Because of the complexity of Internal Revenue Service Code Section 6050I, this article is broken down into five parts: (1) Enactment of Section 6050I, (2) Operation of Section 6050I, (3) Use of Section 6050I in Law Enforcement, (4) Form 8300 Disclosures, and (5) Tax Policy. So hold onto your seats as we peel off the layers of Section 6050I to expose its true purpose.

A. Enactment of Section 6050I

Congress enacted section 6050I to attack and unearth the underground economy. As enforced, however, section 6050I has been used as a weapon in the IRS’s criminal arsenal. The underground economy is comprised of “those persons outside the tax system who deal in currency.” While money launderers are certainly participants in the underground economy, the term is also used to describe other citizens who earn money legally but do not file tax returns. The underground economy, whether it be a drug dealer or a construction worker working “under the table,” threatens the integrity of the system because it puts increased pressure on those who comply with the tax laws.

The underground economy is also one of the major contributors to the “tax gap.” The tax gap is defined as “the difference between what taxpayers owe and what they do not voluntarily pay.” Congress’ attempts to close the tax gap include programs that seek to increase the accuracy of both reported income as well as unreported income through document reporting and matching programs. For example, interest and dividend income received by taxpayers is reported by banks and corporations, respectively, and is compared by the IRS with amounts reported on taxpayer returns. But these types of reporting and withholding systems are not effective with the underground economy because the unreported income is not invested in legal, income producing vehicles.

With the burgeoning budget deficit in the 1980s, Congress sought increased tax revenues to help reduce the deficit. As part of the Deficit Reduction Act of 1984, Congress enacted section 6050I of the Internal Revenue Code. Because section 6050I is a tax provision, the IRS is authorized to administer and enforce it.

******

Footnotes for full post

i – Gerald A. Feffer et al., Proposals to Deter and Detect the Underground Cash Economy, in Income Tax Compliance: A Report of the ABA Section of Taxation Invitational Conference on Income Tax Compliance 293 (1983); see also Michael C. Durst, American Bar Ass’n Sec. of Taxation & American Bar Found., Report of the Second Invitational Conference on Income Tax Compliance, 42 Tax Law. 705 (1988) (discussing problems of income tax compliance in the United States and policy recommendations).

ii – United States General Accounting Office, Report to the Joint Committee on Taxation, Reducing the Tax Gap: Results of a GAO Sponsored Symposium (GAO/GGD-95-157 1995).

iii – The Secretary of Treasury, and by delegation the Commissioner of Internal Revenue are given broad authority to administer the federal tax law: Except where such authority is expressly given by this title to any person other than an officer or employee of the Treasury Department, the Secretary shall prescribe all needful rules and regulations for the enforcement of this title, including all rules and regulations as may be necessary by reason of any alteration of law in relation to internal revenue. I.R.C. 7805(a) (1994). The Justice Department represents the Commissioner of the Internal Revenue Service in Article III Courts.

iv – I.R.C. 6050I(a) (1994). Businesses subject to the Bank Secrecy Act, e.g., banks and other financial institutions, are excepted from section 6050I’s reporting provisions. Id. 6050I(c)(1)(B).

v – FinCEN Form 8300: Report of Cash Payments Over $ 10,000 Received in a Trade or Business, http://www.irs.gov/pub/irs-pdf/f8300.pdf (last visited Nov. 13, 2009).

vi – Id.

vii – Id.

viii – Id.

ix – Id.

x – United States General Accounting Office, Report to the Chairman, Permanent Subcommittee on Investigations, Committee on Governmental Affairs, U.S. Senate, Money Laundering: State Efforts to Fight it are Increasing but More Federal Help is Needed (GAO/GGD-93-1 1992) [hereinafter GAO Report].

xi – Harrington, 24 Hofstra L. Rev. at 637 (1996).

xii – Id.

xiii – Treas. Reg. 1.6050I-1(b).

xiv – Treas. Reg. 1.6050I-1(c)(7)(ii).

xv – 31 U.S.C. § 5324(b).

xvi – I.R.C. 6050I(f)(2) provides for both criminal and civil penalties to be assessed against any person who “causes or attempts to cause a trade or business to fail to file a return.” I.R.C. 6050I(f)(1)(A) (1994). The provisions of 31 U.S.C. 5313 require financial institutions – which are otherwise exempt from the provisions of 26 U.S.C. 6050I – to file “currency transaction reports” whenever they receive cash deposits in excess of $ 10,000. 31 U.S.C. 5313(a) (1994).

xvii – See Peter Reuter & Edwin M. Truman, Chasing Dirty Money: The Fight Against Money Laundering 66 (2004); Anti-Drug Abuse Act of 1988, Pub. L. No. 100-690, 102 Stat. 4181.

xviii – See I.R.C. § 6103(i)(8) (2006); see also Internal Revenue Manual §§9.5.5.4.8.4, 9.5.5.4.8.5 (2007) (setting forth the elaborate procedures an IRS agent must follow to disseminate a Form 8300 under Title 26 authority).

xix – Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism (USA PATRIOT) Act of 2001, Pub. L. No. 107-56, tit. III, § 365(a), 115 Stat. 272 (codified as amended at 31 U.S.C. § 5331 (2006)).

xx – See Internal Revenue Manual § 9.5.5.4.8 (2007) (“The rules under Title 26 strictly limit [Form 8300] disclosures, whereas the rules under Title 31 are less restrictive.”).

xxi – I.R.C. 170 (1994) (charitable deductions).

xxii – I.R.C. 162(e) (denial of exclusion for lobbying expenses) and I.R.C. 5881 (excise tax on corporate “greenmailers”).

xxiii – Al Capone was finally convicted and sent to prison on income tax evasion. David Laro, The Evolution of the Tax Court As an Independent Tribunal, 1995 U. Ill. L. Rev. 17, 21.

xxiv – Harrington, 24 Hofstra L. Rev. at 670.

xxv – Id.

xxvi – See, e.g., Eric A. Lustig, The Emerging Role of the Federal Tax Law in Regulating Hostile Corporate Takeover Defenses: The New Section 5881 Excise Tax on Greenmail, 40 U. Fla. L. Rev. 789 (1988); Edward A. Zelinsky, Greenmail, Golden Parachutes and the Internal Revenue Code: A Tax Policy Critique of Sections 280G, 4999, and 5881, 35 Vill. L. Rev. 1 (1990).

In accordance with Circular 230 Disclosure