What is Structuring and Money Laundering

Structuring Transactions: IRS Regulations and Money Laundering Concerns

In the intricate landscape of tax compliance and financial regulation, the concept of structuring—also known as “smurfing”—poses significant risks for individuals and businesses. Structuring involves breaking down large financial transactions into smaller amounts to evade reporting requirements, often triggering scrutiny from the Internal Revenue Service (IRS) and other regulatory bodies like the Financial Crimes Enforcement Network (FinCEN). For business owners, understanding the legal boundaries of IRS structuring, its implications under IRS rules, and its intersection with anti-money laundering (AML) laws is critical to avoid any potential criminal investigations. This tax lawyers guide explores structuring, money laundering, its regulatory framework, associated risks, and best practices for compliance.

What is Structuring?

Structuring refers to the deliberate act of organizing financial transactions to avoid triggering mandatory reporting requirements. Under the Bank Secrecy Act (BSA) of 1970, financial institutions in the United States must file a Currency Transaction Report (CTR) for cash transactions exceeding $10,000 in a single business day. Structuring occurs when an individual or entity intentionally splits a large cash transaction into multiple smaller transactions, each below the $10,000 threshold, to circumvent this reporting obligation. These types occur frequently in money laundering operations.

For example, instead of depositing $15,000 in cash in one transaction, an individual might make three deposits of $5,000 over several days. While this may seem innocuous, such actions can raise red flags with financial institutions and regulators, as structuring is often associated with attempts to conceal illicit activities, such as tax evasion or money laundering.

Laws governing cash structuring includes:

• Bank Secrecy Act (BSA): Requires financial institutions to report cash transactions over $10,000 via CTRs and maintain records to assist law enforcement in detecting financial crimes.
• 31 U.S.C. § 5324: Prohibits structuring transactions to evade reporting requirements. Violations can result in civil and criminal penalties, including fines up to $250,000 and imprisonment for up to five years.
• IRS Regulations: The IRS enforces compliance with BSA requirements and investigates structuring as part of its efforts to combat tax evasion and unreported income.
• USA PATRIOT Act: Strengthens AML regulations, requiring financial institutions to implement robust customer identification and suspicious activity reporting programs.

IRS and Cash Structuring: Tax Implications

The IRS closely monitors structuring because it often signals attempts to hide income, evade taxes, or engage in other illicit financial activities. Structuring can complicate tax compliance in several ways:

1. Unreported Income: Cash transactions that are structured to avoid CTRs may indicate unreported income, which violates IRS reporting requirements under 26 U.S.C. § 6050I (Form 8300 for cash payments over $10,000 in trade or business).
2. Audit Triggers: Structured transactions can trigger IRS audits, especially if deposits or withdrawals are inconsistent with a taxpayer’s reported income or business activities.
3. Civil and Criminal Penalties: The IRS can impose penalties for structuring, including forfeiture of the funds involved, monetary fines, and, in egregious cases, criminal prosecution.

Case Example: IRS Enforcement

In United States v. Sperrazza (2017), a business owner was convicted of structuring after making multiple cash deposits just below $10,000 to avoid CTRs. The IRS identified the pattern through bank records, leading to a criminal investigation. The court imposed a 51-month prison sentence and ordered forfeiture of over $1 million. This case underscores the IRS’s aggressive stance on structuring and its coordination with law enforcement to pursue violations.

Cash Structuring and Money Laundering Concerns

Structuring is a red flag for IRS money laundering, as it often serves as a mechanism to obscure the source, ownership, or destination of funds. Money laundering involves three stages—placement, layering, and integration—and structuring typically occurs during the placement stage, where illicit funds are introduced into the financial system.

AML – Anti Money Laundering Regulatory Framework

The Financial Crimes Enforcement Network (FinCEN) oversees AML compliance, requiring financial institutions to:

• File Suspicious Activity Reports (SARs) for transactions that appear suspicious, including structured deposits or withdrawals.
• Implement Know Your Customer (KYC) protocols to verify customer identities and monitor account activity.
• Maintain records of cash transactions to facilitate investigations.

Under the BSA, financial institutions must report suspected structuring, even if the transactions are below the $10,000 threshold. For example, a series of $9,500 deposits over a short period may prompt a bank to file an SAR, alerting FinCEN and potentially the IRS to investigate.

Money Laundering Risks

Structuring transactions to avoid detection can lead to severe consequences:

• Criminal Charges: Structuring is a predicate offense for money laundering under 18 U.S.C. § 1956, carrying penalties of up to seven years in prison and fines up to $500,000 or twice the value of the laundered funds.
• Asset Forfeiture: Funds involved in structured transactions may be seized under civil or criminal forfeiture laws.

Best Practices for Structuring and Money Laundering Defense

To mitigate the risks of structuring and ensure compliance with IRS and AML regulations, business owners should be following these best practices:

1. Understand Reporting Requirements:
   • Businesses must file Form 8300 for cash payments over $10,000 received in a trade or business.
   • Individuals and entities should avoid splitting cash transactions to stay below the $10,000 threshold unless there is a legitimate business purpose.
2. Maintain Transparent Records:
   • Document the purpose and source of cash transactions to demonstrate legitimacy.
   • Retain bank statements, receipts, and invoices to support tax filings and respond to IRS inquiries.
3. Engage in Proactive Banking Relationships:
   • Communicate with financial institutions about large cash transactions to avoid misinterpretation as structuring.
   • Work with banks to ensure compliance with KYC and AML requirements.
4. Implement Internal Controls:
   • Businesses should establish policies to monitor cash transactions and train employees on BSA compliance.
   • Conduct regular audits to identify and address potential structuring patterns.
5. Seek Legal Counsel:
   • Consult tax attorneys before engaging in complex cash transactions to ensure compliance with IRS and FinCEN regulations.
   • If suspected of structuring, engage legal representation immediately to navigate investigations and mitigate penalties.

Table: Key Compliance Actions for Structuring Prevention

Recent Developments and Enforcement Trends

In recent years, the IRS and FinCEN have intensified efforts to combat structuring and money laundering. Key trends include:

• Advanced Data Analytics: The IRS uses sophisticated algorithms to detect patterns of structured transactions across bank accounts, even when amounts are below $10,000.
• Interagency Collaboration: The IRS, FinCEN, and the Department of Justice increasingly share data to pursue structuring cases, particularly those linked to tax evasion or money laundering.
• Focus on Cryptocurrency: As digital currencies gain popularity, regulators are scrutinizing structured crypto transactions designed to evade reporting requirements.

Consult with a Tax Lawyer

Structuring poses significant risks for individuals and businesses, with far-reaching implications under IRS and AML regulations. By intentionally evading reporting requirements, taxpayers may face audits, penalties, asset forfeiture, and criminal prosecution. Tax law firms play a critical role in guiding clients through the complexities of cash transaction compliance, ensuring adherence to BSA, IRS, and FinCEN requirements. To schedule a conference, please email us or call (310) 788 9820