3

This is a question about a financial transaction in a novel.

At the denouement of the book, An elderly, naive, innocent, middle-class couple who have been bilked by a loan racket run by extremely nasty people has $33,000,000 wired to their checking account by the white-knight protagonist (WKP), who then literally rides off into the sunset on a Greyhound bus. The money is, of course, filthy. The nasties are newly dead. The couple, who are totally innocent, plan to give most of the money to charities.

Sounds lovely! But has the WKP landed the couple in a pickle with the IRS or other authorities? By the way, the police are not going to be curious for reasons too complex to explain in a short question. How can the couple explain the $33,000,000 in a way that lets them off any hook, and also allows them to keep some of the money? If they can't, should they withdraw the money and put it their mattress or bounce it around the world several times? How much time do they have to figure out what to say or do?

This question arises from my irritation at the very large credibility gap at the end. I am not planning any scheme!

  • Not that I care about the book, but isn't most of the spoiler and even the mention of the specific book needless? The backstory isn't germane to the question about the large deposit. – Hart CO Nov 21 '19 at 22:24
  • 2
    #1 How will the IRS know that the money is there? #2 "The police" might not care, but what about the bank's duty to KYC (know your customer) in regards to FinCEN (the Financial Crimes Enforcement Network)? – RonJohn Nov 21 '19 at 23:47
  • 1
    Absolutely not on the bounce it around--that's done to hide the source of money and basically proves there's something iffy about it. The non-criminal has no reason to do it. – Loren Pechtel Nov 22 '19 at 4:37
  • When was the book written? I think KYC is relatively recent (since 2002 or so in the US). – shoover Nov 22 '19 at 5:49
  • @shoover It was written in 2019. – ab2 MonicaNotForgotten Nov 22 '19 at 13:08
2

You asked a slightly different version of this question on meta. For the sake of completeness, I'm going to largely answer this question by cutting and pasting material from that one. This is an interesting question because it allows for exploration of a larger topic: how do "the authorities" know the transaction had happened? Would the IRS, if they had any stake in this at all, actually know about the money? Questions like this often come up as a result of IRS Form 8300, which is the vehicle by which FinCEN is alerted of possible money laundering transactions. Filings of this form are sometimes called CTRs (currency transaction reports). People ask questions related to this process often, out of interest in knowing how or why transactions are reported to the IRS.

However, the thing people often forget is that only cash transactions are required to be reported via form 8300 - and only if they are over $10,000, or multiple transactions are made that total over $10,000. The goal of this regulation is to provide a method to capture transactions which involve moving funds in to or out of the (electronic) financial system. Changing funds back and forth between electronic and physical currency is often an important step in money laundering operations (because - while electronic funds leave a trail, paper money can be hard to track). Hence, the government needs a reporting mechanism in order to allow tracking of these transfers.

Your scenario of an electronic transfer would not, by default, strictly require reporting on a CTR. So, in the strictest sense, there's not strict regulatory reason why the IRS would know about this transaction.

That said, financial institutions are also required to report to FinCEN (and by extension the IRS) anything they consider suspicious. This type of reporting is often referred to as a SAR (suspicious activity report). This is somewhat open ended and there are not perfectly strict rules around what counts as suspicious, but generally most institutions look at patterns of behavior to determine what to report. Some even have automated reporting tools that pull potential transactions. A married couple with typical middle-class-American transaction volumes on a checking account (say, paychecks deposited every two weeks and several thousand dollars of debit card swipes, bill pays, etc to spend it back down) who received an 8-figure electronic transfer would almost certainly trigger any automated or human-decision flagging as suspicious activity.

This kind of "profiling" is related to a regulated practice called Know Your Customer (KYC). Know Your Customer provides a set of standards by which financial institutions are required to verify identities of anyone they do business with, along with a set of (somewhat loose) guidelines for staff to basically keep an eye out for unusual activity (such as a couple with a few thousand in monthly transactions suddenly receiving $33M). The identity verification component basically means that the bank would know the identities of the couple (seems obvious, but the standards are much more rigorous than what had existed in the past) and would almost certainly flag this transaction.

So, despite the lack of requirement for a CTR, the answer to your question about when the IRS would know is almost certainly "immediately."

Perhaps the more important question, though, is what would the IRS do once they had that information? Based on my exposure to SARs, there is visible follow up on only a very, very small fraction of them. There are legitimate reasons to receive a large transfer which might not be illegal or even result in any tax burden (taking out a loan, receiving a gift).

As a slightly related footnote, in addition to the above, banks in the US are required to keep specific types of records about some electronic transfers (which would easily include your example), but these records are only required to be retained by the institution, not automatically supplied to the IRS. So these requirements don't directly impact your specific question, but the bank would be required to keep information on hand about this transaction above and beyond the basic record keeping they keep on all transactions.

Since this version of your question includes additional details about exactly how the money came into this couple's possession, I think we can continue your fictional exercise and come up with a better answer than "probably nothing will happen." Since we know that the $33M is dirty, we can assume that - somewhere within the criminal enterprise that created pile of money - there are chinks in the armor. We don't know the nature of the fictional criminal activity, but suffice to say, any activity large or complicated enough to generate $33M would likely end up on someone's radar at some point. So, the ultimate way that the authorities may arrive at the doorstep of this couple would likely be because they were following the paper trail through normal criminal investigations about this criminal enterprise. If we are assuming that the WKP is a rogue vigilante actor (and not actually involved in official law enforcement activities), then there's probably a strong argument that real law enforcement may not considered him to have ever been the legitimate "owner" of the money, and by extension may consider the couple in question to have no legitimate stake to the money. in essence, although your question seems to have a tax-based slant, it's probably more likely that the couple in question would end up in legal trouble vs having any outstanding debt to the IRS.

If the money was traced to the couple by law enforcement, but they were able to somehow dodge any criminal implications (perhaps the WKP thought that through and coerced the now-deceased criminals into somehow legitimizing his claim on the money), there would still essentially be a tax burden for the WKP. The IRS imposes a lifetime limit of $11.4M, after which the giver needs to pay tax on additional gifts. So, even if we assume the WKP has never gifted anything in the past, there would still be taxes due on a large portion of the $33M gift.

Further to all of this, personally, I think the true question here is one of morals, not laws. From my perspective, the couple in question is accepting a gift of what we know to be illegally obtained property. Even if the WKP had some arrangement with the criminals to make their ownership legitimate, it sounds like the criminals obtained that money by illegitimate means - by ripping off other victims. Personally, I would not be able to sleep at night knowing that I was gifted $33M in stolen money, even if I had lost a little money myself - after all, even if I give the money to charity, that still means that there are other innocent victims out there in the world who, like me, were taken advantage of. Why should I, by extension, take advantage of me? Why not try to work with law enforcement to compensate other victims?

  • "a strong argument that real law enforcement may not considered him to have ever been the legitimate "owner" of the money, and by extension may consider the couple in question to have no legitimate stake to the money" Clawback? – RonJohn Nov 22 '19 at 14:23
  • Good analysis! The WKP coerced the boss criminal to wire all his (the criminal's) liquid assets to the elderly couple, after which the boss criminal met with an accident. His illiquid assets disappeared in a fire. My conclusion from your answer and that of @nanoman is that the elderly couple should get a good tax lawyer and a good criminal lawyer, and pay a negotiated amount of tax. Then in cooperation with the pertinent authorities recompense the other people who got screwed by the criminals (which is what they wanted to do), thru a charitable foundation keeping a mil, net, for themselves. – ab2 MonicaNotForgotten Nov 22 '19 at 20:25
  • It's hard to talk specifics about hypotheticals, but if the transaction counts as a gift, the elderly couple won't owe any taxes. On the other hand, if they are cooperating with law enforcement, I don't see how it's likely they will keep the money (the transaction will be reversed once it has been discovered to be fraudulent and/or the result of criminal activity.) – dwizum Nov 22 '19 at 20:28
  • Unclear how anyone could prove criminal activity. There are no witness able to testify to the WKP's actions (the elderly couple was oblivious), and there was a very hot fire. I suppose electronic records of the ultimate source of the money (bilked victims) could be pieced together. As I recall 4 mil had been thoroughly washed. The real danger is that the case could drag on forever. – ab2 MonicaNotForgotten Nov 22 '19 at 20:50
  • The criminal investigation would likely come from authorities investigating the criminal organization. They will want to follow the criminal's money. Finding this transaction would be one of the final pieces of the investigation, not it's start. You can have as hot of a fire as you'd like in your own office, but unless you also burn down your bank (and all of it's DR sites, and all of the clearinghouses and reserve banks it trades with), there will be records you cannot destroy which will usually be more than enough to piece together the entire picture without even knowing about the WKP. – dwizum Nov 22 '19 at 20:54
4

Let's keep it simple: The money is a gift to the couple from the WKP. No income tax should be owed by the couple. The WKP, however, would owe gift taxes at the very least, and perhaps would face investigation over what kind of income the money was to them before they gave it away. It's possible that if the WKP has an unpaid tax bill, the IRS could go after the couple for the amount that was improperly given to them.

In the worst case, if the IRS doesn't believe that the money was a proper gift to the couple and considers it fully taxable, the couple might have to pay 37% (the top individual tax rate), after deducting charitable donations up to 60% of the income. In this case, it's very important that they not give more than ~85% to charity, because then they would not have enough left to pay the taxes (37% x 40% ~ 15%). This should be adjusted to include their state and local income tax if any.

Bouncing the money around the world would not help and would likely attract suspicion.

  • 2
    Now I've got a new idea for a story about somebody gives away > 90% to charity and winds up "bankrupted" - and yes, I realize that they probably would not actually have any way to discharge this debt, but I'm not sure it's on topic here to ask a question about such a situation. – Michael Nov 22 '19 at 2:39
  • 1
    I think it's only a gift to the extent that it exceeds what was originally stolen. And I think the WKP has far worse issues than unpaid gift tax. (Although I suspect nobody knows who they are.) – Loren Pechtel Nov 22 '19 at 4:38
  • Lets all remember that Al Capone was caught because he failed to pay his taxes! – RonJohn Nov 22 '19 at 14:26

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.