Have you ever wondered how much the government knows about your financial life? It may surprise you to learn that the government can know almost nothing or nearly everything about you.
If you don’t earn interest on your bank account and rarely use cash, the government may not know where you bank at all. On the other hand, if you frequently deposit large sums of cash, the United States government may keep detailed tabs on your activity.
In this article, we explain what banks are required to report to the United States government, and when bank reporting falls into a gray zone.
By law, banks and other financial institutions must report certain information to the Internal Revenue Service (IRS). For example, banks must tell the IRS how much you earned in dividends or interest from your activity with the bank.
Each year, banks issue a 1099-INT to you if you earned more than $10 in interest from the bank, and that same form is filed with the IRS at tax time. You should receive a 1099-INT for earning money in a high-yield savings account, and a 1099-DIV if for money earned from dividends. Don’t ignore either one of these forms.
Make sure you include all of your 1099 income when you file your taxes. Most banks issue electronic 1099 files if you missed the form elsewhere.
Know Your Customer Laws
Know Your Customer (KYC) laws are a set of regulations that require banks to verify their customers’ identities and report suspicious activities to either the Financial Crimes Enforcement Network (FinCEN). KYC laws apply to individuals and businesses and are part of broader Anti-Money Laundering (AML) regulations that are designed to identify and prevent criminal abuse of the financial system.
KYC laws apply not only to banks but to all financial institutions, including brokerages, crypto brokerages, car dealerships, and real estate closing or escrow firms.
When you open a bank account (or a brokerage account) in the U.S., you will always be asked for:
- Your name
- Date of birth
- Physical address (not a P.O. Box)
- Tax ID Number (usually a Social Security Number for individuals)
Banks and other financial institutions have a policy in place for verifying the identity of a person before that person can do business with the bank. Many mobile-first apps ask you to take a picture of yourself and your government-issued ID to verify your identity.
KYC laws do not necessarily have a reporting requirement, for example, your bank does not have to report that you have a bank account with them. Instead, they are designed to force banks to accurately assess risk for all their customers.
Did You Know? You also have a “banking score” along with a credit score. Your banking score is a record kept by third party companies about your banking activity. If you bounce checks or have other banking issues, you could damage your banking score – and as a result, other banks won’t allow you to bank with them.
Report Suspicious Financial Activity
While banks do not necessarily have to report who banks with them, they must monitor customer activity and report suspicious financial activity to FinCEN.
Regulators largely leave the definition of “suspicious financial activity” to banks. Banks have to create training programs for their employees and ensure that bank employees can identify suspicious activity and know how to report it to FinCEN.
Suspicious activity could include anything that looks like a person or business is funding terrorism, evading taxes, or laundering money (using the financial system to legitimize funds earned through illegal means such as drug sales).
Banks establish internal protocols to ensure that employees can recognize red flags and report on these transactions. This proactive monitoring is part of FinCEN’s Bank Secrecy Act (BSA). This ensures that banks keep a paper trail that regulators could use to investigate the suspicious financial activity.
Report All Financial Transactions Greater Than $10,000
While banks have a lot of latitude in identifying and reporting suspicious financial activity, FinCEN has very clear rules around currency transactions. Currency transactions are any that involve cash (like dollar bills) or other physical paper currency.
If you withdraw or deposit more than $10,000 to your bank account, the bank is required to file a Currency Transaction Report (CTR) that includes the following when you make a large transaction:
- Social Security Number
- Date of Birth
- Street address (or Account Number and Tax ID Number for business accounts)
CTRs must be filed within 15 days of the transaction for paper reports or 25 days for other report types. The goal of CTRs is to identify potential money laundering or terrorism funding schemes easily.
Note: This also applies to using cash as stores! If you try to spend $10,000 in cash at a Target or Wal-Mart, those stores will also need to file a CTR.
If You File Too Many CTRs
Banks may change the risk profile of a customer after doing business with them for a year. This change exempts some customers from filing many CTRs, such as a bar or restaurant that deposits a lot of cash or construction companies that issue payroll with cash. Banks may develop these exceptions to reduce paperwork.
However, banks will still report suspicious financial activity associated with these accounts, even if they don’t report every single cash transaction. If a local, state, or Federal law enforcement agency has a warrant for records from a bank, the bank must comply with these requests.
The paper trails that banks develop through Know Your Customer Laws or as part of the Banking Secrecy Act may be given to appropriate law enforcement agencies if you are under investigation.
Using cash is not illegal, but banks have to report large cash transactions. If you earn cash and choose to deposit it infrequently, you may deposit $10,000 or more at a time. The bank will file a CTR and may ask you about the source of those funds.
Depositing large sums of cash does not automatically get you in trouble as long as you’re not laundering money and can provide a paper trail of the source of your cash.
Keeping good records is especially important if you earn cash through your side hustle and need to file quarterly taxes.