In an effort to combat illegal activities like money laundering, organized crime and tax evasion, federal law requires anyone engaged in a trade or business who receives cash in excess of $10,000 to report that transaction to the U.S. government. This isn’t to say that all businesses who deal in large cash transactions are illegitimate. For example, criminal defense attorneys representing defendants accused of serious felonies are often paid large retainers in paper currency. However, since cash transactions do not often leave a paper trail like credit cards and checks, this law is designed to keep taxpayers honest in reporting their income to the IRS.
The Internal Revenue Code requires “[a]ny person engaged in trade and business AND who, in the course of such trade or business, receives more than $10,000 in cash in 1 transaction (or 2 more related transactions)” shall file a return at such time as the U.S. Department of Treasury may require. 26 U.S.C. §6050I(a). This reporting even extends to federal or state criminal clerk courts who receive more than $10,000 in cash as bail for any individual charged with controlled substance offenses, racketeering or money laundering. 26 U.S.C. §6050I(g). “Related transaction” are those transactions that either occurred between the same parties in a 24-hour period or, if more than a 24-hour period, all of those transactions between two parties that the recipient knows or has reason to know to be part of a series of connected transactions. 26 CFR §1.6050I-1(c)(7)(ii). In fact, recipients are prohibited from structuring transactions for the purpose of evading reporting requirements, and doing so will result in the same civil and criminal penalties that a person would face for failing to file or filing a false/incomplete tax return. 26 U.S.C. §6050I(f).
“Cash” includes U.S. coins and currency, foreign currency and any monetary instrument with a face amount not exceeding $10,000. 26 U.S.C. §6050I(f). Federal regulations also define “cash” as a cashier’s check, bank draft, traveler’s check or money order with a face value not exceeding $10,000 used EITHER in a retail sale of a consumer good, collectible or travel/entertainment activity OR in an attempt to avoid the reporting requirements of cash transactions. 26 CFR §1.6050I-1(c)(1). “Cash” does not include a personal check or business check drafted from a bank account at a financial institution.
Applicable recipients of $10,000.00 must file Form 8300 – Report of Cash Payments Over $10,000 Received In a Trade or Business as follows:
- The recipient must report the following information:
- Name, address and taxpayer identification number (TIN) of the payer.
- Amount of cash received and the form it was received in (e.g. U.S. currency, foreign currency, cashier’s check, bank draft, traveler’s check or money order).
- Date and nature of the transaction.
- Description of the property or service that was purchased.
- The Form 8300 return must be filed within 15 days of receiving this cash transaction. However, the receipt of multiple cash payments must report as follows:
- If the initial payment exceeds $10,000, then the initial payment must be reported. 26 CFR §1.6050I-1(b)(1).
- If the initial payment is $10,000 or less, the recipient must aggregate all subsequent payments within one year of the initial payment and report this aggregate amount within 15 days after the total exceeds $10,000. 26 CFR §1.6050I-1(b)(2).
- For subsequent payments, a report must be made each time that previously unreportable payments made within a one year period with respect to a single transaction (or 2 or more related transactions), whether individually or in the aggregate, exceed $10,000. 26 CFR §1.6050I-1(b)(3).
- The Form 8300 return must be filed as follows:
- If a paper return, filed at the Internal Revenue Service, Detroit Computing Center, P.O. Box 32621, Detroit, MI 48232, OR;
- Electronically filed using the Financial Crimes Enforcement Network’s (FinCEN) Bank Secrecy Act E-Filing System.
- In addition to filing Form 8300, the recipient must furnish a written statement to the payer on or before January 31st following the tax year that the transaction was made. There is no particular form for this statement, but it must include the name, address and phone number of the business, the aggregate amount of reportable cash received and that the information was furnished to the IRS. 26 U.S.C. §6050I(e).
The following transactions of cash over $10,000 are NOT required to be reported:
- Bank Secrecy Act Reports (26 U.S.C. §6050I(c)(1)): Cash transactions over $10,000 that were already reported using FinCEN Form 112 to the U.S. Department of Treasury if using Form 8300 would merely be a duplicate report.
- Certain Bank Loans (26 CFR §1.6050I-1(c)(1)(iv)): A cashier’s check, bank draft, traveler’s check, or money order received in a retail sale of a consumer good, collectible or travel/entertainment activity if the instrument constitutes the proceeds of a bank loan
- Certain Installment Sales (26 CFR §1.6050I-1(c)(1)(v)): A cashier’s check, bank draft, traveler’s check, or money order received in a retail sale of a consumer good, collectible or travel/entertainment activity if the instrument is received in payment on a promissory note or installment sales contract IF:
- Promissiory notes and installment sales contracts with substantially similar terms are used in the ordinary course of the recipient’s trade or business, AND;
- Total amount of payments received on or before the 60th day after the sale do not exceed 50% of the purchase price.
- Certain Down Payments (26 CFR §1.6050I-1(c)(1)(v)): A cashier’s check, bank draft, traveler’s check, or money order received in a retail sale of a consumer good, collectible or travel/entertainment activity if the instrument is received pursuant to a payment plan requiring one or more down payments and the balance of the purchase price is paid no later than the date of sale, IF:
- Payment plans with substantially similar terms are used in the ordinary course of the recipient’s trade or business, AND;
- The instrument is received more than 60 days before the date of sale (or, in the case of a travel or entertainment item, on the date in which the final payment is due).
- Outside the United States (26 U.S.C. §6050I(c)(2)): Reporting is not required if the ENTIRE transaction occurs outside of the United States.
- Not In a Trade or Business: Reporting is not required if the transaction was not related to the recipient’s trade or business. For example, the private owner of an antique car who sells the vehicle to his next-door neighbor for $20,000 (and neither are engaged in the business of buying or selling vehicles) would not have to report the transaction.
A taxpayer engaged in a trade or business who fails to report cash transactions over $10,000 when required to by law is subject to the following penalties:
- Failure to file correct information return penalties (26 U.S.C. §6721) is punishable by a civil penalty of $250 per occurrence up to a total amount of $3,000,000 per calendar year.
- Failure to furnish correct statements to payers (26 U.S.C. §6722) is punishable by a civil penalty of $250 per occurrence up to a total amount of $3,000,000 per calendar year.
- Possible criminal prosecution for tax avoidance or tax evasion if the Internal Revenue Service believes you are willfully and intentionally concealing large sums of cash for income reporting.
The IRS will aggressively enforce these provisions in pursuit of its goal of defeating money laundering schemes and organized criminal enterprises. Don’t unwittingly become liable for penalties and interests because you were ignorant about the law. A tax professional can provide guidance if you are unsure of your legal obligations concerning large sums of cash. If you have questions about filing correct information returns or any other aspect of federal tax law, do not hesitate to contact the tax attorneys at Kershaw, Vititoe & Jedinak PLC.