The U.S. Treasury Office of Inspector General for Tax Administration (TIGTA) has criticized the Internal Revenue Service in two key areas related to financial crime compliance and investigations, stating in one report that the agency’s anti-money laundering (AML) division – that typically examiners all non-bank operations without a federal functional regulator, has “minimal impact,” while it’s also failing to fully maximize the data in customer transaction reports (CTRs).

The TIGTA report stated that the IRS Small Business/Self-Employed Division was lax in the majority of its exams, letting major violators slide with letters, not penalties.

“TIGTA reviewed a statistically valid random sample of 140 compliance cases from a population of 24,212 closed cases worked by the BSA Program for Fiscal Years 2014 through 2016 and found that 105 (75 percent) were closed with 383 Title 31 violations in which the respective business only received a letter citing the violations found.”

As well, the entire penalty process and coordination with IRS Criminal and the U.S. Treasury’s Financial Crimes Enforcement Network (FinCEN), the agencies with powers to hand down monetary fines, was a flawed, money-losing operation – and one that has yet to adequately train or examine firms related to virtual currency operations.

“For the same fiscal year period, TIGTA found that 1) referrals to the FinCEN of Title 31 penalty cases go through lengthy delays and have little impact on BSA compliance; 2) the BSA Program spent about $97 million to assess approximately $39 million in penalties; and 3) while referrals were made to IRS Criminal Investigation, most of the investigations were declined and less than half of the cases were accepted.”

TIGTA issued several recommendations:

  • coordinate with the FinCEN on the authority to assert Title 31 penalties or reprioritize resources to more productive work;
  • leverage the BSA Program’s Title 31 authority and annual examination planning in the development of the IRS’s virtual currency strategy;
  • notify examiners of new appointment letter enclosures that includes Publication 1;
  • evaluate the effectiveness of the newly implemented review procedures for FinCEN referrals; and
  • improve the process for referrals to IRS Criminal Investigation.

The IRS “agreed with four of the five recommendations,” according to the report. “The IRS will incorporate its virtual currency strategy into its Title 31 compliance efforts; provide BSA examiners guidance on appointment letter enclosures; review and improve the FinCEN referral process; and review the BSA criminal referral criteria to maximize efficiency and enhance BSA referrals to Criminal Investigation.”

However, the IRS “disagreed with pursuing Title 31 penalty authority stating it was outside its purview and that the FinCEN intends to retain this authority.” To read the full report, click here.

On the issue of CTRs, the oversight body found a host of issues.

“Although IRS management agreed with TIGTA’s recommendation in a September 2010 report and cited steps taken to develop examination referrals from the CTRs, the IRS is still not systemically using the CTRs to identify and pursue potentially noncompliant individuals,” according to the report.

It is also “not effectively tracking information referrals from Bank Secrecy Act examiners to the Examination function. Finally, some examiners are not documenting that they are considering available CTR information in their audits.”

During the fieldwork for this review, TIGTA also found that “CTR data stored in the Integrated Data Retrieval System incorrectly aggregated CTR amounts for multiple individuals and showed the same CTRs total dollar amount for these individuals,” according to the report.

TIGTA “recommended that the IRS 1) establish formalized procedures for processing Bank Secrecy Act Program referrals and begin tracking the time required to send referrals to the Field Exam Support Team, and 2) clarify formal Internal Revenue Manual procedures to assist examiners in their consideration of CTR data in examinations.” To read the full report, click here.