Posts Tagged ‘Currency Transaction Report’

Currency Transaction Reports Burn the “Cook”

February 17th, 2011 No comments

That didn’t take long.  Within hours of my posting about how the IRS can detect a taxpayer’s gambling winnings from Currency Transaction Reports this past Monday, the U.S. Tax Court issued a decision sustaining a tax deficiency based in large part on, you guessed it, Currency Transaction Reports.  Credit fellow tax practitioner Russ Fox of Irvine, CA for breaking the story in the tax blogosphere.

On their joint 2004 and 2005 tax returns, the petitioner and his wife reported gross income amounts of $16,450 and $18,230, respectively.  The petitioner stated “cook” as his occupation for both years.

The petitioner did not just spend his time perfecting the culinary arts.  A New York resident, he traveled frequently to the Foxwoods Resort Casino in Connecticut.  And gambled, of course.

During the two years in question, Foxwoods issued currency transaction reports showing that the taxpayer purchased more than $800,000 in casino chips.  Foxwoods filed these CTRs with the IRS as required.  Seeing a large discrepancy between reported income and cash transacted by the taxpayer, the IRS selected the returns for audit.

During the audit, the IRS requested on numerous occasions an explanation of the taxpayer’s source for the cash used to purchase the casino chips.  For example, the taxpayer could have used borrowed money (nontaxable source).

Taxpayer presented two explanations:

  • He lent his “Dream Card” (a card issued by Foxwoods for patrons to use for gambling and to accumulate rewards points) to his friends.  The taxpayer ultimately demonstrated that approximately $211,860 in chips were purchased while he was out of the country; and
  • He obtained a loan from “Fukkianese company” and would testify to such at the trial.

Problem was, the taxpayer didn’t show for trial.  He was represented by counsel, who argued that because the IRS conceded that some of the CTRs were erroneously attributed to the taxpayer, that the remainder are unreliable.

It doesn’t take a leap of faith to accurately predict the taxpayer lost on this point.  The IRS used the CTRs to determine unreported taxable income, and ultimately, additional tax, interest, and penalties.

In a footnote, the decision notes that Foxwoods provided to the IRS a log detailing the taxpayer’s gambling activity at the casino.  The log reflected chip purchases exceeding those reported in the CTRs; this is no surprise since CTRs are issued only if total cash ins or cash outs in a gaming day exceed $10,000.  The IRS probably could have assessed even more tax from unreported income, but chose not to.

As a final note, the taxpayer’s total assessed liabilities regarding the two tax years in question will almost certainly not end with this entree of a decision.  It’s dessert time.  There was a reason for mentioning the taxpayer’s New York residency status:

Under NY Tax Law, taxpayers are *required* to report any change in their federal return that has the effect of changing NY tax liability.

NYS applies income tax on all income earned by its residents, regardless of the source.  NYS will assess tax on the taxpayer’s additional income, plus interest, plus penalties.  Perhaps a very minor “victory” for the taxpayer is that Connecticut does not impose income tax on gambling winnings of nonresidents, other than state lottery winnings.

In the end, the “cook” gets burned in more ways than one.

U.S. Casinos and Currency Transaction Reports

February 14th, 2011 No comments

There are various ways for the IRS to receive notice of gambling winnings.  Last December I covered some situations requiring the issuance of a Form W-2G to the recipient of gambling winnings, a form the IRS also receives.

Receiving a W-2G is not the only way the IRS is notified of gambling winnings.  The Bank Secrecy Act requires United States casinos generating more than $1,000,000 in annual gaming revenues to report to the IRS certain large cash transactions.  It doesn’t take a gaming expert to realize that many U.S. casinos meet the threshold.

Whenever a casino patron engages in a cash transaction involving more than $10,000 in a single gaming day, the casino must file with the IRS a FinCEN Form 103, Currency Transactions Report By Casinos.  “Cash transaction” includes either cash ins or cash outs, and separate forms are filed for each transaction.

Each form contains the taxpayer’s identification information.

So you say, OK, I’ll just make smaller cash transactions, such as $3,000 at a time, then the IRS won’t be on notice of my dealings.  This scheme is called “structuring,” and is illegal.  Engage in structuring, and you may serve time.

If a casino has knowledge of smaller cash transactions the combination of which result in excess of $10,000, it must aggregate the multiple transactions into a single transaction.  Although I can’t say I have seen cash deposit and withdrawal tracking systems of a U.S. casino, I would be very surprised if a casino generating at least $1 million in gaming revenues lacked the technology to easily identify such transactions.

If you are caught structuring, the casino may be required to file a FinCEN Form 102, Suspicious Activity Report by Casinos and Card Clubs, within 30 days of when the activity is detected.  Form 102 is required for suspicious activities involving $5,000 or more in funds, either in a single or aggregated transaction.  Casinos may, but are not required to, file the Form 102 if the amount involves less than $5,000.

When a casino files the Form 102, the casino is prohibited from informing the patron that one has been filed.  The patron will almost certainly find out eventually.  Don’t be that person.

COMPENSATION DISCLAIMER: Please note that Taxes in the Back has financial relationships with some of the merchants mentioned here. Taxes in the Back may be compensated if consumers choose to utilize the links located throughout the content on this site and generate sales for the said merchant.