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Again, your investigators pointed that out this morning on incomplete transactions.
Since the civil penalty is equal to 10 percent of the transaction, an automobile dealer gambled on a penalty of $3,000 for a $9,000 profit made on the car sale. That is real gambling.
The form 8300 compliance level is unsatisfactory. Part of the problem is the general lack of knowledge, or claimed lack of knowledge, on the part of businesses.
In IRS, our job is to provide information to taxpayers that want to comply, the opportunity to do it and do it right. Among the steps being pursued to counter this lack of knowledge is the creation of two new documents. Attached is a copy of the new IRS Notice 923, "A Guide to Reporting Cash Transactions for Trades and Business," which has just been released. The other will be publication 1544, "Reporting Cash Payments of Over $10,000," which will be available in November. These documents will be used in our efforts to educate businesses on form 8300 filing requirements.
Many district and regional offices have explored various methods of identifying and contacting businesses liable for filing forms 8300. Some of these projects used personnel from a single function to personally contact likely businesses.
In other projects, individuals from Collection, Criminal Investigation, and Examination participated in the contacts. For example, last month the Birmingham District contacted 131 businesses to test their compliance. Of those, 60 percent, 79 of them were found to be in violation of the form 8300 filing requirements. That is not as high a percentage, Mr. Chairman, as you reported this morning, but it certainly is further indication of the problem.
Approximately $2 million in unreported cash transactions was identified and some $18,000 in civil penalties have been proposed. Additionally, the Miami office sent out two-person teams to personally contact some 400 import-export businesses to explain these requirements.
Mr. Anthony earlier pointed out the need for education, and I would like to report that several offices have sent mailings to selected occupational groups. The Milwaukee District Office used certified mail to advise the 2,200 new and used car dealers in the State of the section 60501 requirements and provide instructions for filing forms 8300. And, yes, that item is very well covered in the press clipping that I have submitted for the record. The Fresno office mailed notices to all reporting auto and boat dealers filing with that service center. The Richmond district sent a three-fold brochure through the Virginia State sales tax mailings.
So we believe that an increased education campaign needs to be conducted nationwide. Professional trade associations such as the National Automobile Dealers Association, numismatic and gemologist groups, and the various State boards of realty need to become involved in encouraging their members to be alert to reporting illegal cash dealings.
Chairman PICKLE. Do these district offices or regional offices have the discretion to conduct these special mailing programs?
Mr. MURPHY. Yes, they do, Mr. Chairman. I can assure you that there is no problem in that.
I can give you all kinds of examples of what is going on in various parts of the country, but I think you would agree that the national approach to this is something that will ensure that it is covered throughout the country. But they do have the discretion to do it and we would coordinate that with them at the national, regional and district.
Chairman PICKLE. They have that discretion, but what leadership do they have from you? Do you encourage them to do that? Do you have a national policy?
Mr. MURPHY. Yes, Mr. Chairman, but we have to do it more and it has to have more of a national leadership to it. I submit to you that that is exactly what we intend to do.
Chairman PICKLE. I think it should be a form of national policy. Mr. MURPHY. Thank you, sir.
Let me conclude, Mr. Chairman, by saying that while compliance with the form 8300 reporting requirements is poor, our efforts are beginning to bear fruit.
This month, a business had a customer agree to buy an item for over $10,000 in cash. When they sought personal information for completion of the form 8300, the purchaser expressed opposition to having the transaction reported to IRS and canceled the transaction, like we heard this morning.
However, the individual then returned with a series of money orders to purchase the item. After the sale, the business prepared a form 8300 to the best of their ability and explained the events that had transpired. This case has been referred for investigation.
We feel that as the business community becomes more aware of the requirements and more publicity generated, compliance should improve.
We will continue to improve our education and enforcement efforts, and we certainly want to thank you again for your support, Mr. Chairman, in holding this hearing and also for what you have been able to do to support our 1991 budget, which I think is essential for us to have the resources to deal with these type of problems as they occur.
Thank you very much, Mr. Chairman. We are all three available to answer whatever questions you may have.
[The prepared statement and attachments follow:]
Michael J. Murphy
Senior Deputy Commissioner
Internal Revenue Service
Subcommittee on Oversight
House Committee on Ways and Means
September 20, 1990
Mr. Chairman and Members of the Subcommittee:
With me today are Inar Morics, Assistant Commissioner (Criminal Investigation) and Marshall V. Washburn, Deputy Assistant Commissioner (Examination). We appreciate the opportunity to appear before you today to discuss the IRS contribution to Federal efforts to combat money laundering. emphasis today will be on reports required to be filed by businesses under Internal Revenue Code section 60501. We will be glad to answer any questions you may have at the conclusion of this opening statement.
The IRS welcomes this hearing into our activities to combat money laundering. As you are aware, IRS devotes substantial resources to this effort. Both the Currency Transaction Report (CTR) and the Form 8300, Report of Cash Payments over $10,000 Received in a Trade or Business, provide important leads for these investigations. There is inadequate compliance by those responsible under section 60501 for filing the Form 8300. We welcome your interest and attention to our efforts to educate the business community on its responsibilities in this vital area. The problems we face with Form 8300 compliance are similar to the compliance problems we faced with regulated financial institutions regarding Currency Transaction Reports in the past.
Money laundering is the concealment of the existence, nature or illegal source of illicit funds in such a manner that the funds will appear legitimate if discovered. Thus, 'dirty' money is washed in order to appear 'clean'. To many people, money laundering is equated solely with the proceeds of narcotics trafficking. However, to IRS, it includes income from any illicit activity, including white collar crime, as well as unreported income from an otherwise legitimate activity.
Key tools in the detection of illicit income are the requirements for the reporting of certain financial transactions established by Titles 31 and 26 of the United States Code. Title 31 requirements date from 1970 with enactment of the Bank Secrecy Act. This Act requires financial institutions to file Currency Transaction Reports on certain cash transactions in excess of $10,000. The reports are filed with our Detroit Computing Center where they are incorporated into a data base with financial and currency information from other reports. CTR information is transmitted to the Customs Service by magnetic tape which permits weekly updates to the Treasury Enforcement Communication System maintained by Customs.
Also included in these data bases is information from Forms 8300, which report the receipt of more than $10,000 by a person engaged in a trade or business as required by section 60501. This section was added in 1984 to establish a reporting mechanism for entities not covered under Title 31, such as auto dealers, insurance companies, and dealers in precious metals. Analysis of this information has aided IRS in identifying and prosecuting criminal violations, as well as assessing additional taxes on unreported income.
There are over 7,000 IRS employees with on-line access to the data base in Detroit. While much of the publicity and this testimony revolve around the use of this data for IRS Criminal Investigation purposes, it is used by all IRS functions with increasing frequency.
During August 1990, Examination, Criminal Investigation and Collection personnel made 23,000, 16,000 and 4,000 queries, respectively of the Detroit Data Base. Examination personnel use the data when developing Title 31 and Form 8300 compliance projects, in the development of potential fraud cases, when conducting package audits, and in situations where the examiner is seeking leads on additional income or assets. It is also used by Collection personnel seeking asset or income sources from which to collect delinquent accounts.
Compliance with the CTR reporting requirements by financial institutions was inadequate for many years, despite various educational and compliance efforts by IRS and Treasury. In 1985, the Bank of Boston pled guilty to Bank Secrecy Act violations. This was followed by the assertion of a number of large civil penalties by the Treasury. Since then compliance by banks has improved dramatically. CTR filings increased from fewer than 70,000 per month to the present level of over 500,000 per month. We are now faced with a similar problem in compliance with the section 60501 reporting requirements. Despite a variety of educational and compliance efforts, only a few thousand are filed each month.
The ways in which funds can be laundered are limited only by the imagination. Money laundering may include the movement of cash domestically or internationally through financial institutions or conversion of cash into assets. In the past it was fairly easy for a money launderer to locate a bank that would agree not to file a CTR. This is no longer the case. Compliance by the banking community is quite good. Current CTR reporting problems generally involve the unregulated financial institutions such as currency exchanges. As you know, the House Banking Committee has been exploring possible solutions in this area.
The Assistant Commissioner (Criminal Investigation) has responsibility for criminal investigation activities across the country, while the Assistant Commissioner (Examination) has responsibility for all examination activities. At this point we would like to describe the efforts of these offices in combatting money laundering.
Examination's mission is to identify those returns most in need of examination and to conduct quality examinations. In order to accomplish this, we must allocate our limited resources across a variety of tax returns, such as income, estate, gift, employment and excise. In addition, we have established tax abuse and other special programs. One of the latter is our currency and banking reports program which includes two activities. Both activities are intended to promote compliance with the reporting and recordkeeping requirements regarding cash transactions.
The first activity reflects the IRS responsibility for ensuring Title 31 civil compliance, the filing of CTRS, by financial institutions not examined by any other Federal agency for safety or soundness. Examples of these nonbank financial institutions include: check cashing services; currency exchange operations; issuers, redeemers or cashiers of travelers checks, money orders, or similar instruments; and licensed gambling casinos with gross revenue exceeding $1 million.
The types of businesses providing such services are extremely varied. For example, it is possible to purchase money orders or arrange for the wire transfer of funds through customer service departments of many grocery stores, truck stops, convenience stores, and travel agencies. This diversity creates a major task just to identify the entities who should be filing CTRS.
Examination conducts specific Title 31 compliance checks on these institutions separately from our tax examinations under Title 26. The resources committed to performing these compliance checks has been increased by 100% over the past four years. fiscal year 1991, we have planned for an increase of 38%, which will mean the commitment of 81 staff years to this activity.
The second activity included in our currency and banking reports program is the administration of the information reporting provisions of section 60501. Compliance with the requirement to file Forms 8300 is checked during our package audit process. The package audit concept is a required examination procedure which calls for revenue agents to ensure that all tax returns and documents have been filed by the taxpayer under such an examination. This is an incremental addition to the time expended in the examination of entities selected for package audits and results are not separately reported. While an effective method of allocating our limited resources, this approach has the disadvantage of not providing specific statistics on resources applied or results obtained.
Another method for checking on section 60501 compliance is through local compliance initiatives. Currently, there are 20 Form 8300 compliance projects being tracked by our seven regional offices. The Manhattan and Boston Districts have each established an examination group focused on money laundering and white collar crime.
In addition, three national projects have been developed to assist in the identification of businesses most in need of compliance checks. The first project addressed attorneys who filed incomplete Forms 8300, asserting that a completed form would mean a violation of the attorney/client privilege. The missing information is being sought through service of administrative summonses. Some attorneys have complied while others have not. A New York summons enforcement case was decided in the government's favor at the District Court level and is now on appeal. An additional 21 cases proposing summons enforcement litigation have been referred to the Justice Department. The other two national projects involve the identification of nonfilers.
In addition to the internal revenue laws, Criminal Investigation is responsible for investigating all allegations of criminal violations of the Bank Secrecy Act except violations related to the international transportation of currency and monetary instruments.