Agents of Certain Surety Companies at High Risk for Audit

A common cash intensive industry involving an agent and an insurance or surety company is that of bail bonds.  The IRS lists bail bonds as a cash intensive business which involves high risk of tax evasion and fraud.  While reports of bail bondsmen being indicted or convicted for using their businesses to commit tax fraud are rare, bail bondsmen should be aware that the IRS frequently audits businesses in this industry.  For example, bail bondsmen in Maryland pled guilty to charges of tax fraud for failing to report the company’s income.  The acts of one defendant could have earned him a combined sentence of 28 years of incarceration as well as $600,000 in fines.  He received a 51-month prison sentence and five years of probation upon release.

The reasons why the IRS is wary of the bail bonds industry is that 50%-80% of business income is in the form of cash and that the industry lacks the internal controls frequently found in other business forms.  Because taxpayers in the bail bonds industry are likely to be audited, they should be aware of the warning signs of tax evasion.  The auditing IRS agent will conduct a thorough investigation of gross income as reported and whether the amount reported is disproportionate to the taxpayer’s lifestyle or the business’s viability.  The agent will also examine:

  • Income and expenses from surety company information and compare it with income and expenses of Schedule C filed by the taxpayer.
  • The nature of restrictions and limitations place on BUF accounts by the surety company as well as the amount of distributions into the account from the surety company.
  • The completeness of records of reimbursement expenses from clients for travel, court costs, long distance phone calls, or any other expenses for tracking and retrieving a client for court appearances.
  • Retention of collateral.
  • Deductions of BUF payments.
  • Proper amortization of bond costs on bonds expected to exceed one year.
  • Changes in accounting methods, whether it is a change in the overall method or in the treatment of an item.

Bail bondsmen must be aware of state and federal regulations of the industry.  The Currency and Banking Retrieval System is used to track cash transactions over $10,000.  The two forms that are most often encountered in this industry are the Form 4789, Currency Transaction Report, and the Form 8300, Report of Cash Payments Over $10,000 Received in a Trade or Business.  In order to ensure compliance with income tax laws, taxpayers involved in the bail bonds industry should consult a tax attorney, especially if the taxpayer is unsure of industry regulations or receives notice of an audit.

Attorney Stephen J. Pieklik of the Pittsburgh law firm Williams Coulson regularly defends clients at audit before the IRS.  Additionally, he regularly represents clients before the IRS’s Appeals Division and at United States Tax Court.