TAX EVASION IS A CRIME!

Just ask some of these notable Hollywood Stars if its worth it. Recently Lauryn Hill — singer and occasional actress — has been sentenced to three months in federal prison for not paying taxes on the $1.8 million dollars she made from 2005 to 2007.

Other notables who were convicted of tax evasion include:

Martha Stewart: Before doing jail time for insider trading, Stewart was forced to pay $220,000 in back taxes and penalties to the State of New York, learning the hard way that East Hampton mansions also generate taxes. Her claim that she hardly spent time there didn’t reduce her burden, or appease the state of New York.

Wesley Snipes: Snipes was found guilty on three counts of failing to file a federal income tax return, owing the government $17 million in back taxes plus penalties and interest. His attempt to pay off a portion of what he owed during his trial to avoid jail, failed and in 2008, Snipes was sentenced to three years in prison. He began serving his sentence in December 2010.

Willie Nelson: After seizing most of his assets in 1990, the federal government forced Willie to pay over $16 million in back taxes and fines for his involvement with a bogus tax shelter. Offering a note of redemption it was later discovered that Price Waterhouse had not paid Nelson’s taxes for years and invested the funds instead.

Nicolas Cage: Cage owed $6 million, according to the IRS’ 2009 charge. Accusing his ex-manager and accountant of making poor investment choices in risky real estate and failing to pay his taxes, Cage set out to make good with the IRS, but still paid considerable fines on the taxes. Be careful whom you trust with tax advice.

Marc Anthony: In 2007, the IRS served Anthony with $2.5 million in back tax bills. Then in 2010, he received two additional bills totaling over $3 million for unpaid taxes on real estate. Marc Anthony blames management, but few empathize after the IRS claimed numerous years of zero tax payments.

Annie Leibovitz: In 2009 Leibovitz owed $2.1 million in unpaid taxes for 2004-2007 and was forced to pledge the copyright to every photograph she has ever taken, or ever will, to get the loan she needed to pay her debts.

Darryl Strawberry: Mets or Yankees; Strawberry led them both to World Series titles. After years of signing autographs without paying taxes, Strawberry received a tax evasion conviction.

Boris Becker: Claiming to be living in the tax haven of Monaco from 1991 to1993, Becker was actually at home in Munich with his wife and kids. When the final ball dropped, Becker paid approximately $3 million in back taxes and interest on earnings from prize money, endorsements and appearance fees.

“Survivor” Richard Hatch: He survived the first season of Survivor, winning $1 million. But when it came time to paying his taxes, he stayed on the island. In 2006, Hatch was found guilty of tax evasion and served part of a six-year prison sentence as a result. Then in March 2011, he returned for his third prison term for failing to file amended returns. Celebrity tax lesson: Don’t “forget” to pay taxes on your income…especially before 51 million television viewers.

Heidi Fleiss: Heidi Fleiss was sentenced in 1997 on tax evasion charges in connection with her high-profile prostitution ring. She served part of her seven-year sentence in prison and a halfway house.

While some celebrities engage in various attempts to avoid paying taxes, from filing false returns to hiding money overseas, regardless of the method or fame of the individual, the government can force those guilty of tax fraud to pay back taxes and penalties, and serve time in confinement—a costly lesson for an avoidable mistake.

TAX CRIMES AND PENALTIES

For civil and criminal tax purposes each year is separate and the government can “stack up” civil and criminal claims.

Civil Tax Penalties

The failure to pay penalties are set forth in §6651 relating to the general penalty;

The accuracy-related penalties of §§6662 and 6662A;

The fraud penalty of §6663.

Failure to Pay Tax Not Shown on the Return

A taxpayer who fails to pay a tax that is required to be (but was not) shown on a return within 21 days after the date of the IRS's notice and demand for that tax is subject to a penalty under §6651(a)(3). The notice is the IRS's notice to the taxpayer that it has assessed an additional amount in excess of the amount that has been shown on the return and its demand that the taxpayer pay this assessed amount. The grace period is only 10 business days if the amount for which the notice and demand is made is $100,000 or more.

Computation of the Penalty

Rate

The penalty is imposed at the rate of .5% for each month (or part thereof) that the assessment remains unpaid, up to a maximum of 25%.  Where the tax is being paid in installments pursuant to an installment agreement with the IRS, the rate is reduced to .25% for any month in which the installment agreement is in effect if the individual taxpayer filed the tax return in a timely manner, including extensions.

The rate is increased under §6651(d) following receipt of a notice of levy or a notice of a jeopardy assessment.

Penalty Period

Unlike interest on the same deficiency, which runs from the due date of the return, the §6651(a)(3) penalty runs from 21 calendar days (10 business days if the amount shown on the notice and demand is $100,000 or more) after the date of the notice and demand. The penalty period ends when the IRS receives payment of the penalty.

The Accuracy-Related Penalty

The accuracy-related penalty for underpayments is imposed at the rate of 20% on the portion of any underpayment of tax required to be shown on a return attributable to any of the following:

• Negligence (§6662(b)(1));

• Substantial understatement of tax (§6662(b)(2));

The maximum accuracy-related penalty imposed on any portion of an underpayment is 20%.

The accuracy-related penalty also does not apply to any portion of an underpayment on which the fraud penalty is imposed.

The Fraud Penalty

Section 6663(a) provides that if any part of any underpayment of tax required to be shown on a return is due to fraud, a penalty is imposed equal to 75% of the portion of the underpayment attributable to fraud.

As discussed above, the accuracy-related penalties do not apply to any portion of an underpayment on which the fraud penalty is imposed. In addition, the fraud penalty — like the accuracy-related penalty — applies only when a return has been filed.

Evidence of Fraud:

1.       Failure to Report income

The failure to report income generally is not, by itself, adequate evidence of fraudulent intent, but the consistent failure to report substantial amounts of income over a number of years may be a controlling factor in establishing fraud.  A fraud penalty based on the failure to report income is generally combined with a deficiency determination. The IRS must not only establish fraud but, as an initial matter, must establish that the unreported income was in fact realized.

2.       Lack of Cooperation with IRS

Failure to cooperate with the IRS can be an indication of fraud. Thus, lying or giving evasive answers to IRS investigators, delaying tactics, and other actions designed to mislead IRS agents are all indicia of fraud. These and other indicia or badges of fraud (including acts of concealment, the use of dummy business entities and bank accounts opened under assumed names or in the names of relatives or nominees) can be found in numerous criminal and civil tax fraud cases.

On the other hand, even when substantial amounts of income are not reported, the taxpayer's maintenance of full and complete records, made available to IRS investigators, serves to negate any inference of intentional wrongdoing.

3.       Awareness of Tax Laws

The taxpayer's knowledge of the tax law is an important factor in determining whether fraud has been committed.

4.       Criminal Prosecution

Comparisons are sometimes made between the elements necessary to convict an individual indicted for criminal tax evasion under and those required to be established by the government in a civil fraud suit.

A conviction or guilty plea in a criminal prosecution brought under collaterally estops a taxpayer from asserting a defense to the fraud penalty for the same taxable year. Yet, when a guilty plea is prompted by unusual factors, such as the poor health of the taxpayer  or lack of understanding due to little education, the guilty plea may not be controlling in a subsequent civil case. These circumstances are the exceptions to the rule; a guilty plea usually is sufficient to sustain a finding of civil fraud. A plea of nolo contendere, however, is considered to be a mere statement of the taxpayer's unwillingness to contest the charges made against him and is not admissible evidence with respect to the issue of civil fraud.

A conviction or guilty plea in a criminal prosecution brought under §7206(1) — making false statements on a return — does not collaterally estop the taxpayer from asserting a defense to the fraud penalty for the same taxable year, although the conviction may be considered as evidence of the taxpayer's intent to evade payment of a tax known to be due and owing.

The civil fraud penalty can be imposed upon a taxpayer even though he is acquitted in a criminal fraud prosecution. Because the civil penalty carries a lesser burden of proof, collateral estoppel does not apply. There is also no double jeopardy, even when the civil fraud penalty is imposed on a taxpayer who is ordered to pay a criminal fine after a criminal conviction.

Tax Crimes

Section 7201 — Tax Evasion

Tax evasion, the most well known of crimes under the Internal Revenue Code, is a felony defined in §7201 as the willful attempt to evade or defeat any tax imposed by Title 26. The basic elements of a prima facie case are:

(1)      the existence of a tax deficiency,

(2)      an affirmative act constituting an evasion or attempted evasion of the tax, and (3) willfulness.

Conviction under §7201 requires an affirmative act evidencing an intent to conceal income from the imposition of tax. “Congress intended some willful commission in addition to the willful omissions that make up the list of misdemeanors.” For example, filing a false return could be a felonious evasion under §7201, while failing to file a return is a misdemeanor under §7203.

Willfulness has been defined as the “voluntary, intentional violation of a known legal duty.” Previously, a showing of “evil motive, bad purpose, or corrupt design” was required for a conviction of a tax crime. Courts now, however, authorize jury instructions that do not include such language. “Bad purpose” and “evil purpose” are not “magic words” that must be invoked in each criminal tax case. A good faith misunderstanding of the law is a defense to a tax crime.

Negligence, even gross negligence, is insufficient to establish willfulness. Thus, reckless disregard for the truth or negligent failure to inquire into the facts underlying criminal activity is insufficient to support a conviction.

Direct proof of willfulness is often unavailable. Circumstantial evidence of this element of the crime may consist of, inter alia, failure to report a substantial amount of income, a consistent pattern of underreporting large amounts of income, and the expenditure of large amounts of cash that cannot be reconciled with reported income. An “affirmative willful attempt” can be inferred from, inter alia, keeping false account books and records, destruction of records, concealment of assets or income, avoidance of usual transactional records, and any other act likely to mislead or conceal. The Internal Revenue Manual sets forth a list of potential “badges of fraud” that might be deemed to constitute a willful attempt. IRM 4.10.6.2.2 (5-14-99). 

Fraud, as distinguished from negligence, is always intentional. One of the elements of fraud is an intent to evade tax. Some of the indications of fraud are as follows:

A.    False explanations regarding understated or omitted income;

B.    Large discrepancies between actual and reported deductions of income;

C.   Concealment of income sources;

D.   Numerous errors, all in the taxpayer’s favor;

E.    Fictitious records or other deceptions;

F.    Large omissions of personal service income, specific items of income, gambling winnings, or illegal income;

G.   False deductions, exemptions, or credits;

H.   Failure to keep or furnish records;

I.      Incomplete information given to the return preparer regarding a fraudulent scheme;

J.     Large and frequent cash dealings that may or may not be common to the taxpayer’s business; and

K.    Verbal misrepresentations of the facts and circumstances.

The defendant may be convicted under §7201 even if the amounts of taxes evaded are not substantial; the statute contains no substantiality requirement. IRS guidelines issued in 1989, however, state that in cases in which the “specific item” method of proof is used  an indictment will be sought under §7201 only if the average yearly tax deficiency for the period under investigation is $2,500 or more. For cases in which an “indirect method of proof is utilized prosecution generally will not be sought unless the aggregate tax deficiency for the period under investigation is $10,000 or more. Such prosecutorial “floors” may be waived in flagrant cases, or where income is derived from illegal activities.

Under the Code, upon conviction of tax evasion the defendant may be fined, or imprisoned not more than five years, or both, and made to pay the costs of prosecution and any special assessments. Under 18 U.S.C. §3571, the maximum fine is $250,000 for individuals and $500,000 for corporations.

Section 7202 — Willful Failure to Collect or Pay Over Tax

Section 7202 proscribes the willful failure to collect or pay over tax. This section provides penalties to ensure that employers comply with their obligation to withhold federal wage and FICA taxes and pay over to the government the sums withheld. In order to sustain a conviction under this section, both the failure to truthfully account for and the failure to pay over must be willful.

Under the Code, upon conviction, a defendant may be fined, or imprisoned not more than five years, or both, and made to pay the costs of prosecution. The maximum fine is $250,000 for individuals and $500,000 for corporations

Section 7206 — False Returns and Preparers of False Returns

Section 7206, a felony provision, is violated by, inter alia, any person who willfully makes any document under the Internal Revenue laws that he does not believe to be true and correct and any person who willfully aids or assists in the preparation of any document under the Internal Revenue laws that is fraudulent or false. It is the most frequently charged criminal tax violation. In a prosecution brought under §7206, venue lies in the district in which the return was signed, or in which the return was filed, or in which the acts of aiding and assisting took place.

Upon conviction the defendant may be fined, or imprisoned not more than three years, or both, and made to pay the costs of prosecution. Under the Criminal Fine Enforcement Act of 1984, the maximum fine is $250,000 for individuals and $500,000 for corporations.

The requisite elements of an offense under §7206(1) are:

(1)      a belief that the return, statement or other document is not true and correct;

(2)      willfulness;

(3)      materiality; and

(4)      the making and subscribing of the document in question under penalty of perjury. The perjury is deemed to occur when the false entry is made, even if it is never relied upon.

This statute is used by the government where it is possible to prove the falsity of a return but where it would be difficult to establish the requirement of §7201 that the falsification was motivated by tax evasion. Thus, §7206 is a lesser included offense of §7201. As §7206(1) proscribes the making and subscribing of a return, only the taxpayer himself may be prosecuted under this provision.

Section 7207 — Submitting False Documents

Section 7207, a misdemeanor, is violated by any person “who willfully delivers or discloses to the Secretary [of the Treasury] any list, return, account, statement, or other document,” or other disclosures regarding private foundations ¹¹⁴ or information required as to certain retirement and bond-sharing plans under §6047(b), “known by him to be fraudulent or to be false as to any material matter.”

Section 7207 differs from the more serious §7206(1) in that the latter requires a subscription under penalties of perjury while the former does not; liability can attach under §7207 even when the taxpayer delivers a document prepared and signed by another person. ¹¹⁸ Moreover, while attempted evasion under §7201 requires an actual tax deficiency, the §7207 offense does not; the fact that a false statement does not actually influence the IRS is immaterial.

In a prosecution brought under §7207, venue is proper in the judicial district in which the false document is delivered or disclosed to the IRS. Upon conviction of this misdemeanor, the defendant may be fined up to $10,000 ($50,000 in the case of a corporation), or imprisoned not more than one year, or both. Under the Criminal Fine Enforcement Act of 1984, the maximum fine is $100,000 for individuals and $200,000 for corporations.

Statute of Limitations

An indictment must be brought within six years of the commission of the offense for most tax crimes, ¹⁴⁶ including the following offenses:

Section 6531 actually creates a general three-year limitation period for prosecution of tax crimes, but the six-year “exceptions” encompass virtually all tax crimes prosecuted with any frequency.

•         Defrauding or attempting to defraud the United States in any manner, whether by conspiracy or not;

•         Tax evasion (§7201);

•         Aiding or assisting in the preparation or presentation of a false return or document (§7206(2));

•         Willful failure to file or to pay tax (§7203);

•         Offenses described in §§7206(1) and 7207 (i.e., false statements or documents whether or not verified under the penalties of perjury).

Sham Trusts Created for Asset Protection Are Disregarded

In Vlach v. Comm'r, T.C. Memo. 2013-116 (April 30, 2013), the Tax Court held that a series of trusts created by a physician to hold his personal and business assets and activities were shams that must be ignored for federal tax purposes. In particular, the court noted:

A. The trust documents were purchased from an abusive trust promoter,

B. The taxpayers executed the forms without variation and without seeking independent legal or tax advice,

C. The taxpayers employed a return preparer referred by the promoter,

D. The trusts never paid a salary to the physician even though he provided medical services on behalf of the trust,

E. The trust funds were used to pay the physician's personal expenses,

F. The taxpayers' relationship to the trusts' assets did not materially change after the trusts were created,

G. No economic interest passed to anyone other than the taxpayers, and

H. No documents imposed any meaningful restriction on the taxpayers' use of the trusts' property.

The court rejected the claim that the trusts were created for asset protection, noting that the taxpayers never established that the trusts actually owned the medical equipment and real estate purportedly rented by them, or that the trust structure offered more protection against potential lawsuits than the corporate form used to operate the doctor's medical practice.

A trust recognized as valid under state law isn't necessarily also recognized for income tax purposes. For instance, tax law isn't necessarily satisfied with the informality permissible under state trust law. Clear evidence of the trust's existence, and actual consistent treatment of the funds as trust funds manifestly separate from those of the settlor is required. The use of the terms “trust”, “trustee”, and “beneficiaries” isn't conclusive. Nor is any weight given to elaborate trust documents if they are part of a canned, mass-produced package that is marketed for a fee.

A trust will be ignored for tax purposes if it's considered a sham. Thus, a trust that has no economic substance apart from tax considerations will be disregarded for tax purposes, and the income of the trust will be taxed to the person who controls the trust. The Tax Court considers the following factors in deciding whether a trust lacks economic substance:

(1) whether the taxpayer's relationship to the property differed materially before and after the trust's formation;

(2) whether the trust had an independent trustee;

(3) whether an economic interest passed to other trust beneficiaries;

(4) whether the taxpayer felt bound by any restrictions imposed by the trust itself or by the law of trusts.

The Tax Court also considers whether the taxpayer has a basic understanding of the trust's operations.

Asset protection whatever form it takes is serious business and those who are interested must seek advice from a knowledgeable practitioner and avoid those who purport to provide solutions which have no economic consequence and is nothing more that paper shuffling.

Marijuana Businesses to Deduct Their Expenses from Their Taxable Income

The Colorado Senate recently approved a bill (HB 1042) that would allow medical marijuana businesses to deduct their expenses from their taxable income.

The legislature legalized the possession and sale of small amounts of marijuana in November 2012, and the state has had a thriving medical marijuana industry since 2009.

Most Colorado businesses can deduct their expenses automatically since their state taxes are based on their federal taxable income. But marijuana businesses are still illegal under federal law and cannot deduct their expenses under IRC section 280E. HB 1042 would allow those businesses to deduct expenses like rent and personnel costs from their state taxable income.

Sen. Lucía Guzmán (D), who sponsored the legislation, said it is a matter of fairness for businesses that have been operating with a state license. The bill allows those businesses to deduct "the regular kinds of business expenses that any other business in Colorado would be able to deduct," she said.

"It doesn't really matter anymore what you think of marijuana. It is a legal business," said Sen. Cheri Jahn (D). "And therefore they should be treated like any other business in the state of Colorado."

HB 1042 would apply only to medical marijuana businesses. The bill now goes to Gov. John Hickenlooper (D), and he is expected to sign it.

Tax increases in 2013 Under The Affordable Care Act

Even if Congress were to somehow avoid the Fiscal Cliff the fact remains that under the Affordable Care Act (the Patient Protection and Affordable Care Act, and the Health Care and Education Reconciliation Act of 2010), a number of important tax increases will go into effect next year. These include higher HI taxes for high earners, a 3.8% surtax on unearned income of higher-income individuals, and caps on health FSA contributions. These changes will cause compliance issues for companies, and some of them also will face new deduction limitations and fees.

Here is a brief summary

Increased HI tax for high-earning workers and self-employed taxpayers.

For tax years beginning after Dec. 31, 2012, an additional 0.9% hospital insurance (HI) tax applies under Code Sec. 3101(b)(2) to wages received with respect to employment in excess of: $250,000 for joint returns; $125,000 for married taxpayers filing a separate return; and $200,000 in all other cases. Under Code Sec. 1401(b)(2), the additional 0.9% HI tax also applies to self-employment income for the tax year in excess of the above figures. (Code Sec. 6051(a)(14))

Surtax on unearned income of higher-income individuals. For tax years beginning after Dec. 31, 2012, an unearned income Medicare contribution tax is imposed on individuals, estates, and trusts. (Code Sec. 1411) For an individual, the tax is 3.8% of the lesser of either (1) net investment income or (2) the excess of modified adjusted gross income over the threshold amount ($250,000 for a joint return or surviving spouse, $125,000 for a married individual filing a separate return, and $200,000 for all others). For surtax purposes, gross income does not include excluded items, such as interest on tax-exempt bonds, veterans' benefits, and excluded gain from the sale of a principal residence. Hence the sale of one’s home could trigger the 3.8% tax.

Higher threshold for deducting medical expenses. For tax years beginning after Dec. 31, 2012, unreimbursed medical expenses will be deductible by taxpayers under age 65 only to the extent they exceed 10% of adjusted gross income (AGI) for the tax year. (Code Sec. 213(a)) If the taxpayer or his or her spouse has reached age 65 before the close of the tax year, a 7.5% floor applies through 2016 and a 10% floor applies for tax years ending after Dec. 31, 2016. (Code Sec. 213(f))

Dollar cap on contributions to health FSAs. For tax years beginning after Dec. 31, 2012, for a health flexible spending account (FSA) to be a qualified benefit under a cafeteria plan, the maximum amount available for reimbursement of incurred medical expenses of an employee (and dependents and other eligible beneficiaries) under the health FSA for a plan year (or other 12-month coverage period) can't exceed $2,500. (Code Sec. 125(i))

Deduction eliminated for retiree drug coverage. Sponsors of qualified retiree prescription drug plans are eligible for subsidy payments from the Secretary of Health and Human Services (HHS) for a portion of each qualified covered retiree's gross covered prescription drug costs (“qualified retiree prescription drug plan subsidy”). These qualified retiree prescription drug plan subsidies are excludable from the taxpayer's (plan sponsor's) gross income for regular income tax and alternative minimum tax (AMT) purposes. For tax years beginning before 2013, a taxpayer may claim a business deduction for covered retiree prescription drug expenses, even though it excludes qualified retiree prescription drug plan subsidies allocable to those expenses. But for tax years beginning after Dec. 31, 2012, under Code Sec. 139A, the amount otherwise allowable as a deduction for retiree prescription drug expenses will be reduced by the amount of the excludable subsidy payments received.

Fee on health plans. For each policy year ending after Sept. 30, 2012, each specified health insurance policy and each applicable self-insured health plan will have to pay a fee equal to the product of $2 ($1 for policy years ending during 2013) multiplied by the average number of lives covered under the policy. The issuer of the health insurance policy or the self-insured health plan sponsor is liable for and must pay the fee. (Code Sec. 4375, Code Sec. 4376, and Code Sec. 4377)

$500,000 compensation deduction limit for health insurance issuers. For tax years beginning after Dec. 31, 2012, for services performed during that year, a covered health insurance provider isn't allowed a compensation deduction for an “applicable individual” (officers, employees, directors, and other workers or service providers such as consultants) in excess of $500,000. A health insurance provider is covered if at least 25% of its gross premium income from health business derives from health insurance plans that meet certain minimum requirements. (Code Sec. 162(m)(6)(A))

The are no exceptions for performance-based compensation, commissions, or remuneration under existing binding contracts. Also, in the case of remuneration that relates to services that an applicable individual performs during a tax year but that is not deductible until a later year, such as nonqualified deferred compensation, the unused portion (if any) of the $500,000 limit for the year is carried forward until the year in which the compensation is otherwise deductible, and the remaining unused limit is then applied to the compensation.

Excise tax on medical device manufacturers. For sales after Dec. 31, 2012, a 2.3% excise tax applies under Code Sec. 4191 to sales of taxable medical devices intended for humans. The excise tax, paid by the manufacturer, producer, or importer of the device, won't apply to eyeglasses, contact lenses, hearing aids, and any other medical device determined by IRS to be of a type that is generally purchased by the general public at retail for individual use.

Cash Payments of Over $10,000

What About Suspicious Transactions?

If you receive $10,000 or less in cash, you may voluntarily file Form 8300 if the transaction appears to be suspicious.

A transaction is suspicious if it appears that a person is trying to cause you not to file Form 8300 or is trying to cause you to file a false or incomplete Form 8300, or if there is a sign of possible illegal activity.

If you are suspicious, you are encouraged to call the local IRS Criminal Investigation Division as soon as possible. Or, you can call the FinCEN Financial Institution Hotline toll free at 1-866-556-3974.

When, Where, and What To File

The amount you receive and when you receive it determine when you must file. Generally, you must file Form 8300 within 15 days after receiving a payment. If the Form 8300 due date (the 15th or last day you can timely file the form) falls on a Saturday, Sunday, or legal holiday, it is delayed until the next day that is not a Saturday, Sunday, or legal holiday.

More than one payment. In some transactions, the buyer may arrange to pay you in cash installment payments. If the first payment is more than $10,000, you must file Form 8300 within 15 days. If the first payment is not more than $10,000, you must add the first payment and any later payments made within 1 year of the first payment. When the total cash payments are more than $10,000, you must file Form 8300 within 15 days.

After you file Form 8300, you must start a new count of cash payments received from that buyer. If you receive more than $10,000 in additional cash payments from that buyer within a 12-month period, you must file another Form 8300. You must file the form within 15 days of the payment that causes the additional payments to total more than $10,000.

If you are already required to file Form 8300 and you receive additional payments within the 15 days before you must file, you can report all the payments on one form.

Example. On January 10, you receive a cash payment of $11,000. You receive additional cash payments on the same transaction of $4,000 on February 15, $5,000 on March 20, and $6,000 on May 12. By January 25, you must file a Form 8300 for the $11,000 payment. By May 27, you must file an additional Form 8300 for the additional payments that total $15,000.

Amending a Report? If you are amending a report, check box 1a at the top of Form 8300. Complete the form in its entirety (Parts I-IV) and include the amended information. Do not attach a copy of the original report.

Where to file. Mail the form to the address given in the Form 8300 instructions.

Required statement to buyer. You must give a written or electronic statement to each person named on any Form 8300 you must file. You can give the statement electronically only if the recipient agrees to receive it in that format. The statement must show the name and address of your business, the name and phone number of a contact person, and the total amount of reportable cash you received from the person during the year. It must state that you are also reporting this information to the IRS.

You must send this statement to the buyer by January 31 of the year after the year in which you received the cash that caused you to file the form.

RECORDS: You must keep a copy of every Form 8300 you file for 5 years.

Examples

Example 1. Pat Brown is the sales manager for Small Town Cars. On January 6, 2009, Jane Smith buys a new car from Pat and pays $18,000 in cash. Pat asks for identification from Jane to get the necessary information to complete Form 8300. A filled-in form is shown in this publication.

Pat must mail the form to the address shown in the form's instructions by January 21, 2009. He must also send a statement to Jane by January 31, 2010.

Example 2. Using the same facts given in Example 1, suppose Jane had arranged to make cash payments of $6,000 each on January 6, February 6, and March 6. Pat would have to file a Form 8300 by February 26 (17 days after receiving total cash payments within 1 year over $10,000 because February 21, 2009, is a Saturday). Pat would not have to report the remaining $6,000 cash payment because it is not more than $10,000. However, he could report it if he felt it was a suspicious transaction.

Penalties

There are civil penalties for failure to:

• File a correct Form 8300 by the date it is due, and

• Provide the required statement to those named in the Form 8300.

If you intentionally disregard the requirement to file a correct Form 8300 by the date it is due, the penalty is the greater of:

1. $25,000, or

2. The amount of cash you received and were required to report (up to $100,000).

There are criminal penalties for:

• Willful failure to file Form 8300,

• Willfully filing a false or fraudulent Form 8300,

• Stopping or trying to stop Form 8300 from being filed, and

• Setting up, helping to set up, or trying to set up a transaction in a way that would

make it seem unnecessary to file Form 8300.

If you willfully fail to file Form 8300, you can be fined up to $250,000 for individuals ($500,000 for corporations) or sentenced to up to 5 years in prison, or both.

The penalties for failure to file may also apply to any person (including a payer) who attempts to interfere with or prevent the seller (or business) from filing a correct Form 8300. This includes any attempt to structure the transaction in a way that would make it seem unnecessary to file Form 8300. Structuring means breaking up a large cash transaction into small cash transactions.

Reporting Cash Payments of Over $10,000 Received in a Trade or Business -PART I

Introduction

The IRS has published new guidance on reportable cash transactions (Pub. 1544).

If, in a 12-month period, you receive more than $10,000 in cash from one buyer as a result of a transaction in your trade or business, you must report it to the Internal Revenue Service (IRS) and the Financial Crimes Enforcement Network (FinCEN) on Form 8300, Report of Cash Payments Over $10,000 Received in a Trade or Business.

Financial institutions must file FinCEN Form 104 (formerly Form 4789), Currency Transaction Report, and casinos must file FinCEN Form 103 (formerly Form 8362), Currency Transaction Report by Casinos.

Why Report These Payments?

Drug dealers and smugglers often use large cash payments to "launder" money from illegal activities. Laundering means converting "dirty" or illegally-gained money to "clean" money.

The government can often trace this laundered money through payments reported. Laws passed by Congress require you to report these payments. Your compliance with these laws provides valuable information that can stop those who evade taxes and those who profit from the drug trade and other criminal activities.

Who Must File Form 8300?

Generally, any person in a trade or business who receives more than $10,000 in cash in a single transaction or in related transactions must file Form 8300.

For example, you may have to file Form 8300 if you are a dealer in jewelry, furniture, boats, aircraft, or automobiles; a pawnbroker; an attorney; a real estate broker; an insurance company; or a travel agency.

However, you do not have to file Form 8300 if the transaction is not related to your trade or business. For example, if you are a pawnbroker and sell your personal automobile for more than $10,000 in cash, you would not submit a Form 8300 for that transaction.

What transactions are subject to reporting? A "transaction" occurs when:

• Goods, services, or property are sold;

• Property is rented;

• Cash is exchanged for other cash;

• A contribution is made to a trust or escrow account;

• A loan is made or repaid; or

• Cash is converted to a negotiable instrument, such as a check or a bond.

Who is subject to the law? A "person" includes an individual, a company, a corporation, a partnership, an association, a trust, or an estate.

Exempt organizations, including employee plans, are also "persons." However, exempt organizations do not have to file Form 8300 for a more-than-$10,000 charitable cash contribution they receive since it is not received in the course of a trade or business.

What about Foreign transactions? You do not have to file Form 8300 if the entire transaction (including the receipt of cash) takes place outside of:

• The United States,

• The District of Columbia,

• Puerto Rico, or

• A possession or territory of the United States.

However, you must file Form 8300 if any part of the transaction (including the receipt of cash) occurs in Puerto Rico or a possession or territory of the United States and you are subject to the Internal Revenue Code.

What about cash deposited for bail received by court clerks. Any clerk of a federal or state court who receives more than $10,000 in cash as bail for an individual charged with any of the following criminal offenses must file Form 8300:

1. Any federal offense involving a controlled substance,

2. Racketeering,

3. Money laundering, and

4. Any state offense substantially similar to (1), (2), or (3) above.

What Payments Must Be Reported?

You must file Form 8300 to report cash paid to you if it is:

1. Over $10,000,

2. Received as:

a. One lump sum of over $10,000,

b. Installment payments that cause the total cash received within 1 year of the initial payment to total more than $10,000, or

c. Other previously unreportable payments that cause the total cash received within a 12-month period to total more than $10,000,

3. Received in the course of your trade or business,

4. Received from the same buyer (or agent), and

5. Received in a single transaction or in related transactions (defined later).

A simple question: What Is Cash?

Cash is:

1. The coins and currency of the United States (and any other country), and

2. A cashier's check, bank draft, traveler's check, or money order you receive, if it has a face amount of $10,000 or less and you receive it in:

a. A designated reporting transaction (defined later), or

b. Any transaction in which you know the payer is trying to avoid the reporting of the transaction on Form 8300.

Cash may also include a cashier's check even if it is called a "treasurer's check" or "bank check."

Note: Cash does not include a check drawn on an individual's personal account.

A cashier's check, bank draft, traveler's check, or money order with a face amount of more than $10,000 that you purchase is not treated as cash. These items are not defined as cash and you do not have to file Form 8300 when you receive them because, if they were bought with currency, the bank or other financial institution that issued them must file a report on FinCEN Form 104.

Example 1. You are a coin dealer. Bob Green buys gold coins from you for $13,200. He pays for them with $6,200 in U.S. currency and a cashier's check having a face amount of $7,000. The cashier's check is treated as cash. You have received more than $10,000 cash and must file Form 8300 for this transaction.

Example 2. You are a retail jeweler. Mary North buys an item of jewelry from you for $12,000. She pays for it with a personal check payable to you in the amount of $9,600 and traveler's checks totaling $2,400. Because the personal check is not treated as cash, you have not received more than $10,000 cash in the transaction. You do not have to file Form 8300.

Example 3. You are a boat dealer. Emily Jones buys a boat from you for $16,500. She pays for it with a cashier's check payable to you in the amount of $16,500. The cashier's check is not treated as cash because its face amount is more than $10,000. You do not have to file Form 8300 for this transaction.

Designated Reporting Transaction

A designated reporting transaction is the retail sale of any of the following:

1. A consumer durable, such as an automobile or boat. A consumer durable is property, other than land or buildings, that:

a. Is suitable for personal use,

b. Can reasonably be expected to last at least 1 year under ordinary use,

c. Has a sales price of more than $10,000, and

d. Can be seen or touched (tangible property).

For example, a $20,000 car is a consumer durable, but a $20,000 dump truck or factory machine is not. The car is a consumer durable even if you sell it to a buyer who will use it in a business.

2. A collectible (for example, a work of art, rug, antique, metal, gem, stamp, or coin).

3. Travel or entertainment, if the total sales price of all items sold for the same trip or entertainment event in one transaction (or related transactions) is more than $10,000.

To figure the total sales price of all items sold for a trip or entertainment event, you include the sales price of items such as airfare, hotel rooms, and admission tickets.

Example. You are a travel agent. Ed Johnson asks you to charter a passenger airplane to take a group to a sports event in another city. He also asks you to book hotel rooms and admission tickets for the group. In payment, he gives you two money orders, each for $6,000. You have received more than $10,000 cash in this designated reporting transaction. You must file Form 8300.

Retail sale. The term "retail sale" means any sale made in the course of a trade or business that consists mainly of making sales to ultimate consumers.

Thus, if your business consists mainly of making sales to ultimate consumers, all sales you make in the course of that business are retail sales. This includes any sales of items that will be resold.

Broker or intermediary. A designated reporting transaction includes the retail sale of items (1), (2), or (3) of the preceding list, even if the funds are received by a broker or other intermediary, rather than directly by the seller.

Exceptions to Definition of Cash

A cashier's check, bank draft, traveler's check, or money order you received in a designated reporting transaction is not treated as cash if one of the following exceptions applies.

Exception for certain bank loans. A cashier's check, bank draft, traveler's check, or money order is not treated as cash if it is the proceeds from a bank loan. As proof that it is from a bank loan, you may rely on a copy of the loan document, a written statement or lien instruction from the bank, or similar proof.

Example. You are a car dealer. Mandy White buys a new car from you for $11,500. She pays you with $2,000 of U.S. currency and a cashier's check for $9,500 payable to you and her. You can tell that the cashier's check is the proceeds of a bank loan because it includes instructions to you to have a lien put on the car as security for the loan. For this reason, the cashier's check is not treated as cash. You do not have to file Form 8300 for the transaction.

Exception for certain installment sales. A cashier's check, bank draft, traveler's check, or money order is not treated as cash if it is received in payment on a promissory note or an installment sales contract (including a lease that is considered a sale for federal tax purposes). However, this exception applies only if:

1. You use similar notes or contracts in other sales to ultimate consumers in the ordinary course of your trade or business, and

2. The total payments for the sale that you receive on or before the 60th day after the sale are 50% or less of the purchase price.

Exception for certain down payment plans. A cashier's check, bank draft, traveler's check, or money order is not treated as cash if you received it in payment for a consumer durable or collectible, and all three of the following statements are true.

1. You receive it under a payment plan requiring:

a. One or more down payments, and

b. Payment of the rest of the purchase price by the date of sale.

2. You receive it more than 60 days before the date of sale.

3. You use payment plans with the same or substantially similar terms when selling to ultimate consumers in the ordinary course of your trade or business.

Exception for travel and entertainment. A cashier's check, bank draft, traveler's check, or money order received for travel or entertainment is not treated as cash if all three of the following statements are true.

1. You receive it under a payment plan requiring:

a. One or more down payments, and

b. Payment of the rest of the purchase price by the earliest date that any travel or entertainment item (such as airfare) is furnished for the trip or entertainment event.

2. You receive it more than 60 days before the date on which the final payment is due.

3. You use payment plans with the same or substantially similar terms when selling to ultimate consumers in the ordinary course of your trade or business.

Taxpayer Identification Number (TIN)

You must furnish the correct TIN of the person or persons from whom you receive the cash. If the transaction is conducted on the behalf of another person or persons, you must furnish the TIN of that person or persons. If you do not know a person's TIN, you have to ask for it. You may be subject to penalties for an incorrect or missing TIN.

There are three types of TINs.

1. The TIN for an individual, including a sole proprietor, is the individual's social security number (SSN).

2. The TIN for a nonresident alien individual who needs a TIN but is not eligible to get an SSN is an IRS individual taxpayer identification number (ITIN). An ITIN has nine digits, similar to an SSN.

3. The TIN for other persons, including corporations, partnerships, and estates, is the employer identification number (EIN).

Exception. You are not required to provide the TIN of a person who is a nonresident alien individual or a foreign organization if that person or foreign organization:

1. Does not have income effectively connected with the conduct of a U.S. trade or business;

2. Does not have an office or place of business, or a fiscal or paying agent in the United States;

3. Does not file a federal tax return;

4. Does not furnish a withholding certificate described in § 1.1441-1(e)(2) or (3) or 1.1441-5(c)(2)(iv) or (3)(iii) to the extent required under 1.1441-1(e)(4)(vii);

5. Does not have to furnish a TIN on any return, statement, or other document as required by the income tax regulations under section 897 or 1445; or

6. In the case of a nonresident alien individual, the individual has not chosen to file a joint federal income tax return with a spouse who is a U.S. citizen or resident.

What Is a Related Transaction?

Any transactions between a buyer (or an agent of the buyer) and a seller that occur within a 24-hour period are related transactions. If you receive over $10,000 in cash during two or more transactions with one buyer in a 24-hour period, you must treat the transactions as one transaction and report the payments on Form 8300.

For example, if you sell two products for $6,000 each to the same customer in 1 day and the customer pays you in cash, these are related transactions. Because they total $12,000 (more than $10,000), you must file Form 8300.

More than 24 hours between transactions. Transactions are related even if they are more than 24 hours apart if you know, or have reason to know, that each is one of a series of connected transactions.

For example, you are a travel agent. A client pays you $8,000 in cash for a trip. Two days later, the same client pays you $3,000 more in cash to include another person on the trip. These are related transactions, and you must file Form 8300 to report them.

(PART II- Suspecious Transaction and Penalties)