Metal Dealers

    • Electronics

    • Furniture Stores

    • Furriers

    • Pawn Shops

    • Retail Jewelers

    • Sports Memorabilia Dealers

    • Stamp Dealers

     

  3. Many retail stores are owned and operated by large corporations identified under many different names at numerous locations. These stores maintain an inventory of items for sale. Many smaller specialty shops especially antique and art dealers, hold costly items. The potential for cash payments over $10,000 is extremely high.

4.26.12.9.1  (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 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. Cash - Cash includes the coin and currency of the United States, or any other country, which circulates and is accepted as money in the country in which issued. In addition, after February 2, 1992, cash also includes cashier's checks, bank drafts, money orders or travelers checks having a face amount of not more than $10,000 that were:

    1. Received in a designated reporting transaction, or

    2. Received in any transaction in which the recipient knows or has reason to know that such instrument is being used in an attempt to avoid reporting the transaction as required by IRC Section 6050I.

     

  4. Designated Reporting Transaction - A retail sale of a consumer durable, collectible or a travel or entertainment activity.

  5. Consumer Durable - An item of tangible personal property of a type that is suitable under ordinary usage for personal consumption or use and has a sales price of more than $10,000. The item can reasonably be expected to be useful for at least one year under ordinary usage. NOTE: While an automobile with a sales price in excess of $10,000 is a consumer durable whether or not sold for business use, a dump truck or factory machine is not.

  6. Retail Sale - Any sale made in the course of a trade or business, if that trade or business principally consists of making sales to ultimate consumers.

  7. For additional information on the law and any statutory exceptions, see IRM 4.26.10.

4.26.12.9.2  (01-01-2003)
Records Commonly Found

  1. Records most commonly found include:

    • Bank statements

    • Cash receipts journal

    • Cash register tape

    • Customer cards

    • Customer files

    • Customer invoices and receipts

    • Duplicate deposit slips

    • Installment records

    • Inventory control sheets

    • Lay-away records

    • Professional appraisal

    • Sales journal

     

4.26.12.9.3  (01-01-2003)
Terminology

  1. Auction Barn/Yard--can include livestock and heavy equipment sales.

  2. Auction House -also known as estate sales and private auction. Generally presenting valuable high-ticket items of possible antique value.

  3. Bid --amount offered to purchase

  4. Bullion--precious metal and coin

  5. Customer cards-a record of customer purchases or account receivable cards

  6. Furrier--the seller of apparel and accessories made from animal fur or artificial furs.

  7. In-house financing--financing that is provided by the business without using outside sources.

  8. Loan Agreement--term of loan for numerous retail items from furniture to electronics.

  9. Pawn Ticket--record of stock held for customer retrieval by a specific date in exchange for cash.

  10. Public Auction--can draw large cash transactions depending on items presented.

  11. Rental Purchase Plan - a plan that allows the rental of furniture, electronics and appliances that will eventually allow the customer to own the items.

  12. Silent Auctions - sealed bids are made on items-most often seen in art and antique sales.

4.26.12.9.4  (01-01-2003)
Identifying Businesses for a 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. Prior to contact, all entities identified for potential Form 8300 compliance reviews must be forwarded to the anti-money laundering coordinator for clearance.

4.26.12.9.5  (01-01-2003)
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.

4.26.12.9.5.1  (01-01-2003)
Pre-Plan

  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 practices of the business.

  3. The examiner should become familiar with the general business structure for retail stores, which may include:

    • Owner/Corporate Headquarters

    • Store/Operations Manager

    • Office Manager

    • Sales Staff

    • Bookkeeper

    • Cashier

     

4.26.12.9.5.2  (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.

4.26.12.9.5.3  (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. 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 official document?

    10. Procedures used by the business to notify transactors.

    11. The entity's membership in various types of trade associations; and

    12. Related entities.

     

  3. The interview and records inspection must be solely for the purpose of the Form 8300 compliance review. No inquiries 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 constitute 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 may use the information from their records for any tax matter permitted by the Internal Revenue Code.

4.26.12.9.5.4  (01-01-2003)
Review of Records

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

    1. Transactions 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 Forms 8300 were filed on such transactions.

     

  2. The examiner should be alert to identify 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