by Michael Lodge
Clients come into the office or send me emails regarding the IRS and their bank accounts. Does the IRS monitor their bank accounts? The IRS does not monitor bank accounts but has very easy ways to gain access to your bank account information – under certain circumstances. As you know on your tax form you report the bank accounts you have and any interest you may have received from those accounts, and you also have to report any foreign bank accounts – not only on your tax return but also to the Treasury Department if your bank account was $10,000 or greater during any period during the year. The IRS expects you to honestly and accurately disclose your bank account information. The issue is do you want to comply? If you choose not to comply and provide the banking information, the IRS can force you to comply. If you are attempting to lie to or deceive the IRS they can carry heavy fines and even potential jail sentence, depending on the extent of the issues.
So what is the IRS looking for and what is your bank required to do?
Suspicious Deposits – Everyone is a suspect in the eyes of the IRS. Banks are required to file currency transaction reports on cash deposits of $10,000 or more. Cash is defined as money, a cashier’s check, bank draft, traveler’s check or money order. If you make smaller deposits in an attempt to avoid reaching the $10,000 transaction threshold, you might just find yourself in serious legal trouble. According to Forbes and a recent Fox News Report, structuring your deposits to avoid a currency report is considered fraud, which is a felony. If the bank suspects you are obtaining the money illegally, they must send a suspicious activity report to flag potential criminal activity. All banking transactions are subject to a suspicious activity report if the amount is $5,000 or more. If you have been reported the bank will not notify you that a report has been filed.
Now a lot of small businesses make cash deposits, some make deposits in amounts that meet that threshold. Some have had their bank accounts seized by the IRS because the IRS got a report from their bank and reported them. The business is not doing anything illegal, just depositing revenue they have earned. However, if the IRS even suspects or makes the assumption of a wrong doing, they can take your bank account. So this law has hurt a lot of small business owners who thought they were doing the right thing, they did not know they were breaking the law. Once the IRS suspects they can take bank accounts and it takes a long legal process to get the bank accounts back.
Foreign Bank Accounts – If you have an offshore bank account you must report the account by filing a Foreign Bank Account Report with the Department of the Treasury. This means any bank account you have or have had $10,000 or more, or you were a signer on an account. Some of you are signers on bank accounts in foreign countries with your mom, dad or other relatives. So if you have signing power you have to report. This reporting requirement was added to a transportation bill in Congress and not many people saw it go through. And why would a foreign account tax bill be in a transportation bill? Doesn’t make sense. Accounts with a value of $10,000 at any time during the year are subject to the annual reporting requirement. The report must list the names and address of the financial institution, account number and maximum account balance for the year. If you fail to file, you can face a minimum penalty of $10,000 for any inadvertent error. If you intentionally did not file, the minimum penalty increases to $100,000 and criminal charges.
One other issue. Foreign banks, depending on the tax and banking treaty between countries, must collect your American Social Security number. They will now report your income into the IRS and Treasury Department. Both countries that you are banking in want to know what accounts you have open, what you have reported, and if you have paid taxes on that income.
Audits – When the IRS is conducing an audit on you, or what they call an official investigation of all of your accounts, including your bank accounts – they will get access to your bank accounts. Auditors are trained to identify fraud, including attempts to conceal bank accounts and income. If you are audited, the auditor will compare the income you reported on your tax return to your bank account statements to ensure your taxes are assessed accurately. Unreported income can result in a large tax bill along with interest and penalties. While a simple error is understandable, intentional fraud carries serious consequences.
If you own a small business and you loan your business money to meet payroll or other expenses, make sure that your accountant or bookkeeper correctly reports that as a loan – not income. If you have not reported it correctly the IRS will include that as income and tax you on it. Documents all loans you make to the company so if audited you can show it was not income – just a loan. Remember the IRS first step in the audit process will look at all income and make their own determination of what is income. The IRS feels that all taxpayers that own a business are under reporting – so documents every part of your income so you can explain your income to the IRS.
Uncovering Your Accounts – The IRS has various ways to locate your bank account information. Since you need a Social Security number to open a bank account, the IRS can track bank accounts associated with your name and number. When you request your tax refund via direct deposit, the IRS maintains the bank account information in their database. They also gather information from financial audits you may have completed in the past. Remember on income that you have earned in your bank account the bank will issue you a 1099 that gets reported to the IRS, so the IRS already knows what income you have earned.
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