IRS Title 31 Audit

An IRS Title 31 audit is an examination of a non-bank financial institution's compliance with the Bank Secrecy Act (BSA), carried out by the US Internal Revenue Service. Despite the word "audit", it is not a tax review. It checks whether a business such as a money transmitter, check casher or currency exchanger runs an adequate anti-money laundering programme, registers properly, keeps the required records and files the required reports.

The name comes from Title 31 of the United States Code, which contains the BSA, and its regulations in Title 31 of the Code of Federal Regulations. FinCEN administers the BSA but has no large examination staff of its own, so it has delegated examination of most non-bank financial institutions to the IRS. Banks, by contrast, are examined by their federal banking supervisors. Practitioners often say "Title 31 exam" to distinguish these reviews from the Title 26 tax audits the IRS is better known for.

Think of a restaurant health inspection. The inspector is not there to judge the food's taste or the owner's taxes, only whether the kitchen follows the hygiene rules: fridges at the right temperature, logs filled in, staff trained. A business can be very successful and still fail the inspection.

A Title 31 audit is the financial version. An IRS examiner visits a money business and checks its anti-money laundering "kitchen": whether it knows its customers, records large transactions, reports suspicious ones, trains staff and has someone in charge of compliance. The question is not how much tax is owed but whether the business is helping or hindering the fight against money laundering.

FinCEN's regulations at 31 CFR 1010.810 delegate BSA examination authority for financial institutions without a federal functional regulator to the Commissioner of Internal Revenue. Within the IRS, the work is done by specialist BSA examiners in the Small Business/Self-Employed Division, following the procedures in Part 4.26 of the Internal Revenue Manual.

Institutions examined in this way include:

• Every type of money services business (MSB): money transmitters, issuers and sellers of money orders and traveller's cheques, check cashers, dealers in foreign exchange and providers or sellers of prepaid access.
• Casinos and card clubs.
• Dealers in precious metals, stones or jewels, and certain insurance companies.
• Non-bank residential mortgage lenders and originators.

Virtual-currency businesses that meet the money transmitter definition are MSBs and fall within the programme. The IRS selects businesses for examination on a risk basis, so an MSB may go years without a visit or be examined after a referral or a change in its activity.

An exam usually covers the core BSA obligations for MSBs:

• Registration. Most MSBs must complete FinCEN registration, renew it every two years and keep a current list of their agents.
• AML programme. Under 31 CFR 1022.210, an MSB must have a written, risk-based AML program with internal controls, a designated compliance officer, staff training and an independent review.
• Currency reports. A currency transaction report (CTR) is required for cash transactions over $10,000 in a business day, including multiple transactions that add up to that amount.
• Suspicious activity. MSBs must file a suspicious activity report (SAR) for suspicious transactions of $2,000 or more, a lower threshold than for banks.
• Recordkeeping. Records are required for funds transfers of $3,000 or more, for cash sales of monetary instruments between $3,000 and $10,000, and for currency exchanges over $1,000, along with the identity data under the travel rule.

1. The examiner sends a contact letter and an information request covering policies, risk assessment, transaction data, filings and the most recent independent review.
2. The examiner interviews the owner and compliance officer, reviews the written programme and assesses whether it fits the business's actual risks.
3. Transaction testing follows: samples of transfers and cash activity are traced to check that CTRs, SARs and records were completed correctly and on time.
4. The exam closes with a letter describing any violations and the corrective action expected, and the business is usually asked to respond.

Most exams end with findings that the business fixes on its own. Where problems are serious or repeated, the IRS can refer the case to FinCEN, which decides on civil money penalties, and cases involving deliberate evasion can be referred to IRS Criminal Investigation. Exam findings can also affect a firm's relationships with its bank, since an MSB bank account depends heavily on the bank's view of the client's controls.

A Title 31 audit is separate from the examinations state regulators conduct for a money transmitter license (MTL), although states and the IRS sometimes coordinate or share findings. State exams look at safety and soundness, net worth and permissible investments as well as BSA compliance, and many are coordinated through the Conference of State Bank Supervisors (CSBS). A well-run MSB prepares for both by keeping its risk assessment current, documenting its know your customer (KYC) procedures and acting promptly on its independent review.

• IRS: Bank Secrecy Act
• Internal Revenue Manual Part 4.26: Bank Secrecy Act
• FinCEN: Money Services Business Definition