When you’re filing your tax return, you want to make sure it’s as complete and accurate as possible to avoid Internal Revenue Service (IRS) audits and penalties. If what you report on your tax return doesn’t match your bank’s records, however, you might be concerned about raising red flags or triggering an audit. Find out when and why banks report deposits to the IRS and learn what types of transactions could put you at risk.
While it’s easy to assume that the IRS tracks your every financial move, that doesn’t hold true for most people. Your bank is required to tell you if your transactions require a special IRS form, which means you would typically know if the agency had this high level of access to your financial transactions.
In most cases, the IRS doesn’t monitor check deposits or bank transactions unless it has a distinct reason to do so. The IRS considers the following situations worthy of monitoring:
Also known as the Currency and Foreign Transactions Reporting Act, the Bank Secrecy Act spells out how and when financial institutions must provide transaction data to the IRS. This act dates back to 1970, when it was originally designed to identify individual and business taxpayers engaged in money laundering and tax evasion.
When the Patriot Act was passed in 2002, a portion of this legislation reinforced the original Bank Secrecy Act. The International Money Laundering Abatement and Financial Anti-Terrorism Act of 2001 first introduced IRS Form 8300, which banks use to document large or suspicious transactions.
Today, federal law still requires financial institutions to report large or suspicious transactions via Form 8300. Banks use this same form for both individual and business taxpayers. It requires the financial institution to provide its own contact information along with the personal details of the account holder in question. In the event that you’ve made a large deposit into a joint account, your bank will have to inform the IRS of all account holders’ identities. Similarly, large or suspicious deposits from multiple parties will require your bank to report all identifying information.
When submitting Form 8300, banks must also record the amount of the related deposits. Finally, they have to confirm whether they came in the form of personal or business checks, cash, money orders, cashier’s checks, or bank drafts.
In most cases, financial institutions don’t have unlimited time to file this form. Typically, banks have to submit Form 8300 within 15 days of the transaction in question in order to keep the IRS apprised of potentially suspicious financial activity. Banks and credit unions that fail to meet the deadline typically have to pay a fine, which gives financial institutions an incentive to act quickly.
Form 8300 isn’t exclusive to financial institutions and the IRS. When your financial institution uses this form to report large deposits and other suspicious transactions, the Financial Crimes Enforcement Network (FinCEN) also receives a copy of the documentation.
In some cases, your bank or credit union may flag several of your deposits as excessively large, or they may flag multiple transactions as suspicious. If the IRS determines that your financial activity relates to an attempt to avoid taxes, the agency can pursue a process known as civil forfeiture. When this happens, the IRS can seize your financial assets, including the funds in your bank account.
Even if you obtained the money legally and you aren’t doing anything wrong, the IRS could still accuse you of breaking the law. For example, if you’ve tried to avoid making deposits over $10,000 to prevent red flags, the IRS could accuse you of deliberately spacing out your payments, an illegal process known as structuring.
If you find that your transactions have been flagged as suspicious or if the IRS seizes your assets, it’s in your best interest to get professional assistance right away. A tax attorney can advise you about your taxpayer rights and help you build a case to defend yourself if necessary.