TIGTA Finds IRS Not Properly Using Currency Transaction Data

The Accuracy of Currency Transaction Report Data in IRS Systems Should Be Improved to Enhance Its Usefulness for Compliance Purposes

September 4, 2020

This report has cleared the Treasury Inspector General for Tax Administration disclosure review process and information determined to be restricted from public release has been redacted from this document.

HIGHLIGHTS

Final Audit Report issued on September 4, 2020

What TIGTA Found

Some subjects of the CTRs with significant dollar amounts of cash-in transactions may not be filing income tax returns. Although CTR data are officially collected and maintained by FinCEN, the IRS can use CTR data for compliance purposes. TIGTA found that 5,266 subjects of cash-in CTRs totaling more than $1.9 billion did not file income tax returns for Tax Year 2017; however, the IRS is not using this data to identify nonfilers.

Additionally, the IRS is not tracking CTR amounts accurately for some individuals. The data retrieval system used by IRS employees in some cases incorrectly aggregated CTR amounts for multiple unrelated individuals and presented these amounts as CTRs for one person. The IRS is also including the CTRs from earlier processing years. Instead of using the transaction date to assign a calendar year to the CTR, the date of entry was used which, in some cases, was assigned the incorrect processing year.

The IRS has limited processes to validate the quality and reliability of the data imported from FinCEN. For example, the IRS does not perform record counts to verify that all transactions are properly imported. TIGTA reviewed data contained in FinCEN's database and compared it to IRS systems and found that some CTRs were missing from some IRS databases. Additionally, the IRS imports some details of currency transactions but does not import or make available some information that could be useful for compliance.

What TIGTA Recommended

TIGTA recommended that the IRS use CTR data to systemically identify potentially noncompliant taxpayers and nonfilers, ensure the accuracy of CTR data in the Information Returns Master File, develop processes to verify that data imported are complete and reliable, and ensure the data are accessible to IRS employees.

IRS management agreed with one recommendation and plans to conduct a review of its case identification and selection processes to determine if CTR data can be used more effectively to systemically identify and/or select cases. The IRS partially agreed with another recommendation pertaining to ensuring the accuracy of CTR data and disagreed with two recommendations pertaining to developing processes to ensure that imported data are complete and reliable and to ensure that the data are accessible to IRS employees. TIGTA believes that in cases when the initial review of CTR data are based on inaccurate, incomplete, or missing data presented in IRS systems, an examiner may make incorrect decisions based on the inaccurate data or may not request FinCEN data if the examiner believes that no such data exist. Given that the errors of the data presented in some IRS systems amount to trillions of dollars, the IRS should attempt to validate CTR data imported into its systems, whether or not it owns the data.

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September 4, 2020

MEMORANDUM FOR:
COMMISSIONER OF INTERNAL REVENUE

FROM:
Michael E. McKenney
Deputy Inspector General for Audit

SUBJECT:
Final Audit Report — The Accuracy of Currency Transaction Report Data in IRS Systems Should Be Improved to Enhance Its Usefulness for Compliance Purposes (Audit # 201830035)

This report presents the results of our review to determine filing noncompliance of taxpayers who have received Currency Transaction Reports, and evaluate the accuracy of Currency Transaction Reports data in the Internal Revenue Service's information systems. This review is part of our Fiscal Year 2020 Annual Audit Plan and addresses the major management and performance challenge of Improving Tax Compliance and Payment Compliance.

Management's complete response to the draft report is included as Appendix III.

Copies of this report are also being sent to the Internal Revenue Service managers affected by the report recommendations. If you have any questions, please contact me or Matthew A. Weir, Assistant Inspector General for Audit (Compliance and Enforcement Operations).

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Table of Contents

Background

Results of Review

Appendices

Appendix I — Detailed Objective, Scope, and Methodology

Appendix II — Outcome Measures

Appendix III — Management's Response to the Draft Report

Appendix IV — Glossary of Terms

Appendix V — Abbreviations

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Background

The U.S. Department of the Treasury established the Financial Crimes Enforcement Network (FinCEN) in 1990 to provide a Government-wide multisource financial intelligence and analysis network. The organization's operation was broadened in 1994 to include regulatory responsibilities for administering the Bank Secrecy Act (BSA), one of the Nation's most potent weapons to prevent corruption of the U.S. financial system.¹

Congress passed the BSA in 1970 as one of the first laws to fight money laundering in the United States. The BSA requires businesses to keep records and file reports that are determined to have a high degree of usefulness in criminal, tax, and regulatory matters. The documents filed by businesses under BSA requirements are used by law enforcement agencies, both domestic and international, to identify, detect, and deter money laundering whether it is in furtherance of a criminal enterprise, terrorism, tax evasion, or other unlawful activity. As a partner in the U.S. National Money Laundering Strategy, the Internal Revenue Service (IRS) seeks to achieve a balance between enforcement of the money laundering laws and education.

Federal law requires financial institutions to report currency (cash or coin) transactions of more than $10,000 conducted by, or on behalf of, one person, as well as multiple currency transactions that aggregate to be more than $10,000 in a single day. FinCEN Form 112, Currency Transaction Report, is used to report these transactions. The Federal law requiring Currency Transaction Reports (CTR) was passed to safeguard the financial industry from threats posed by money laundering and other financial crime. To comply with this law, financial institutions must obtain personal identification information about the individual conducting the transaction such as a Social Security Number, as well as a driver's license or other government-issued document. This requirement applies whether the individual conducting the transaction has an account relationship with the institution or not.

FinCEN's regulations implementing the BSA require financial institutions to aggregate multiple currency transactions, “if the financial institution has knowledge that [the multiple transactions] are by or on behalf of any person and result in either cash in or cash out totaling more than $10,000 during any one business day.”² Accordingly, the financial institution must file FinCEN Form 112 when it has knowledge that the same person has conducted multiple transactions that total more than $10,000 in currency in one business day or when it has knowledge that multiple transactions that total more than $10,000 in currency in one business day are on behalf of the same person.

Prior to 2012, the IRS was responsible for receiving and maintaining the CTRs. In 2012, the responsibility for tracking the CTRs transitioned to FinCEN. Although FinCEN is now responsible for the administration of the CTRs, the IRS can still use CTR information to identify cash activity that may not be accurately reported on income tax returns and as an indicator of compliance issues that should be incorporated into income tax examinations. For example, one examination method involves using the CTRs and bank deposits to conduct an analysis of potential taxable income.

The Treasury Inspector General for Tax Administration (TIGTA) issued an audit report on the BSA Program in September 2018 that found that referrals of Title 31 penalty cases to FinCEN go through lengthy delays and have little impact on compliance.³ The report also found that less than one-half of the referrals made to IRS Criminal Investigation were accepted. TIGTA recommended that the IRS: 1) coordinate with FinCEN on the authority to assert Title 31 penalties or reprioritize resources to more productive work, 2) leverage the BSA Program's Title 31 authority and annual examination planning in the development of the IRS's virtual currency strategy, 3) notify examiners of new appointment letter enclosures that includes Publication 1, Your Rights as a Taxpayer, 4) evaluate the effectiveness of the newly implemented review procedures for FinCEN referrals, and 5) improve the process for referrals to IRS Criminal Investigation. The IRS agreed with four of the five recommendations, but disagreed with pursuing Title 31 penalty authority stating it was outside its purview and that FinCEN intends to retain this authority.

TIGTA issued another audit report in September 2018 on the IRS's use of CTR information to select and examine taxpayers.⁴ This audit found that the IRS was not systemically using the CTRs to identify and pursue potentially noncompliant individuals. The IRS also was not effectively tracking information referrals from BSA Program examiners to the Examination function. IRS management agreed with the recommendations and planned to take corrective actions. However, the IRS's response to the report stated that it disagreed with TIGTA's assertion that the IRS did not make effective use of the CTRs.

During the fieldwork for the September 2018 CTR review, TIGTA found that CTR data stored in the IRS's Integrated Data Retrieval System displayed incorrectly aggregated CTR amounts for multiple individuals and showed the same CTRs total dollar amount for these individuals.⁵ The current audit is a follow-up to this earlier CTR audit with the objective to determine filing noncompliance of taxpayers who have received the CTRs and evaluate the accuracy of CTR data in the IRS's information systems.

Results of Review

Our review of CTR data obtained directly from FinCEN found that thousands of individuals with billions of dollars of CTR cash-in transactions for Calendar Year (CY) 2017 have not filed income tax returns.⁶ CTR data have been officially maintained and reported by FinCEN since 2012. Prior to this, the IRS collected CTR data. However, programming limitations in IRS computer systems since the transfer of responsibility to FinCEN have resulted in FinCEN's CTR data being inaccurately presented in IRS systems due to changes in reporting methodology initiated by FinCEN and programming limitations in IRS computer systems. In addition, the IRS has limited processes to validate the quality and reliability of the data imported from FinCEN.

Some Subjects of Currency Transaction Reports With Large Cash-In Transactions Are Not Filing Income Tax Returns

During our review, we found that individuals identified in the CTRs with a total of more than $100,000 of cash-in transactions may not be filing required income tax returns. We reviewed FinCEN CTR data to identify all taxpayers with combined CTRs with total cash-in of more than $100,000 and found that 5,266 subjects of cash-in CTRs totaling more than $1.9 billion did not file income tax returns for Tax Year 2017. We are unable to determine the amount of taxable income for these subjects of the CTRs because they did not file tax returns. However, the large amount of cash transactions for these taxpayers, combined with the failure to file a tax return, is an indication of tax noncompliance.

The IRS's latest estimate of the Tax Gap, the amount of tax liability not paid voluntarily and timely, was $441 billion annually for Tax Years 2011 through 2013. The Tax Gap is comprised of taxpayers not providing tax returns to establish liabilities (nonfiling), taxpayers misreporting amounts used to calculate liabilities (underreporting), and taxpayers not paying liabilities reported on timely filed tax returns (underpayment). The IRS estimates that these components contribute $39 billion, $352 billion, and $50 billion, respectively, to the Tax Gap annually.

In response to our September 2018 CTR report, IRS officials stated that the IRS is not systemically using the CTRs to identify and pursue individuals who are not meeting their filing obligations. Based on the number of subjects of the CTRs we found who have not filed tax returns, and the amount of cash-in transactions, the IRS could potentially be missing an opportunity to bring thousands of individuals into compliance and reduce the nonfiling and underreporting portions of the Tax Gap. TIGTA continues to believe that accurate CTR data would be useful to IRS functions such as Criminal Investigation, Collection, and Examination, as part of planning, selecting, and accomplishing their workload.

Data Importing Errors Cause Inaccurate Currency Transaction Report Data

Since 2012, FinCEN has had the responsibility to collect CTR data, which the IRS collected previously. Certain outside agencies, such as the IRS, can access the data to download into their own systems. After assuming the responsibility for collecting CTR data, FinCEN allowed the batching of individual CTR transactions into larger batches of data. However, technical issues with the IRS's data translation process transmit the CTR Form total rather than the CTR Transaction total from one IRS system (Web Currency and Banking Retrieval System) to another (Information Returns Master File) when multiple transactions are reported on a single CTR form, which resulted in a large number of overstated cash transactions. An IRS Unified Work Request was approved in May 2020 that is intended to address the data translation issues, with an implementation data of September 2021. In addition, the IRS is not adequately validating FinCEN's data or performing record counts, resulting in the addition of millions of inaccurate CTR transactions each year to IRS databases.

IRS computer systems display incorrect CTR amounts for individuals

The IRS was originally responsible for the collection of CTR information, initially using its Currency and Banking Retrieval System. In 2012, this responsibility was transferred to FinCEN. The IRS now obtains CTR data by accessing a FinCEN server, where files are placed on a daily basis for downloading by outside agencies, including the IRS. After CTR data are downloaded from the FinCEN server, IRS programs transmit the data into other IRS systems. Prior to 2013, CTR forms were filed on a transaction-by-transaction basis, with a dollar amount recorded for each transaction. Starting in 2013, multiple CTR records could be batched in a single record that included an individual transaction amount and a form total amount.

The IRS has experienced technical difficulties with importing FinCEN data following the change to batched CTR records, causing some individual CTR records to reflect the form total instead of the individual transaction amount, resulting in millions of overstated transactions. Below is a hypothetical example showing the misstated CTR amounts.

Figures 1 and 2 show the amounts by which CTR cash-in and cash-out transactions were overstated in IRS computer systems for CYs 2015 to 2017.⁷ This inaccurate information was included in IRS computer systems, including the Information Returns Master File and the Integrated Data Retrieval System, preventing IRS examiners and workload planning functions from using the data to select and examine returns of taxpayers with cash transactions that may indicate underreported income.⁸

Figure 1: Overstated Cash-In CTRs for CYs 2015 to 2017
(IRS Amount Greater Than FinCEN Amount)

CY	Number of CTR Transactions	Overstated CTR Amount
2015	5,151,586	$2,331,179,418,378
2016	5,678,862	$2,875,069,767,377
2017	6,361,336	$4,825,035,690,442
Total	17,191,784	$10,031,284,876,197
Source: TIGTA analysis of IRS and FinCEN data.

Figure 2: Overstated Cash-Out CTRs for CYs 2015 to 2017
(IRS Amount Greater Than FinCEN Amount)

CY	Number of CTR Transactions	Overstated CTR Amount
2015	315,079	$52,172,495,770
2016	381,106	$84,549,120,759
2017	526,567	$129,188,515,556
Total	1,222,752	$265,910,132,085
Source: TIGTA analysis of IRS and FinCEN data.

In August 2019, the IRS issued an Interim Guidance Memo to clarify actions examiners must take to analyze and document CTR data during an audit. The memo cautioned that CTR data on some IRS systems contain minimal information and the total reflected could be an aggregate of several unrelated transactions. Therefore, examiners must complete a form to request a full copy of CTR data from a FinCEN Query Super User. In May 2020, an IRS Unified Work Request was approved to make programming changes to ensure that multiple transactions recorded on a single CTR are correctly attributed to the respective transaction subject.⁹ The proposed implementation date for the changes is September 2021.

IRS CTR data for individuals include transactions from earlier calendar years

The IRS's system should record CTR transactions for the calendar year in which they occurred. However, our review found that some CTRs from earlier calendar years are recorded as current year transactions in the IRS's databases although they occurred in prior calendar years, because the IRS performs limited validation on FinCEN data it receives (consisting of confirming that the CTR contains a Taxpayer Identification Number, name, and dollar amount). The IRS could perform additional data validation techniques such as checking for duplicate entries, confirming no missing entries, verifying null entries, and checking for unusually large outliers and out-of-date data. As a result, IRS data do not reflect accurate CTR amounts for a given calendar year, and IRS employees may not see transactions in the actual year of occurrence. Figure 3 shows the number of transactions reported in the incorrect year for CYs 2015 to 2017.

Figure 3: CTRs With Incorrect Transaction Dates for CYs 2015 to 2017
(Dates Prior to Transaction Calendar Year)

CY	Number of CTRs	Oldest Transaction Date
2015	3,856,212	8/25/1950
2016	1,429,892	7/26/1916
2017	1,096,440	6/19/1917
Source: TIGTA analysis of IRS and FinCEN data.

Existing Controls Do Not Ensure That All Useful Currency Transaction Report Data Are Available

The IRS currently has limited processes to validate the quality and reliability of the data imported from FinCEN. For example, the IRS does not perform record counts to verify that all transactions are properly imported. In addition, the IRS does not include all useful data fields for use in IRS systems.

Some CTR reports in FinCEN's database are missing from IRS systems

The IRS attempts to import all CTR data from FinCEN, but it does not perform record count checks or other procedures to verify that all transactions are properly imported. The Government Accountability Office's Standards for Internal Control in the Federal Government requires government entities to use quality information to achieve the entity's objectives.¹⁰ IRS management should evaluate both internal and external sources of data for reliability to meet these standards.

During our review, we compared the total number and amounts of the CTRs contained in the FinCEN database for CYs 2015 to 2017 to the number and amounts of the CTRs contained in IRS computer systems for the same period and found 446,399 CTRs from the FinCEN database that were not in the IRS's databases. Figure 4 shows the number of CTRs contained in the FinCEN database that were not found in IRS computer systems. According to IRS management, a limited review of these records found that some transactions had incorrect account numbers that were erroneously used in place of transaction amounts, duplicated entries, and amended CTRs correcting previous errors.

Figure 4: FinCEN CTRs Not Found in IRS Databases for CYs 2015 to 2017

CY	Total Number of FinCEN CTRs Not Found in IRS Databases
2015	134,048
2016	115,182
2017	197,169
Source: TIGTA analysis of IRS and FinCEN data.

The August 2019 Interim Guidance Memo noted that CTR data may exist but not be shown on some IRS systems. Examiners were encouraged to consider requesting FinCEN Query data from a Super User in situations that indicate CTR data may be present.

More useful CTR data are available but not included in IRS systems

The IRS imports CTR transactions from FinCEN data, but does not import or present all the data fields. The primary reason for this is that the IRS used data fields designed to import data for multiple tax forms including the Form 1098, Mortgage Interest Statement, the Form 1099 series, and several other forms and repurposed the data fields to import CTR data. However, not all CTR fields were viewable in IRS systems. Some examples of missing fields that could be useful to the IRS are shown below:

• Type of CTR Report (Initial/Amended).

• Person Involved Type (Conducting Transaction on own behalf, On behalf of another).

• Alternate Name/Business Name.

• Occupation/Type of Business.

• Bank Account Numbers.

• Contact information (Telephone Number, E-mail Address).

The Government Accountability Office's Standards for Internal Control in the Federal Government requires government entities to use quality information to achieve the entity's objectives. Quality information is defined as appropriate, current, complete, accurate, accessible, and provided on a timely basis. IRS management should evaluate CTR transaction data viewable in its systems to ensure that quality information is available. Otherwise, the IRS may not have sufficient information to identify potential tax noncompliance and conduct quality examinations because incomplete CTR transaction data from FinCEN are imported into IRS computer systems.

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Appendix I
Detailed Objective, Scope, and Methodology

Our overall objective was to determine filing noncompliance of taxpayers who have received CTRs, and evaluate the accuracy of CTR data in the IRS's information systems. To accomplish our objective, we:

• Identified and documented IRS policies, procedures, and controls over importing CTR data from FinCEN.

• Obtained CTR data for CYs 2015 through 2017 from FinCEN and compared to data in IRS systems to determine the accuracy of IRS data by comparing CTR transactions in FinCEN Query to the same transactions in the Information Returns Master File to determine if the IRS is accurately reporting the transactions as shown in FinCEN Query.

• Analyzed CTR data, information returns, and individuals' tax records on IRS systems to determine if there is a potential for unreported income by identifying individual nonfilers with cash-in CTRs of more than $100,000.

• Evaluated the risk of fraud, waste, and abuse to obtain reasonable assurance that CTR data inaccuracies do not exist due to impropriety.

Performance of This Review

This review was performed with information obtained from the IRS Application Development office located in Detroit, Michigan, and from IRS personnel in various locations during the period September 2018 through May 2020. We conducted this performance audit in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objective. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objective.

Major contributors to the report were Matthew A. Weir, Assistant Inspector General for Audit (Compliance and Enforcement Operations); Linna Hung, Director; Robert Jenness, Audit Manager; and John Park, Lead Auditor.

Validity and Reliability of Data From Computer-Based Systems

During this review, we relied on data stored at TIGTA's Data Center Warehouse and performed analysis of data received from the IRS and FinCEN. We performed tests to assess the reliability of the data and evaluated the data by performing electronic testing of required data elements, reviewing existing information about the data and the system that produced them, and interviewing agency officials knowledgeable about the data. We determined that the data were sufficiently reliable for purposes of this report.

Internal Controls Methodology

Internal controls relate to management's plans, methods, and procedures used to meet their mission, goals, and objectives. Internal controls include the processes and procedures for planning, organizing, directing, and controlling program operations. They include the systems for measuring, reporting, and monitoring program performance. We determined that the following internal controls were relevant to our audit objective: the Internal Revenue Manual, along with other IRS policies and procedures for handling FinCEN CTR data.

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Appendix II
Outcome Measures

This appendix presents detailed information on the measurable impact that our recommended corrective actions will have on tax administration. These benefits will be incorporated into our Semiannual Report to Congress.

Type and Value of Outcome Measure:

• Reliability of Information — Potential; 18,414,536 CTR records with cash-in and cash-out transactions were overstated in IRS computer systems (see Recommendation 2).

Methodology Used to Measure the Reported Benefit:

We compared CTR cash-in and cash-out transactions obtained from FinCEN for CYs 2015 to 2017 to CTR cash-in and cash-out data in IRS data systems for the same period. Our analysis determined that due to technical difficulties with importing FinCEN data into IRS systems, a total of 18,414,536 CTR records (17,191,784 cash-in CTRs and 1,222,752 cash-out CTRs) had larger transaction amounts in IRS systems than in FinCEN data.

Type and Value of Outcome Measure:

• Reliability of Information — Potential; 6,382,544 CTR records had transaction dates from earlier calendar years (see Recommendation 3).

Methodology Used to Measure the Reported Benefit:

We compared the dates for CTR transactions in FinCEN data for CYs 2015 to 2017 to the transaction dates for CTR transactions in IRS data systems for the same period. Our analysis determined that due to the limited data validation performed by the IRS, a total of 6,382,544 CTR records had transaction dates from earlier calendar years.

Type and Value of Outcome Measure:

• Reliability of Information — Potential; 446,399 CTR records in the FinCEN database were not in the IRS's computer systems (see Recommendation 4).

Methodology Used to Measure the Reported Benefit:

We compared CTR transactions in FinCEN data for CYs 2015 to 2017 to CTR transactions in IRS data systems for the same period. Our analysis found 446,399 CTRs contained in the FinCEN database that were not in the IRS's computer systems.

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Appendix III
Management's Response to the Draft Report

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Appendix IV
Glossary of Terms

Term	Definition
Bank Secrecy Act Program	The IRS BSA Program educates, examines, and enforces compliance with BSA reporting requirements for individuals required to file a FinCEN Form 114, Report of Foreign Bank and Financial Accounts, and nonbank financial institutions required to file the CTRs, as well as trades and businesses that are required under both the BSA and the Internal Revenue Code to file a FinCEN Form 8300, Report of Cash Payments Over $10,000 Received in a Trade or Business, when receiving cash of more than $10,000.
Calendar Year	The 12-consecutive-month period beginning January 1 and ending on December 31.
Information Returns Master File	Part of the IRS taxpayer batch file that contains all taxpayer information return data extracted from various sources.
Integrated Data Retrieval System	IRS computer system capable of retrieving or updating stored information. It works in conjunction with a taxpayer's account records.
Internal Revenue Code	Title 26 of the U.S. Code enacted by Congress containing all relevant legislation pertaining to Federal tax law.
Internal Revenue Manual	The IRS's primary official source of instructions to employees related to the administration and operations of the IRS.
Tax Year	The 12-month accounting period for keeping records on income and expenses used as the basis for calculating the annual taxes due. For most individual taxpayers, the tax year is synonymous with the calendar year.
Web Currency and Banking Retrieval System	An online IRS database that contains BSA information.

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Appendix V
Abbreviations

BSA	Bank Secrecy Act
CTR	Currency Transaction Report
CY	Calendar Year
FinCEN	Financial Crimes Enforcement Network
IRS	Internal Revenue Service
TIGTA	Treasury Inspector General for Tax Administration