Understanding Letter 2277: IRC Section 6050I Compliance

IRS Letter 2277When businesses collect significant amounts of cash in a single transaction or multiple related transactions, those cash payments must be reported to the IRS. The IRS sends Letter 2277 when it has reason to believe you may need to file Form 8300 and report cash payments. This letter requests that you have a meeting (sometimes called an 8300 exam) with the IRS to discuss the matter.

Since this letter includes an appointment time, it’s crucial to act quickly, prepare for your meeting, and understand what the IRS is asking of you. Let’s explore what Letter 2277 means, your obligations as a business owner, and how you can prepare for your IRS meeting. To get guidance now, contact Seattle Legal Services today.

Key takeaways:

  • Businesses are required to submit Form 8300 when they receive $10,000 or more in cash in a single transaction.
  • Failing to meet this requirement may result in receiving IRS Letter 2277, which sets up a time for you to meet with the IRS in person.
  • Potential financial penalties and even prison time may apply.
  • You can prepare for this meeting and improve compliance with the help of Seattle Legal Services.

Understanding IRS Letter 2277

The IRS sends Letter 2277 to businesses that have not filed Form 8300. This letter alerts you that you must meet with the IRS about the unfiled form. During the meeting, you can establish why you didn’t need to file the form or talk about how to get back into compliance. 

The IRS tracks large cash transactions as a way to help law enforcement identify money laundering, drug dealing, tax evasion, payments to terrorists, and other serious criminal activity. These transactions often involve cash, as it is much less traceable than card or check transactions.

As a result, businesses must report large cash transactions to the IRS. If the IRS believes you have conducted sizable cash transactions, they may set up a meeting to look over your finances, get information on your transactions, and determine whether or not you are in compliance with IRS regulations.

Review Process—and Why Your Business Was Selected

When the IRS conducts investigations and looks into non-compliance concerns, they generally use a risk-based approach. This involves looking at a variety of factors. For example, a business that has made multiple large cash deposits or cash transactions without filling out the necessary paperwork may be flagged.

The IRS also focuses its efforts on specific high-risk industries. For example, commonly targeted businesses include casinos, pawn shops, jewelry stores, and car dealerships.

If a business is in a high-risk industry but never files Form 8300, this may flag them for investigation. Even if they don’t do as many cash transactions as other businesses in their industry, odds are good that they would need to file Form 8300 at least a few times over the lifetime of their business.

The Connection Between Letter 2277 and Form 8300

IRS Form 8300, Report of Cash Payments Over $10,000 Received in a Trade or Business, is closely related to Letter 2277. The form requests information on the transaction referenced, the method of payment, the type of transaction, and the individual paying. Per the IRS, Form 8300 must be submitted within 15 days of the cash transaction. 

If it is not, the business that accepted the cash may be in violation of the law, and in this situation, you are very likely to receive Letter 2277.

Breaking Down IRC Section 6050I

IRC Section 6050I covers returns relating to cash received in trade or business. It states that any person who does trade or business and either receives more than $10,000 in one transaction or in multiple related transactions must submit the proper return to the IRS. The specification that the $10,000 may occur over multiple transactions aims to avoid structuring, as structuring cash transactions is illegal.

Cash and Reporting Thresholds

Per IRC Section 6050I, cash refers to U.S. dollars, foreign currency, and digital assets, and it may also include cashier’s checks and money orders. The rules around cashier’s checks and money orders are a little more complicated. 

If the face value of the cashier’s check is more than $10,000, it is not considered to be cash. Additionally, cashier’s checks, regardless of value, that come from a clear source – for example, a cashier’s check provided by a bank to a borrower who’s using it to buy car – is also not considered to be cash. 

However, if a buyer uses a cashier’s check or a money order (with face values under $10,000) along with cash and the total is more than $10,000, then, the cashier’s check or money order is considered to be cash. For instance, if someone buys jewelry using $4000 cash and an $8000 cashier’s check, that’s all considered to be cash under the terms of the IRC. 

Legal Obligations With Large Cash Payments

Section (f) goes into information on structuring transactions to avoid triggering the return requirements, specifying that this is illegal. If a business does a cash transaction of more than $10,000 (or multiple related transactions equaling or exceeding $10,000) they are required to submit a return meeting the requirements listed under section (b).

Why the IRS is Contacting You

Now you know why the IRS may reach out to business owners to set up a meeting with Letter 2277—but why have you caught their attention and what should your next steps be? We noted that you may be in a high-risk industry or have unusual deposits or tax returns that warrant further investigation. 

However, the IRS may also open up an investigation if an employee, customer, or transaction blows the whistle on unreported cash transactions. The IRS also works closely with the Financial Crimes Enforcement Network (FinCEN) to identify potential financial crimes, which may land you on their radar.

Common Compliance Errors

There are numerous issues that may cause a business owner to receive IRS Letter 2277, including:

  • Failure to file Form 8300: Business owners aren’t always aware of the requirement to file Form 8300, particularly if they handle their taxes on their own and aren’t familiar with tax law.
  • Filing Form 8300 late: Form 8300 has a 15-day deadline, which is fairly quick for IRS matters. When businesses submit these forms late, they are out of compliance.
  • Incorrect or inaccurate information: The forms must be submitted with full and accurate information. Business owners who submit inaccurate information, leave spots blank, or use fraudulent information to fill out the form are in violation of tax law. Remember, this requirement is meant to catch money laundering and other crimes—submitting fake information actually allows these crimes to happen.
  • Structuring: Businesses may intentionally or unintentionally structure transactions in a way that puts them below the $10,000 limit. However, remember that the IRC also requires documentation when multiple related transactions meet or exceed the $10,000 threshold.
  • Failing to keep records: Businesses are meant to keep proper documentation of cash transactions. Failing to do so could earn a visit from the IRS.
  • Employee non-compliance: While business owners may be aware of the laws surrounding large cash transactions, their employees may not be. It’s a business owner’s responsibility to ensure that all employees who work with customers know the documentation requirements.

Potential Penalties and Legal Implications

Businesses may be hit with civil and criminal penalties if they are not compliant with Form 8300 requirements. As of 2024, the penalty for negligent failure to timely file is $310 per return. However, if any failure to file is corrected on or prior to the 30th day after the filing date, the penalty drops to $60. 

If someone intentionally disregards the filing requirement, the penalty is $31,520 or the amount of cash received in the transaction, whichever is greater up to $126,000 per year.

When do criminal penalties come into play? A person who willfully fails to file may be subject to criminal sanctions. Penalties include a fine as high as $25,000 and imprisonment of up to five years. The maximum fine increases to $100,000 for corporations. A business that willfully files a false Form 8300 can be fined up to $100,000 (or $500,000 for a corporation) and be imprisoned for up to three years. Read more in our blog about Form 8300 penalties.

Responding to IRS Letter 2277

You have an IRS meeting on the calendar, so it’s time to take action and prepare. To start, do not ignore this letter or any other IRS notice. Pretending you did not receive it will not cause the IRS to cancel the meeting or give you extra time. 

Read the letter in full—it includes the date and time of the meeting, the time frame that they are investigating, and a list of documentation and forms you should bring to the meeting. It also provides a phone number you can call to reschedule the meeting if the scheduled time does not work for you. Typically, these meetings happen at your place of business. 

Documents and Paperwork

This type of meeting requires a substantial amount of paperwork. Showing up to the meeting prepared can make it go much more smoothly. Generally, the IRS sends Form 4564 which outlines the documentation you should bring, including:

  • Monthly checking, savings, and escrow account statements
  • Deposit slips and deposit items related to the slips
  • Transaction reports, accounts receivable records, and notes receivable records
  • Cash receipts journal
  • Correspondence, computer data, and notes relating to any currency transaction
  • Customer deal jacket or folder
  • Lease contracts
  • Copies of all filed or prepared Form 8300 documents
  • Copy of notification statements given to customers
  • Documents reflecting the total amount of currency and payment methods used

The form states the time period that they are requesting information for—limit your documents to that time frame.

The Role of a Tax Attorney

Any time you are meeting with the IRS, either over the phone or face-to-face, you should consider having a business tax attorney with you. It is unfortunately fairly common for taxpayers to unintentionally implicate themselves by talking to the IRS without legal representation. 

An attorney can help you prepare for the meeting, gather necessary documentation, and explain what likely triggered the investigation. They can also explain potential outcomes of the meeting and how to avoid the worst possible outcomes by how you handle the meeting.

Setting Yourself Up for Compliance Moving Forward

If you unintentionally ran afoul of cash transaction reporting laws, addressing your current situation is your top priority. After that, though, you’ll want to set up safeguards and protocols that prevent future issues.

You can start by establishing internal controls and protocols to monitor cash transactions. This may include extensive staff training. This training should go beyond just proper reporting on transactions over $10,000; it should include signs that a customer is attempting to structure transactions to get around reporting requirements and what to do if a customer refuses to provide the information needed to fill out Form 8300.

This is also a good time to set up documentation and record-keeping procedures that meet legal standards. You’ve been through an IRS meeting at this point, so you know what’s expected and what you’ll need to gather if another meeting is requested; this can help you set up appropriate document storage.

You should also schedule regular internal audits to ensure that transactions are being appropriately flagged, all necessary documentation is being filled out and submitted, and you are meeting all record-keeping requirements. Regular audits can help you identify problems before they lead to legal issues for your company.

Frequently Asked Questions

What should I do immediately after receiving IRS Letter 2277?

You should read the letter in full, paying special attention to the time period the IRS is examining and the documentation they are requesting. Gather the forms they are asking for and consider reaching out to a tax attorney for additional assistance.

What types of transactions are subject to reporting under IRC Section 6050I?

Any single transaction involving $10,000 or more in cash or multiple related transactions totaling $10,000 or more must be reported. In this situation, “cash” includes American and foreign currency, digital assets, and money orders or cashier’s checks with a face value lower than $10,000.

What are the penalties for failing to comply with Form 8300 reporting requirements?

Financial penalties are very high for those who are noncompliant with Form 8300 requirements. Penalties may be as high as $500,000 for corporations and $100,000 for non-corporations. If noncompliance leads to criminal charges, the person responsible may also face prison time.

How do I ensure my business remains compliant with IRS cash reporting rules?

You may want to hire an accountant or other tax professional who can train staff on documentation requirements and set up protocols that identify and flag cash transactions. Regular audits can also identify issues before they escalate, giving you the chance to rectify them.

Is it necessary to hire a tax professional for assistance with IRS compliance reviews?

While it isn’t legally required to hire a tax professional, doing so can save you a significant amount of time and stress. There is a lot of money at stake when you’re talking about Form 8300 penalties, and hiring an attorney may help you negotiate a more favorable outcome.

It is crucial to take IRS Letter 2277 seriously. An in-person meeting with the IRS requires extensive preparation, and taking action right away can minimize your stress during the meeting. With professional assistance from the tax attorneys at Seattle Legal Services, you can feel confident that you are fully prepared for your meeting and ready for all possible outcomes. 

Let’s talk about your next steps and what to expect from your IRS meeting—contact us online or call us to set up a meeting now.