Justice Department Opens 2016 Tax Season With Stern Warning to Taxpayers

The Internal Revenue Service announced that the 2016 individual income tax filing season opened on January 19, 2016, with more than 150 million returns expected to be filed. The IRS expects more than 70 percent of taxpayers to again receive tax refunds this year. Last year, the IRS issued 109 million refunds, with an average refund of $2,797.

Simultaneously sending a stern warning to would-be tax cheats, the Justice Department’s Tax Division announced that a business owner in Alexandria, Virginia, had pleaded guilty to a multi-million dollar conspiracy to defraud the IRS that could land the defendant in jail for four to five years. In that case, the defendant owned and operated a gas station and multiple Subway restaurant franchises. According to court documents, the defendant admitted that between 2008 and 2014, he and his managers failed to deposit all of the gas station and Subway franchises’ gross receipts into corporate bank accounts. Instead, the defendant and his co-conspirators skimmed those receipts and retained them for their personal use, and failed to report those funds to the IRS. IRS investigators built their case by reviewing point-of-sales records for the Subway franchises, which showed total sales of $20 million for this period, but the corporate and partnership tax returns only reflected sales of $14 million. Compounding the problem, certain of the defendant’s businesses did not file returns at all in some years. The defendant also acknowledged filing false individual income tax returns. In his guilty plea, the defendant admitted that his illegal conduct caused a tax loss to the IRS of between $1.5 million and $3.5 million.

Using this defendant’s guilty plea as an opportunity to promote general deterrence and tax compliance, the Justice Department’s press release contains the usual cautionary language typically seen around April 15:

“As we start the 2016 filing season, this case serves as a reminder that the Justice Department, working with its partners at the IRS, remains committed to identifying, investigating and prosecuting businesses and individual taxpayers who willfully fail to file accurate tax returns and pay the taxes due,” said Acting Assistant Attorney General Ciraolo. “Every taxpayer owes a duty to their fellow citizens to pay their fair share and those who choose not to do so will face the consequences.”

“Today’s plea of Obayedul Hoque for conspiracy to defraud the United States sends a clear message to would-be tax cheats,” said Chief Richard Weber of IRS-Criminal Investigation (CI). “Whether you fail to file and pay your corporate taxes or your personal income taxes, IRS-CI special agents work diligently to uncover all kinds of fraud and hold everyone accountable. U.S. citizens expect and deserve a level playing field when it comes to paying taxes and there are no better financial investigators in the world when it comes to following the money.”

It is well-known that the Justice Department’s Tax Division typically increases the frequency of its press releases announcing enforcement activity in the weeks leading up to April 15. Academic research confirms that the DOJ issues a disproportionately large number of tax enforcement press releases as “Tax Day” approaches:

Every spring, the federal government appears to deliver an abundance of announcements that describe criminal convictions and civil injunctions involving taxpayers who have been accused of committing tax fraud. Commentators have occasionally suggested that the government announces a large number of tax enforcement actions in close proximity to a critical date in the tax compliance landscape: April 15, “Tax Day.” These claims previously were merely speculative, as they lacked any empirical support. This article fills the empirical void by seeking to answer a straightforward question: When does the government publicize tax enforcement? To conduct our study, we analyzed all 782 press releases issued by the U.S. Department of Justice Tax Division during the seven-year period of 2003 through 2009 in which the agency announced a civil or criminal tax enforcement action against a specific taxpayer identified by name. Our principal finding is that, during those years, the government issued a disproportionately large number of tax enforcement press releases during the weeks immediately prior to Tax Day compared to the rest of the year and that this difference is highly statistically significant. A convincing explanation for this finding is that government officials deliberately use tax enforcement publicity to influence individual taxpayers’ perceptions and knowledge of audit probability, tax penalties, and the government’s tax enforcement efficacy while taxpayers are preparing their annual individual tax returns.

Joshua D. Blank and Daniel Z. Levin, When Is Tax Enforcement Publicized?, 30 Virginia Tax Review 1 (2010).

With the opening of the 2016 tax filing season, we can expect a steady drumbeat of DOJ press releases with increasingly stronger warnings as April 15 approaches.

Justice Department Announces Historic Conclusion of Swiss Bank Program for Category 2 Institutions

DOJ logoThe Justice Department achieved a historic milestone in its ground-breaking Swiss Bank Program with its announcement today of the final Category 2 bank resolution. The Justice Department executed its 80th and final agreement with HSZH Verwaltungs AG, which agreed to pay a civil penalty of more than $49 million. All told, the 80 Category 2 Swiss banks which resolved their criminal tax exposure with the U.S. government will pay more than $1.36 billion in penalties. Perhaps even more importantly, every Category 2 bank in the Swiss Bank Program is required to cooperate in any future related criminal or civil proceedings, thereby ensuring that the Justice Department will have the complete assistance from each bank as the U.S. government pursues leads throughout the world.

By all accounts, the Swiss Bank Program appears to have been an incredible success for the Justice Department (and IRS) in its efforts to combat offshore tax evasion. Never before had the U.S. government offered an amnesty program to the entire banking industry in a particular country, and at the time the program was unveiled in 2013, it was not clear that the program would be a success or that Swiss banks would be interested. But given the overwhelming demonstration of interest from Swiss banks, the substantial monetary penalties collected, and the wealth of information shared with the U.S., the program can fairly be declared a significant win for the U.S. government. Given the success of the Swiss Bank Program, it will be interesting to see whether the Justice Department offers a similar program to banks in other countries or regions.

Today’s press release included the following quote from the Attorney General thanking the Swiss government for its efforts in making the Swiss Bank Program so successful:

“The Department of Justice is committed to aggressively pursuing tax evasion, and the Swiss Bank Program has been a central component of that effort,” said Attorney General Loretta E. Lynch. “Through this initiative, we have uncovered those who help facilitate evasion schemes and those who hide funds in secret offshore accounts. We have improved our ability to return tax dollars to the United States. And we have pursued investigations into banks and individuals. I would like to thank the Swiss government for their cooperation in this effort, and I look forward to continuing our work together to root out fraud and corruption wherever it is found.”

Other Justice Department officials echoed the Attorney General’s sentiments, and noted that the Swiss Bank Program has provided the DOJ and IRS with a wealth of information that is being mined for leads that are being pursued civilly and criminally throughout the world:

“The department’s Swiss Bank Program has been a successful, innovative effort to get the financial institutions that facilitated fraud on the American tax system to come forward with information about their wrongdoing – and to ensure that they are held responsible for it,” said Acting Associate Attorney General Stuart F. Delery. “As we have seen over the last year, Swiss banks are paying an appropriate penalty for their misconduct, and the information and continuing cooperation we have required the banks to provide in order to participate in the program is allowing us to systematically attack offshore tax avoidance schemes.”

“The completion of the agreements under Category 2 of the Swiss Bank Program represents a substantial milestone in the department’s ongoing efforts to combat offshore tax evasion, and we remain committed to holding financial institutions, professionals and individual taxpayers accountable for their respective roles in concealing foreign accounts and assets, and evading U.S. tax obligations,” said Acting Assistant Attorney General Caroline D. Ciraolo of the Justice Department’s Tax Division. “Using the flood of information flowing from various sources, the department is investigating this criminal conduct, referring appropriate matters to the Internal Revenue Service for civil enforcement and pursuing leads in jurisdictions well beyond Switzerland. Individuals and entities engaged in offshore tax evasion are well advised to come forward now, because the window to get to us before we get to you is rapidly closing.”

Top officials from the Internal Revenue Service similarly commended today’s announcement, noting that more than 54,000 taxpayers have come forward to voluntarily disclose their previously-undisclosed offshore assets:

“Today’s resolution with HSZH Verwaltungs AG brings to a close this phase of DOJ’s Swiss Bank Program,” said acting Deputy Commissioner International David Horton of the IRS Large Business & International Division. “The comprehensive success of this program sends a powerful message to those who might think they can evade their tax obligations by going offshore. A whole sector of financial institutions, 80 banks in all, has been held accountable for aiding the use of secret accounts and circumventing U.S. law. In addition to the more than $1.3 billion in penalties from these resolutions, more than 54,000 taxpayers have come forward to the IRS to pay more than $8 billion in taxes, interest and penalties.”

“The bank agreement with HSZH announced today may bring an end to one phase of the Swiss Bank Program, but more importantly it brings us closer to our overall goal of compliance and accountability for financial institutions and U.S. taxpayers,” said Chief Richard Weber of IRS-Criminal Investigation. “The data received from each agreement on the accounts, schemes and linkages is extremely valuable in combating international tax evasion. I could not be more proud of the effort of our special agents who worked tirelessly to make this program a success in coordination with the Department of Justice.”

The Swiss Bank Program, which was announced on Aug. 29, 2013, provides a path for Swiss banks to resolve potential criminal liabilities in the United States. Swiss banks eligible to enter the program were required to advise the department by Dec. 31, 2013, that they had reason to believe that they had committed tax-related criminal offenses in connection with undeclared U.S.-related accounts. Banks already under criminal investigation related to their Swiss-banking activities and all individuals were expressly excluded from the program.

Under the program, banks are required to:

  • Make a complete disclosure of their cross-border activities;
  • Provide detailed information on an account-by-account basis for accounts in which U.S. taxpayers have a direct or indirect interest;
  • Cooperate in treaty requests for account information;
  • Provide detailed information as to other banks that transferred funds into secret accounts or that accepted funds when secret accounts were closed;
  • Agree to close accounts of accountholders who fail to come into compliance with U.S. reporting obligations; and
  • Pay appropriate penalties.

Swiss banks meeting all of the above requirements are eligible for a non-prosecution agreement.

Taxpayers who have still not “come clean” and declared their offshore assets may still take advantage of various IRS programs, such as the Offshore Voluntary Disclosure Program or the Streamlined Filing Compliance Procedures, but the price of admission has now increased if they had accounts at HSZH:

Most U.S. taxpayers who enter the IRS Offshore Voluntary Disclosure Program to resolve undeclared offshore accounts will pay a penalty equal to 27.5 percent of the high value of the accounts. On Aug. 4, 2014, the IRS increased the penalty to 50 percent if, at the time the taxpayer initiated their disclosure, either a foreign financial institution at which the taxpayer had an account or a facilitator who helped the taxpayer establish or maintain an offshore arrangement had been publicly identified as being under investigation, the recipient of a John Doe summons or cooperating with a government investigation, including the execution of a deferred prosecution agreement or non-prosecution agreement. With today’s announcement of this non-prosecution agreement, noncompliant U.S. accountholders at HSZH must now pay that 50 percent penalty to the IRS if they wish to enter the IRS Offshore Voluntary Disclosure Program.

FinCEN Cracks Down on Real Estate Secrecy

January 22, 2016

by Matthew D. Lee and Jed M. Silversmith

Law360

In yet another sign of its aggressive campaign to fight money laundering, the Treasury Department’s Financial Crimes Enforcement Network has trained its sights on the high-end real estate market in New York and Miami. With the issuance of a little-known yet incredibly powerful anti-money laundering tool called a “geographic targeting order,” FinCEN will soon require certain title insurance companies to identify the natural persons behind companies that used to pay all cash for luxury residential real properties located in the borough of Manhattan and Miami-Dade County.[1] According to a press release announcing the issuance of the GTOs, FinCEN is concerned that individuals are using all-cash purchases of real estate as a mechanism to carry out money laundering, and such individuals are using limited liability companies or other opaque structures to conceal their identities in such transactions.[2] Under the terms of these GTOs, certain title insurance companies involved in all-cash real estate transactions with purchase prices exceeding $3 million in Manhattan, or exceeding $1 million in Miami-Dade County, must report such transactions to FinCEN and, in particular, identify the “beneficial owner” of the entity used to facilitate the purchase.

Background Regarding Geographic Targeting Orders

A GTO is an administrative order issued by the director of FinCEN requiring all domestic financial institutions or nonfinancial trades or businesses that exist within a geographic area to report on transactions any greater than a specified value. GTOs are authorized by the Bank Secrecy Act (BSA). Originally, GTOs were only permitted by law to last for 60 days, but that limitation was extended by the USA Patriot Act to 180 days. GTOs are typically not made public, and generally only those businesses served with a copy of a particular are aware of its existence.

Over the course of the last 24 months, FinCEN — the primary agency of the U.S. government focused on anti-money laundering compliance and enforcement — has exercised its authority to issue GTOs frequently throughout the United States in areas of money laundering concern. Recent GTOs have focused on shipments of cash across the border in California and Texas, the Fashion District of Los Angeles, exporters of electronics in South Florida, and check cashing businesses in South Florida. In each of these instances, FinCEN publicly announced the issuance of the GTO and its terms, and expressed concern that the industries or regions in question were highly susceptible to money laundering.

Prior Efforts to Prevent Money Laundering in Real Estate Transactions

For several years, FinCEN has sought to ensure financial transparency and combat illegality in the real estate market. In February 2015, the New York Times published a series of articles focused on the use of shell companies to purchase high-value real estate in New York City.[3] In a November 2015 speech, FinCEN’s director disclosed that through analysis of BSA reporting and other information, FinCEN has observed the frequent use of shell companies by international corrupt politicians, drug traffickers and other criminals to purchase luxury residential real estate in cash. FinCEN has uncovered fund transfers in the form of wire transfers originating from banks in offshore havens at which accounts have been established in the name of the shell companies. The perpetrator will direct an individual involved in the settlement and the closing in the U.S. to put the deed to the property in the name of the shell company, thereby obscuring the identity of the owner of the property.

The BSA established anti-money laundering obligations for financial institutions, including institutions involved in real estate transactions. By including these businesses in the definition of “financial institution,” Congress recognized the potential money laundering and financial crime risks in the real estate industry. In the USA Patriot Act, Congress mandated that FinCEN issue regulations requiring financial institutions to adopt AML programs with minimum requirements, or establish exemptions, as appropriate. Since that time, FinCEN has implemented AML requirements for certain real estate businesses or established exemptions for others consistent with the BSA.

One particular area of recent focus for FinCEN is seeking greater transparency in the area of beneficial ownership of corporate entities. To that end, in July 2014, FinCEN issued proposed regulations that would amend existing BSA regulations to help prevent the use of shell and shelf companies to engage in or launder the proceeds of illegal activity in the U.S. financial sector. As proposed, the regulations would clarify and strengthen customer due diligence obligations of banks and other financial institutions, including brokers or dealers in securities, mutual funds, futures commission merchants, and introducing brokers in commodities. The proposed amendments would add a new requirement that these entities know and verify the identities of the real people who own, control and profit from the companies they service.

In the press release announcing issuance of the two GTOs focused on real estate transactions, FinCEN Director Jennifer Shasky Calvery said that her agency was “seeking to understand the risk that corrupt foreign officials, or transnational criminals, may be using premium U.S. real estate to secretly invest millions in dirty money.” Calvery further explained that “[o]ver the years, our rules have evolved to make the standard mortgage market more transparent and less hospitable to fraud and money laundering. But cash purchases present a more complex gap that we seek to address. These GTOs will produce valuable data that will assist law enforcement and inform our broader efforts to combat money laundering in the real estate sector.” Information gathered by title insurance companies and reported to FinCEN will be utilized by federal law enforcement agencies to enhance their ability to identify the natural persons involved in transactions vulnerable to abuse for money laundering and will combat the ability of individuals to disguise their involvement in such transactions.

Terms of the Manhattan and Miami-Dade GTOs

The latest GTOs focused on real estate transactions apply to certain title insurance companies engaging in “covered transactions,” which are defined as transactions in which (1) a legal entity (2) purchases residential real estate either in the borough of Manhattan or Miami-Dade County (3) for a total purchase price of excess of $3 million (Manhattan) or $1 million (Miami-Dade) (4) without a bank loan or other similar form of external financing and (5) using, at least in part, currency or a cashier’s check, certified check, traveler’s check, or money order. “Legal entity” is defined as a corporation, limited liability company, partnership or other similar business entity, whether domestic or foreign.

If a title insurance company is engaged in a transaction that meets all of the requirements for a “covered transaction,” the title insurance company must report said transaction to FinCEN within 30 days of the closing using a designated form titled “FinCEN Form 8300.” On the Form 8300, the title insurance company must identify (1) the purchaser; (2) the purchaser’s representative, if any; and (3) the beneficial owner, which is defined as each natural person who, directly or indirectly, owns 25 percent or more of the equity interests of the purchaser. The title insurance company must obtain and copy the driver’s license, passport or other similar identification for each beneficial owner. The title insurance company must retain all records relating to the GTO for at least five years and make such records available to FinCEN or any other law enforcement or regulatory agency upon request.

The Manhattan and Miami-Dade GTOs take effect on March 1, 2016, and remain effective until Aug. 27, 2016, unless extended by subsequent order of the FinCEN director. Each title insurer subject to the GTO is required to supervise, and is responsible for, compliance by each of its officers, directors, employees and agents. The title insurance company must transmit a copy of the GTO to each of its agents, and must also transmit a copy to its chief executive officer or similarly acting manager. Any title insurance company, and any of its officers, directors, employees and agents, may be held liable for civil or criminal penalties for violating any terms of the GTO.

Implications of FinCEN’s Latest GTOs

Title insurance companies handling transactions occurring in Manhattan or Miami-Dade County must immediately familiarize themselves, and their employees and agents, with the obligations imposed by these latest GTOs. Title insurance companies would be well-advised to implement training programs so that they are prepared to address these new compliance obligations when they take effect on March 1, 2016. Companies that fail to comply with the reporting and record-keeping requirements of these GTOs may face civil or criminal penalties. While the terms of each GTO currently last for only six months, FinCEN will likely extend the duration of each GTO for additional six months, and may even make them permanent through further regulatory action. Finally, depending upon the quality of the information reported to FinCEN by title companies in Manhattan and Miami, FinCEN may well determine to expand the geographic reach of these orders to other parts of the United States.

Footnotes:

[1] The Manhattan GTO is available here: https://www.fincen.gov/news_room/nr/files/Real_Estate_GTO-NYC.pdf. The Miami-Dade GTO is available here: https://www.fincen.gov/news_room/nr/files/Real_Estate_GTO-MIA.pdf.

[2] FinCEN’s press release dated Jan. 13, 2016, is available here: https://www.fincen.gov/news_room/nr/html/20160113.html.

[3] See “Towers of Secrecy,” The New York Times, Feb. 8-12, 2015, available at: http://www.nytimes.com/2015/02/08/nyregion/the-hidden-money-buying-up-new-york-real-estate.html?_r=0.


“FinCEN Cracks Down on Real Estate Secrecy,” by Matthew D. Lee and Jed M. Silversmith was published in Law360 on January 22, 2016. To read the article online, please click here.

FinCEN Cracks Down on Real Estate Secrecy in Manhattan and Miami

In yet another indication of its aggressive efforts to fight money laundering, the Treasury Department’s Financial Crimes Enforcement Network (FinCEN) today issued another Geographic Targeting Order (GTO), this time targeting the luxury real estate market in New York and Miami.  The GTO reflects the government’s concerned that criminals are laundering proceeds of criminal activity through cash purchases of expensive real estate.  This latest GTO will temporarily require certain U.S. title insurance companies to identify the natural persons behind companies used to pay “all cash” for high-end residential real estate in Manhattan and Miami-Dade County.  FinCEN has used its powers to issue GTOs frequently in the past 24 months throughout the United States, including at the Texas and California borders (prior coverage here); the Fashion District of Los Angeles (prior coverage here); exporters of electronics in South Florida (prior coverage here); and check cashers in South Florida (prior coverage here).  In a subsequent post we will present more detailed analysis of this latest GTO.

The text of the FinCEN’s press release announcing today’s GTO follows:

FinCEN Takes Aim at Real Estate Secrecy in Manhattan and Miami

 “Geographic Targeting Orders” Require Identification for High–End Cash Buyers

 WASHINGTON – The Financial Crimes Enforcement Network (FinCEN) today issued Geographic Targeting Orders (GTO) that will temporarily require certain U.S. title insurance companies to identify the natural persons behind companies used to pay “all cash” for high-end residential real estate in the Borough of Manhattan in New York City, New York, and Miami-Dade County, Florida. FinCEN is concerned that all-cash purchases – i.e., those without bank financing – may be conducted by individuals attempting to hide their assets and identity by purchasing residential properties through limited liability companies or other opaque structures. To enhance availability of information pertinent to mitigating this potential money laundering vulnerability, FinCEN will require certain title insurance companies to identify and report the true “beneficial owner” behind a legal entity involved in certain high-end residential real estate transactions in Manhattan and Miami-Dade County.

 With these GTOs, FinCEN is proceeding with its risk-based approach to combating money laundering in the real estate sector. Having prioritized anti-money laundering protections on real estate transactions involving lending, FinCEN’s remaining concern is with the money laundering vulnerabilities associated with all-cash real estate transactions. This includes transactions in which individuals use shell companies to purchase high-value residential real estate, primarily in certain large U.S. cities.

 “We are seeking to understand the risk that corrupt foreign officials, or transnational criminals, may be using premium U.S. real estate to secretly invest millions in dirty money,” said FinCEN Director Jennifer Shasky Calvery. “Over the years, our rules have evolved to make the standard mortgage market more transparent and less hospitable to fraud and money laundering. But cash purchases present a more complex gap that we seek to address. These GTOs will produce valuable data that will assist law enforcement and inform our broader efforts to combat money laundering in the real estate sector.”

 Under specific circumstances, the GTOs will require certain title insurance companies to record and report to FinCEN the beneficial ownership information of legal entities purchasing certain high-value residential real estate without external financing. They will report this information to FinCEN where it will be made available to law enforcement investigators as part of FinCEN’s database.

 The information gathered from the GTOs will advance law enforcement’s ability to identify the natural persons involved in transactions vulnerable to abuse for money laundering. This would mitigate the key vulnerability associated with these transactions – the ability for individuals to disguise their involvement in the purchase.

 FinCEN is covering certain title insurance companies because title insurance is a common feature in the vast majority of real estate transactions. Title insurance companies thus play a central role that can provide FinCEN with valuable information about real estate transactions of concern. The GTOs do not imply any derogatory finding by FinCEN with respect to the covered companies. To the contrary, FinCEN appreciates the assistance and cooperation of the title insurance companies and the American Land Title Association in protecting the real estate markets from abuse by illicit actors.

 The GTOs will be in effect for 180 days beginning on March 1, 2016. They will expire on August 27, 2016.

 Any questions about the Orders should be directed to the FinCEN Resource Center at 800-767-2825.

 ###

 FinCEN’s mission is to safeguard the financial system from illicit use and combat money laundering and promote national security through the collection, analysis, and dissemination of financial intelligence and strategic use of financial authorities.

 

IRS Taxpayer Advocate Releases 2015 Annual Report to Congress

TASToday, the Internal Revenue Service’s National Taxpayer Advocate, Nina E. Olson, released her annual report to Congress. The Taxpayer Advocate Service (TAS) is an independent organization within the IRS that is dedicated to helping taxpayers and protecting taxpayer rights.  Section 7803(c)(2)(B)(ii) of the Internal Revenue Code requires the National Taxpayer Advocate to submit this report each year and in it, among other things, to identify at least 20 of the most serious problems encountered by taxpayers and to make administrative and legislative recommendations to mitigate those problems. The report released today is massive, spanning over 750 pages.

The full text of the press release announcing the National Taxpayer Advocate’s annual report follows:

WASHINGTON — National Taxpayer Advocate Nina E. Olson today released her 2015 annual report to Congress, expressing concern that the IRS may be on the verge of dramatically scaling back telephone and face-to-face service it has provided for decades to assist the nation’s 150 million individual taxpayers and 11 million business entities in complying with their tax obligations.  The report reiterates a recommendation the Advocate made in June that the IRS release its “Future State” plan documents, provide additional detail about their anticipated impact on taxpayer service operations, and solicit comments from the public.  The report also recommends that Congress conduct oversight hearings on the plan.

The Future State Plan.  Since 2014, the IRS has invested substantial resources to develop a Future State plan, which has involved significant participation by virtually all IRS business units and the engagement of management consultants, at a cost of several million dollars.  To date, the IRS has chosen not to make the plan public.

The Advocate’s report says there are many positive components to the plan, including the stated goal of creating online taxpayer accounts through which taxpayers will be able to obtain information and interact with the IRS.  The report also acknowledges that cuts to the IRS budget – about 19 percent in inflation-adjusted terms since fiscal year (FY) 2010 – have forced the IRS to explore cheaper service options.

Reduced Service Levels.  The Advocate expresses particular concern about IRS intentions regarding what is not stated in the plan.  “Implicit in the plan – and explicit in internal discussion – is an intention on the part of the IRS to substantially reduce telephone and face-to-face interaction with taxpayers,” the report says.  “The key unanswered question is by how much. . .It is incumbent upon the IRS to be much more specific about how much personal taxpayer assistance it expects to provide in its ‘future state.’”

The report says the IRS appears to presume taxpayer interactions with the IRS through online accounts will address a high percentage of taxpayer needs, enabling it to curtail existing taxpayer services without significantly impacting taxpayers.  The Future State plan also calls for expanding the role of tax return preparers and tax software companies in providing taxpayer assistance – an approach that likely would increase compliance costs for millions of taxpayers who now obtain that assistance from the IRS for free.

The IRS Future State plan could transform the role the agency has long played in helping taxpayers comply with their tax obligations, the report says.  The IRS historically has maintained a robust customer service telephone operation that, in every year since FY 2008, has received more than 100 million taxpayer telephone calls, as well as a network of nearly 400 walk-in sites that, in every year for over a decade, has provided face-to-face assistance to more than five million taxpayers.

Online accounts are likely to reduce taxpayer demand for telephone and face-to-face interaction to some degree but are unlikely to be useful in addressing complex account-specific matters, the report says. “This is true for several reasons, including that millions of taxpayers do not have Internet access, millions of taxpayers with Internet access do not feel comfortable trying to resolve important financial matters over the Internet, and many taxpayer problems are not ‘cookie cutter,’ thus requiring a degree of back-and-forth discussion that is better suited for conversation.”  Last year, more than 9 million taxpayers either received post-filing IRS notices proposing to adjust their tax or experienced refund delays, all matters that are account-specific.

Technology improvements often do not reduce demand for personal service to the extent expected, the report says. For example, the IRS over the past decade has increased the individual tax return e-filing rate from 54 percent to 85 percent, enhanced the Where’s My Refund? tool, and added substantial content to IRS.gov, yet the number of taxpayer calls to its customer service lines has increased by 59 percent.  Similarly, the report cites a recent Federal Reserve survey in which 72 percent of mobile banking customers reported they had visited a branch and spoken with a teller an average of two times within the preceding month. The report says customers often use online service as a supplement to, rather than a substitute for, personal service, particularly for complex matters.

In recent years, the IRS has already begun to reduce taxpayer services, including by declaring all but simple tax-law questions “out of scope” for the IRS to answer during the filing season; declaring it will not answer any tax-law questions after the filing season (including questions from millions of taxpayers with proper extensions of time to file); eliminating preparation of tax returns in its walk-in sites; and eliminating an online program that allowed taxpayers to submit questions electronically.

Need for Transparency.  “We believe it is critical that the IRS share its plans in detail with Congress and outside stakeholders and then engage in a dialogue about the extent to which it intends to curtail or eliminate various categories of telephone service and face-to-face service, whether it will provide sufficient support for taxpayers – and how – as it transitions to its future state, and whether it has an adequate ‘Plan B’ if taxpayer demand for telephone and face-to-face service remains higher than the IRS anticipates,” the report says.

In releasing the report, Olson emphasized that Congress has repeatedly shown support for high-quality taxpayer service.  In the IRS Restructuring and Reform Act of 1998, Congress directed the IRS to “review and restate its mission to place a greater emphasis on serving the public and meeting taxpayers’ needs.”  Added Olson:  “The fact that Congress just last month provided the IRS with an additional $290 million in funding for taxpayer assistance and codified the provisions of the Taxpayer Bill of Rights, including The Right to Quality Service, demonstrates that Members of Congress continue to believe taxpayer service should be strengthened, not reduced,” Olson said.

“Pay to Play” Tax System.  Olson characterized the combination of reductions in personal service and the IRS’s plans to direct taxpayers with questions to preparers and other third parties (along with the expansion of user fees, discussed below) as creating a “pay to play” tax system, where only taxpayers who can afford to pay for tax advice will receive personal service, while others will be left struggling for themselves.

Data Security Concerns.  Olson also warned about the consequences of giving tax return preparers more access to taxpayer accounts.  “When you give that access to unregulated preparers or to other third parties, I have significant concerns.  We already see the problems in this population of preparers relating to the Earned Income Tax Credit (EITC), where certain unregulated, untrained preparers prey on vulnerable taxpayers.  Why would we want to give these preparers even more access to taxpayer information?  And yet, if we don’t provide these preparers access to taxpayer accounts, it is very likely the tens of millions of taxpayers who use these preparers won’t be able to or won’t want to utilize their own online accounts, thereby carving a big hole in the IRS’s online strategy.  Thus, through a single-minded emphasis on online accounts, the IRS creates a situation where it will face enormous pressure to open up taxpayer account access to unregulated return preparers.”

Need for More Details and Public Discussion.  Because the contemplated reductions in service are significant yet undefined, Olson called on the IRS in her FY 2016 Objectives Report to Congress to release its plans and solicit taxpayer comments.  The new report again recommends that the IRS immediately publish its plan and seek public comments.  “U.S. taxpayers pay the bills for our government.  U.S. taxpayers deserve a say in how the tax collection agency will treat them,” the report says.

The report also recommends that Congress hold hearings on the future state of IRS operations so it can obtain more specific information about the IRS’s plans and have an opportunity to weigh in.

Said Olson:  “This has been a difficult report to write because while the intent to reduce telephone and face-to-face service has been a central assumption in the Future State planning process, little about service reductions has been committed to writing.  Therefore, it is impossible to describe the scope of contemplated reductions with specificity.  If there is good news here, it is that the IRS has not formally committed itself to the service reductions we understand to be contemplated.  I am hopeful the IRS will make the plan public, present its perspective on tradeoffs, seek public comments, and ultimately make a commitment to continue to maintain existing telephone and face-to-face services for the millions of U.S. taxpayers who rely on them.”

National Taxpayer Advocate to Hold Public Hearings on Taxpayer Service Needs.  “For the IRS to do its job well, it must start from the perspective of what government is about – namely, it is of the people, by the people, and for the people,” Olson wrote.  “The government is funded by taxes paid by the people.  Therefore, the future state vision of the IRS needs to be designed around the needs of the people.”  To assist the IRS in developing a plan that is responsive to the needs of U.S. taxpayers, Olson announced plans to conduct public hearings around the country in the coming months to which she plans to invite groups that represent the interests of individual taxpayers (including elderly, low income, disabled, and limited English proficiency taxpayers), sole proprietors, and other small businesses as well as Circular 230 practitioners and unenrolled tax return preparers to describe what they need from the IRS to help them comply with the tax laws.

OTHER KEY ISSUES ADDRESSED

Federal law requires the Annual Report to Congress to identify at least 20 of the “most serious problems” encountered by taxpayers and to make administrative and legislative recommendations to mitigate those problems.  Overall, this year’s report identifies 24 problems, makes dozens of recommendations for administrative change, makes 15 recommendations for legislative change, and analyzes the 10 tax issues most frequently litigated in the federal courts.

The “most serious problems” discussed in the report are grouped into four sections:

(1) IRS Future State Vision: Implications for Today and Tomorrow; (2) Problems that Undermine Taxpayer Rights and Impose Taxpayer Burden; (3) Problems that Waste IRS Resources and Impose Taxpayer Burden; and (4) Problems that Contribute to Earned Income Tax Credit Noncompliance and Recommendations for Improvement.  The report says that as the IRS has struggled with reduced funding, it has sometimes made short-sighted decisions that have had the effect of creating rework for itself as well as increasing taxpayer burden.

Among the problems addressed are the following:

IRS User Fee Decisions May Impose Heavy Taxpayer Burden.  Like other federal agencies, the IRS is required to consider charging for services that convey “special benefits.”  In the past, the IRS tried to avoid imposing fees that would impair its mission, particularly in the years before it was authorized to retain fee revenue.  Between FY 2010 and FY 2015, however, when the IRS’s appropriation was reduced by about 10 percent (nominally), its user fee revenue rose by 34 percent.  The report suggests that cuts to the agency’s budget have prompted it to consider fees that will impede its mission to help taxpayers voluntarily comply and pay their taxes.

As an example, the IRS collects revenue when delinquent taxpayers agree to pay their liabilities voluntarily, even if they can only pay in installments over time rather than in a single lump-sum.  Under an installment agreement, tax is collected without draining IRS enforcement resources.  Yet the IRS charges taxpayers a user fee for entering into installment agreements and is actively considering increasing the fee.  The report says such fees exacerbate the “pay to play” aspects of the IRS Future State (discussed above) and expresses concern that increasing user fees may have the effect of deterring taxpayers from using IRS services that promote compliance, thereby reducing voluntary compliance and potentially costing the government more in tax than it would earn in user fees.

In a Dec. 4 memorandum to the Commissioner, the Advocate conveyed concerns about specific user fees that are under consideration; the memorandum is published in the report but has been substantially redacted at the request of the IRS.  The report recommends the IRS estimate the effect of proposed fee increases on demand for services, make its analysis public before adopting the increases, and refrain from charging fees that will have a significant negative impact on its service-oriented mission, voluntary compliance, or taxpayer rights.

Form 1023-EZ Process Allows Unqualified Entities to Obtain Tax-Exempt Status.  Since July 2014, the IRS has addressed backlogs in its inventory of applications for tax-exempt status by allowing certain organizations to use Form 1023-EZ, Streamlined Application for Recognition of Exemption Under Section 501(c)(3).  Form 1023-EZ adopts a “checkbox approach” that requires applicants merely to attest, rather than demonstrate, that they qualify for exempt status.  In particular, Form 1023-EZ does not solicit any narrative regarding an organization’s planned activities, any organizing documents (such as articles of incorporation or bylaws), any financial data, or any explanatory material.  The IRS approves about 95 percent of applications submitted on Form 1023-EZ.  However, the IRS’s own data show it approves only about 77 percent of applications when it requests documentation.

Similarly, TAS conducted a research study, published in Volume 2 of the report, that examined a representative sample of organizations in 20 states that make articles of incorporation viewable online and whose Form 1023-EZ application had been approved by the IRS.  It found, among other things, that 37 percent do not meet the organizational test for qualification as a Section 501(c)(3) organization.  In other words, these organizations received favorable determination letters from the IRS even though they are not eligible for exempt status under the law.  The report recommends that the IRS revise Form 1023-EZ to require applicants to submit their organizing documents, a description of actual or planned activities, and past or projected financial information, and that the IRS review this information before deciding whether to approve exemption applications.

IRS Anti-Fraud Filters Delay Refunds for Hundreds of Thousands of Legitimate Taxpayers, with One Major Program Having a False Positive Rate of 36 Percent.  The IRS operates several programs that filter tax returns to ferret out improper refund claims, including returns showing bogus wage or withholding amounts and returns suspicious for identity theft.  While these are critical programs, the filters have high “false positive” rates, causing substantial refund delays for hundreds of thousands of legitimate taxpayers.  For example, the false positive rate was about 36 percent during FY 2015 in the Taxpayer Protection Program (TPP), which freezes returns the IRS suspects may reflect identity theft.  The IRS sends notices to taxpayers whose returns have been flagged by TPP filters and instructs the taxpayers to authenticate their identities online or by phone.  Yet for three consecutive weeks during the filing season, the IRS answered fewer than 10 percent of taxpayer calls on that telephone line, making it extra ordinarily difficult for affected taxpayers to get their returns unfrozen and receive their refunds.  For other anti-fraud programs, the IRS currently does not track the false positive rate.  The report recommends that the IRS begin tracking the false positive rate of all screening programs, monitor and adjust filters and rules quickly if they are not effectively zeroing in on fraud, and establish maximum false positive rates for each process and filter.

Other issues analyzed in the “most serious problems” section of the report include the adequacy of taxpayer service for taxpayers living abroad, the whistleblower program, the IRS’s administration of the Patient Protection and Affordable Care Act, victim assistance in tax-related identity theft cases, and several issues relating to EITC compliance, including the need for better taxpayer education and assistance in the pre-filing environment, more effective use of audits, and greater emphasis on the role tax return preparers can play to promote compliance.

New TAS Research Studies. Volume 2 of the report contains four new research studies, including a study examining whether organizations that obtained Section 501(c)(3) status on the basis of Form 1023-EZ applications meet the requirements for exempt status and a study designed to gain a better understanding of the needs of underserved Hispanic taxpayers.  The report also contains two studies that look at IRS enforcement programs.

One study examined the impact of audits on the subsequent compliance of self-employed individuals.  The results of the study “provide robust evidence that audits have important long-term revenue implications,” the report says.  However, the study found a significant disparity in results when it attempted to differentiate the subsequent behavioral responses of (seemingly) compliant taxpayers and (seemingly) noncompliant taxpayers.  It found that (seemingly) non-compliant taxpayers who were audited increased their reporting compliance of taxable income by about 120 percent three years later, while (seemingly) compliant taxpayers who were audited subsequently reported less income.

A second study examined the IRS’s “collectability curve.”  The IRS generally assigns delinquencies to Taxpayer Delinquent Account (TDA) status within four to five months after it assesses a liability and sends the taxpayer a series of notices.  However, the volume of TDAs may delay collection actions from occurring for some time.  The study found that the IRS is most successful at collecting liabilities soon after TDA assignment.  While dollars continue to be collected throughout the life of the 10-year statutory collection period, the payment rate slows considerably.  These findings are similar to the results reported by private collection agencies, but run counter to some IRS procedures that prioritize collecting larger accounts, even though many “smaller accounts” become “larger accounts” simply because the IRS delays collection, allowing penalties and interest to continue to accrue and ultimately making them more difficult to resolve.

* * * * *

Please visit http://www.taxpayeradvocate.irs.gov/2015AnnualReport for more information.

Related Items: 

* * * * *

About the Taxpayer Advocate Service

The Taxpayer Advocate Service (TAS) is an independent organization within the Internal Revenue Service (IRS) that helps taxpayers and protects taxpayer rights.  Your local advocate’s number is in your local directory and at taxpayeradvocate.irs.gov.  You can also call TAS toll-free at 1–877–777–4778.  TAS can help if you need assistance resolving an IRS problem, if your problem is causing financial difficulty, or if you believe an IRS system or procedure isn’t working as it should.  And our service is free.  For more information about TAS and your rights under the Taxpayer Bill of Rights, go to taxpayeradvocate.irs.gov. You can get updates on tax topics at facebook.com/YourVoiceAtIRS, Twitter.com/YourVoiceatIRS, and YouTube.com/TASNTA.

Matthew D. Lee is the author of The Foreign Account Tax Compliance Act Answer Book 2015 (published by the Practising Law Institute), a definitive treatment of the due diligence, withholding, reporting, and compliance obligations imposed by FATCA on foreign financial institutions, non-financial foreign entities, and withholding agents.  For more information on this publication, please click here.

 

New Law Authorizes State Department to Revoke U.S. Passports of Tax Delinquents

This afternoon, President Obama signed into law a five-year, $305 billion highway funding bill that includes several controversial tax measures designed to help fund the legislation. One provision in the legislation authorizes the State Department to revoke U.S. passports of taxpayers who owe the U.S. Treasury more than $50,000 in tax liabilities. Another provision authorizes the Internal Revenue Service to use private debt collectors. In this blog post, we address the passport revocation provision, which now provides the IRS with a powerful tool to force tax compliance.

The law adds a new provision to the Internal Revenue Code (section 7345) which authorizes the Treasury Secretary to certify, to the Secretary of State, that a taxpayer has a “seriously delinquent tax debt.” A “seriously delinquent tax debt” is defined as a federal tax liability which been assessed and is greater than $50,000, and for which the IRS has either filed a lien or levy. (This dollar amount will be adjusted for inflation after 2016.)

Upon receipt of such certification, the Secretary of State is authorized to take action with respect to denial, revocation, or limitation of such taxpayer’s U.S. passport. The law prohibits the Secretary of State from issuing a passport to any individual who has a “seriously delinquent tax debt,” with exceptions provided for emergency circumstances or humanitarian reasons. The law authorizes the Secretary of State to revoke a passport previously issued to an individual with a “seriously delinquent tax debt.” If the Secretary of State decides to revoke a passport under these circumstances, he or she is authorized to limit such passport to return travel to the United States only. The Secretary of State may also deny any passport application submitted without a Social Security number.

Taxpayers who have entered into installment agreements or offers-in-compromise, or have requested collection due process hearings or innocent spouse relief, are exempt from this new law. If the Treasury Secretary has already certified a taxpayer to the Secretary of State, such certification must be revoked within 30 days of the taxpayer making full payment and obtaining release of lien; requesting for innocent spouse relief; entering into an installment agreement; or making an offer-in-compromise which is accepted. In the event that the Treasury Secretary issues an erroneous certification, such certification must be revoked as soon as practicable.

The law does includes certain provisions to safeguard taxpayer rights. Taxpayers who are certified to the Secretary of State as having a “seriously delinquent tax debt,” or whose certifications are subsequently revoked, are entitled to prompt written notice. Such notice must specify that the taxpayer is entitled to file a lawsuit in the U.S. Tax Court or a federal district court to challenge the certification. The court may determine that the certification was erroneous and, if so, order the Treasury Secretary to so notify the Secretary of State. Taxpayers who are serving in a combat zone are granted relief from the law’s provisions.

In addition, the new law amends existing Internal Revenue Code provisions to ensure that taxpayers are warned in advance that they could be subject to U.S. passport denial, revocation, or limitation. For example, notices of federal tax lien and notices of intent to levy must now include language advising the taxpayer that they may be certified to the Secretary of State as having a “seriously delinquent tax debt” with attendant passport consequences.

Finally, the law amends the Internal Revenue Code provision addressing confidentiality of tax returns and return information in order to permit the sharing of such information with the Secretary of State. In particular, for each taxpayer certified as having a “seriously delinquent tax debt,” the law authorizes the Treasury Secretary to share information regarding the taxpayer’s identity and the amount of the tax debt.

IRS Criminal Investigation Annual Report Confirms Devastating Impact of Budget Cuts

Today the IRS Criminal Investigation Division released its annual report, summarizing its activities and accomplishments during fiscal year 2015. One of the key takeaways from the report is the devastating impact of budget cuts on the IRS as a whole, and on the criminal investigation function in particular. The report acknowledges that CI hired only 45 new special agents over the last three years, and staffing levels hit their lowest levels since the 1970s. In virtually all categories of enforcement activity – investigations initiated, prosecution recommendations, indictments, convictions, and sentencings – CI’s results for FY2015 were dramatically reduced. In FY2015, CI had only 2,316 special agents, down from a historical high of 3,363 special agents in FY1995.  A Bloomberg article published today neatly summarized this news:

Tax cheats can breathe a little easier. The gun-toting Internal Revenue Service investigators who send felons to prison are retiring in droves and there’s no one to replace them.

The IRS press release announcing the release of the report follows below:

WASHINGTON — The Internal Revenue Service today announced the release of its IRS Criminal Investigation (CI) annual report, reflecting significant accomplishments and enforcement actions taken in fiscal year 2015.

Focusing on tax-related identity theft, money laundering, public corruption, cybercrime and terrorist financing, IRS CI initiated 3,853 cases in FY 2015.

“Our criminal investigators continue to bring complex and meaningful cases that have a significant impact on tax administration,” said John Koskinen, IRS Commissioner. “This work also plays an important deterrent effect on would-be criminals, helping ensure fairness for taxpayers and protecting voluntary compliance in our tax system. The report is a tribute to the important work done by IRS Criminal Investigation.”

“This report reflects the extremely high level of commitment that CI agents bring to the job and the great case work accomplished in the past year,” said Richard Weber, Chief, IRS Criminal Investigation. “But the story that the report tells this year is that fewer agents do mean fewer cases. I’m extremely proud of all that we accomplished in spite of our budget challenges, but the inability to hire is really taking a toll.”

The annual report is released each year for the purpose of highlighting the agency’s successes while providing a historical snapshot of the make-up and priorities of the organization. The very first Chief of IRS CI, Elmer Lincoln Irey, served from 1919 to 1946 and envisioned releasing such a document each year to showcase the agency’s work.

CI is the only federal law enforcement agency with jurisdiction over federal tax crimes. This year, CI again boasted the highest conviction rate in all of federal law enforcement — 93.2%. CI is routinely called upon by prosecutors across the country to be the lead financial investigative agency on a wide variety of financial crimes including international tax evasion, identity theft and transnational organized crime.

“While our highest priority is to enforce the nation’s tax laws, we cannot underestimate the deterrent effect we are having on would-be criminals and the impact we are having on tax administration,” said Weber. “I’m certain that a majority of Americans who follow the law would tell you that they want consequences for those who do not.”

CI investigates potential criminal violations of the Internal Revenue Code and related financial crimes in a manner to foster confidence in the tax system and compliance with the law. The 50-page report summarizes a wide variety of IRS CI activity throughout the fiscal year and includes case summaries on a range of tax crimes, money laundering, public corruption, terrorist financing and narcotics trafficking financial crimes.

The cases in this year’s report represent the diversity and complexity of CI investigations. They touch almost every part of the world and were again some of the most successful in the history of CI. In May, indictments were unsealed in the FIFA investigation, a case that continues to this day. At the time, the investigation involved coordination with police agencies and governments in 33 countries and was one of the most complicated international white-collar cases in recent memory. Ross Ulbricht, the creator and owner of the “Silk Road” website, was sentenced to life in prison and ordered to forfeit more than $183 million. A Michigan man, Dr. Farid Fata, was sentenced to 540 months in prison and ordered to forfeit $17 million for his role in a health care fraud scheme. Fata purposefully misdiagnosed people with cancer, pumping their bodies with chemotherapy that they did not need, in order to get rich.

“I’m proud of IRS CI and the reputation that this agency has as the best financial investigators in the world. We have a long and storied history and we continue to write new chapters to that history each year,” said Weber. “Regardless of our budget situation, I am proud that we have not lost sight of our impact or mission and that the quality of our cases remains high.”

FinCEN Renews South Florida Geographic Targeting Order

The Treasury Department’s Financial Crimes Enforcement Network (FinCEN) has announced that it is extending its Geographic Targeting Order (GTO) focused on trade-based money laundering schemes in South Florida. When the GTO was originally announced, FinCEN stated that it was investigating trade-based money laundering schemes used by drug cartels, including Sinaloa and Los Zetas, to launder illicit proceeds through businesses in South Florida. (See prior coverage here and here.)  FinCEN stated that the GTO was originally served on about 700 electronics exporters in and around Miami. An ongoing criminal investigation conducted jointly by the U.S. Immigration and Customs Enforcement’s Homeland Security Investigations and the Miami Dade State Attorney’s Office South Florida Money Laundering Strike Force revealed that many electronics exporters are exploited as part of sophisticated trade-based money laundering schemes in which drug proceeds in the United States are converted into goods that are shipped to South America and sold for local currency, which is ultimately transferred to drug cartels.

A GTO is an order issued by the United States secretary of the Treasury requiring all domestic financial institutions that exist within a geographic area to report on transactions any greater than a specified value. GTOs are authorized by the Bank Secrecy Act in 31 U.S.C. § 5326(a). Originally, GTOs were only permitted by law to last for 60 days, but that limitation was extended by the USA Patriot Act to 180 days.

In general, a nonfinancial trade or business that receives more than $10,000 in currency in a single transaction, or multiple related transactions, is required to file a Form 8300 with FinCEN. The Miami GTO lowers the $10,000 reporting threshold to $3,000 for covered businesses. These businesses are required to report to FinCEN currency transactions over $3,000, and to include in those reports information about the transaction and the persons involved. Each business covered under this GTO received notice of its obligations via personal service or by certified mail. Failure to comply could result in substantial criminal and civil penalties.

The Miami GTO was effective beginning on April 28, 2015, and was set to expire on Oct. 25, 2015, but has now been extended for an additional 180 days, through April 23, 2016. The GTO provides that its requirements apply to a “covered business,” which refers to any trade or business that exports electronics (including cell phones), and any of its agents, subsidiaries and franchisees, within the following U.S. zip codes: 33172; 33178; 33166; 33122 and 33126.

If, in the course of its trade or business, a business covered by the GTO receives currency in excess of $3,000 in one transaction (or two or more related transactions), then the business must report the transaction by filing a FinCEN Form 8300. For purposes of this GTO, “currency” means: (1) the coin and currency of the United States or of any other country, which circulate in and are customarily used and accepted as money in the country in which issued, or (2) a cashier’s check (by whatever name called, including “treasurer’s check” and “bank check”), bank draft, traveler’s check or money order.

A covered business receiving more than $3,000 in currency must identify the customer involved in the transaction by obtaining a telephone number and one form of valid identification. The business must also determine whether the customer is conducting the transaction on behalf of a third party, by obtaining a written certification identifying whether such a third party is involved and, if so, the identity of such third party. In addition, when a covered business files a FinCEN Form 8300 to report a transaction, it must also include the following information in the comments section of the form: (1) a description of the goods involved in the covered transaction; (2) the name and phone number of the person receiving such goods; and (3) the address to which such goods are being shipped.

The GTO provides that a covered business must supervise, and is responsible for, compliance by each of its officers, directors, employees, agents, subsidiaries and franchisees with the terms of this order. In addition, a covered business must notify each of its officers, directors, employees, agents, subsidiaries and franchisees of the terms of the GTO, and must transmit the order to its chief executive officer. The GTO further provides that a covered business and any of its officers, directors, employees or agents may be liable, without limitation, for civil or criminal penalties for violating any of the terms of the GTO.

In a press release announcing the original issuance of the Miami GTO, FinCEN’s director, Jennifer Shasky Calvery, stated that “[w]hen we issued a similar GTO in the Los Angeles area last year, many speculated about whether we’d be doing the same in other parts of the country. We are committed to shedding light on shady financial activity wherever we find it. We will continue issuing GTOs, as necessary, as well as exercising FinCEN’s other unique anti-money laundering authorities, to ensure a transparent financial system that impedes money launderers and other criminals from masking their identity and illicit activity.”

The Miami GTO was the third publicly announced GTO issued by FinCEN since August 2014. Most recently, FinCEN announced a GTO covering check cashers in the Florida counties of Miami-Dade and Broward from August 3, 2015, through January 30, 2016.  (See prior coverage here.) Check cashers will have to obtain at the time of the check-cashing transaction: (1) a copy of the customer’s identification (which must evidence nationality or residence and include a photograph); (2) a digital photograph of the customer (surveillance video is insufficient for this requirement); (3) the customer’s phone number; and, (4) the customer’s thumbprint on the check. This GTO is meant to assist in combating stolen identity tax refund fraud, which has increased in South Florida. This crime involves filing a fraudulent tax return using a stolen identity and then cashing the refund check also using fake identification.

In October 2014, as part of a probe by the U.S. Immigration and Customs Enforcement’s Homeland Security Investigations targeting alleged money laundering activities in Los Angeles’ garment trade, FinCEN announced the issuance of a GTO that imposed additional reporting and record-keeping obligations on certain businesses located within the city’s fashion district. (See prior coverage here.) Businesses covered under the Los Angeles GTO include garment and textile stores, transportation companies, travel agencies, perfume stores, electronic stores (including those that only sell cell phones), shoe stores, lingerie stores, flower/silk flower stores, beauty supply stores, and stores bearing “import” or “export” in their name. The order took effect Oct. 9 and remained in effect for 180 days. In February 2015, the GTO was extended for an additional 180 days.

Working in close coordination with its Mexican counterpart, the Unidad de Inteligencia Financiera (UIF), FinCEN announced issuance of a GTO in August 2014 that covered the U.S.-Mexico border at two California ports of entry. The purpose of this GTO was to improve the transparency of cross-border cash movements. To address U.S. and Mexican law enforcement concerns about potential misuse of exemptions and incomplete or inaccurate reports filed by armored car services and other common carriers of currency, the GTO required enhanced cash reporting by these businesses at the San Ysidro and Otay Mesa Ports of Entry in California.

These recent GTOs described above demonstrate an increased attention to trade-based money laundering schemes by FinCEN and confirm that criminals are aggressively using legitimate U.S. businesses to launder the proceeds of their illegal activity. The GTOs issued in Miami, Los Angeles, and the San Ysidro and Otay Mesa Ports of Entry are presumably yielding a significant amount of information and data that FinCEN will then share with other federal law enforcement agencies in order to prosecute money launderers. Businesses that operate in any of the areas targeted by these three GTOs—electronics exporters, the fashion and garment industry, armored car services and common carriers—should be vigilant to the indicators of trade-based money laundering and take steps to ensure that cash transactions are properly documented and suspicious activity is reported.