The Bank Secrecy Act must go Part II: the ridiculous Form 8300 loophole

Earlier this spring, I had the pleasure of reading a law review article by Professor Jack Manhire of Texas A&M Law. The article, What Does Voluntary Tax Compliance Mean?, was a breath of fresh air as it remarked how the definition of the word "voluntary" for the tax code does not agree with what most normal people might consider the word to mean. Being forced to say the tax code is "voluntary," when it is clearly not, has agitated me every day of my career as a tax attorney. It's like saying there are four lights when you know — without a shadow of doubt in your mind — that there are five. Or is it vice-versa?


It was a pleasure watching as Professor Manhire's piece calmly took down this inarticulate "voluntary compliance" phrase, and I find myself in agreement with his suggested — and far more accurate — term: "cooperative compliance." Ever since reading his article, I've considered myself a big fan of Professor Manhire.


On August 19, 2015, The Cayman Financial Review was fortunate enough to have Professor Manhire write an article, "When do you report cash payments over $10,000?," which referred to the IRS Form 8300. In order to answer the question — with any degree of certainty — of when cash payments are reportable to the IRS, it took even the quick-witted professor more than 1,700 words. Please note the following excerpt from his response:


"A brief statutory history. The 1970 Bank Secrecy Act required U.S. financial institutions to help the government detect money laundering. Sixteen years later, Congress amended the Internal Revenue Code to require businesses (not just financial institutions) to report cash transactions over $10,000 to the government. In 2001, the PATRIOT Act provisions essentially mirrored the Internal Revenue Code in amending the Bank Secrecy Act… Generally, you must file if you are a person in a trade or business and receive payment of more than $10,000 in cash in a single transaction or related transactions. You must file within 15 days of receiving the cash."


While facially this appears simple enough, the complexities arise in understanding the legal definitions of the key words “person,” “trade or business,” “payment,” “cash,” and “transactions…” First, I really hope you see the joke in that sentence.

I've decided to explain the joke with an analogy (because explaining a joke always makes it funnier): all it takes to make the greatest pizza in the world is dough, tomatoes, cheese, and toppings. While simple enough on the surface, the complexities arise in how to find and combine the optimal ingredients, how to layer them, and how long to cook them for (Pro-tip: 237 Wooster Street, New Haven is a real good place to start). Photo Credit: Serious Eats


Now about that IRS Form 8300 loophole


Alright, now that we've seen how complex things can be, let's get back to the point of my article – the Bank Secrecy Act, the PATRIOT Act, and the roles that they play. First, these laws were sold to the public as essential means for fighting organized crime and terrorism. They weren't put in place to catch some pizza guy depositing cash, but were instead created (or at least according to the government) as a way to track down and dismantle the really bad guys.


So now, let's look at an interesting exception to Form 8300, as noted by Professor Manhire:

"There is a “foreign transaction exception,” which means the transaction is not reportable if it occurs entirely outside of the 50 United States, the District of Columbia, or any U.S. territory or possession."


To rephrase and to emphasize this bizarre aspect of the law, let's look at it in the following way: if a US person is outside the geographic boundaries of the US and its territories and engages in any sort of cash transaction, that transaction is NOT reportable. What?


If a US person was to give pallets of cash from ISIS' petroleum industry to Russia for high-grade weapons, there is no IRS Form 8300 requirement! All you need in order to avoid any Form 8300 filing obligation is to conduct the transaction outside of the US (including US territories). Well, I hate to point out the obvious, but that's where most international crime occurs! Make a transfer outside the US and you won't have any need to worry about Form 8300!


The Bank Secrecy Act (and PATRIOT Act) must go


In the past, I have written about how FBAR penalties can be easily avoided even if someone is 100% willful. And now, I hope I have demonstrated how IRS Form 8300 can be circumvented by doing precisely what international criminals tend to do. Now comes the commentary: these laws need to go far, far away. The full brunt of compliance is born by those with no criminal intent, or those with wilful intent in a completely different league than someone who wants to commit horrible acts of violence or mass murder.


I am not advising anyone to avoid compliance. Do not rely on anything I am saying as legal advice (or even illegal advice), as the Supreme Court — with some of their particularly interesting interpretations of words — still dictates the law of the land. What I am saying is that we need better laws that do not sacrifice good people while letting the really bad guys continue on their merry way. And, if we can't have better laws, then I say we need fewer laws in general.


If you have a tax issue you need assistance with, contact us. We can help.